Securities Group Client Alert: SEC Lifts Ban on General Solicitation and Proposes New Disclosure Requirements in Private Offerings

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1 JULY 19, 2013 CONTACT Tobias Stirnberg Carlos Albarracín James Ball Paul Denaro Andrew Jánszky Rod Miller Stuart Morrissy Marcelo Mottesi Robert Mullen Arnold Peinado Securities Group Client Alert: SEC Lifts Ban on General Solicitation and Proposes New Disclosure Requirements in Private Offerings On July 10, 2013, the Securities and Exchange Commission (the SEC ) adopted amendments to rules under the Securities Act of 1933 (the Securities Act ) that will have the effect of: (1) permitting general solicitation and general advertising in private securities offerings made in reliance on Rule 144A or Rule 506 under the Securities Act and (2) disqualifying so-called bad actors from relying on the Rule 506 safe harbor. On the same day, the SEC also issued proposed rules that, if adopted, would amend Regulation D, Form D and Rule 156 under the Securities Act, and significantly increase disclosure and filing requirements for issuers relying on Regulation D, particularly those engaging in general solicitation in connection with Rule 506 offerings. I. GENERAL SOLICITATION AND ADVERTISING IN RULE 144A AND 506 PRIVATE PLACEMENTS On April 5, 2012, the U.S. enacted the Jumpstart Our Business Startups Act (the JOBS Act ), a series of regulatory reforms aimed at, among other things, easing the capital formation process in private offerings not requiring registration with the SEC. Issuers privately placing securities in offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act have historically been prohibited from using general solicitation or general advertising to market their securities in offerings conducted under those rules. Section 201(a) of the JOBS Act directed the SEC to amend its rules within 90 days to remove the prohibition on general solicitation and general advertising in securities offerings conducted pursuant to Rule 506 and Rule 144A, provided that (a) in the case of offerings pursuant to Rule 506, all purchasers of the securities are accredited investors and the issuer has taken reasonable steps to verify that all purchasers of the securities are accredited investors and (b) in the case of offerings pursuant to Rule Milbank.com 1

2 144A, all purchasers of the securities are persons reasonably believed to be qualified institutional buyers ( QIBs ). In August 2012, as mandated by the JOBS Act, the SEC proposed amendments to Rule 506 and Rule 144A under which domestic and foreign issuers would be permitted to use general solicitation and general advertising to solicit U.S. investors for either type of offering. 1 On July 10, 2013, the SEC adopted final rules to implement this mandate. 2 The rules will become effective 60 days following their publication in the Federal Register, which is expected to occur this month. The current versions of Rule 506 and Rule 144A will remain in effect until that time. AMENDMENTS TO RULE 506 Removal of the Ban on General Solicitation and Advertising Existing Rule 506 provides a safe harbor exemption from the registration requirements under the Securities Act for private placements by an issuer. Rule 506 allows an issuer to raise an unlimited amount of capital from an unlimited number of accredited investors 3 and up to 35 other sophisticated persons conditioned in part on neither the issuer nor any person acting on its behalf making offers or sales by any form of general solicitation or general advertising (e.g., advertisements and articles published in newspapers and magazines, television or radio broadcasts or seminars to which attendees are invited by general solicitation or general advertising). Under Rule 506, an accredited investor includes a person reasonably believed to be an accredited investor. The newly adopted amendment to Rule 506 adds a new and separate exemption, Rule 506(c), which will be available to an issuer that wishes to use general solicitation and general advertising to offer securities that are ultimately sold solely to accredited investors. However, to the extent that other regulations, such as regulations under the Commodity Exchange Act, prohibit general solicitation in connection with reliance on an exemption from registration, persons subject to such regulations may not be able to take advantage of Rule 506(c) to engage in general solicitation. 1 The Milbank Client Alert that addressed these proposals is available at 2 The adopting release is available at A related fact sheet issued by the SEC is available at 3 Under Rule 501 under the Securities Act, an individual qualifies as an accredited investor if she has either: (1) an individual net worth or joint net worth with a spouse that exceeds $1 million at the time of the purchase, excluding the value (and any related indebtedness) of a primary residence or (2) in each of the two most recent years, an individual annual income that exceeded $200,000, or a joint annual income with a spouse that exceeded $300,000, and a reasonable expectation of the same income level in the current year. MILBANK CLIENT ALERT: Securities Group JULY 19,

3 The new Rule 506(c) differs from the current Rule 506 safe harbor (designated as Rule 506(b) under the new amendments) in the following ways: Rule 506(b) Rule 506(c) General solicitation and general advertising permitted No Yes Permitted purchasers: accredited investors Unlimited Unlimited Permitted purchasers: non-accredited investors 35 None Issuer must take reasonable steps to verify purchasers are accredited investors Issuer must furnish information to non-accredited investors No Yes Yes No The SEC confirmed in the adopting release that private funds relying on the 3(c)(1) and 3(c)(7) exemptions from the definition of investment company under the Investment Company Act of 1940 will also be able to engage in general solicitation under Rule 506(c) without losing these exemptions. It should be noted that the general rules and regulations regarding liability for communications and the general antifraud provisions of the U.S. securities laws remain applicable to any communications made in reliance on the Rule 506(c) safe harbor. Historically, issuers have been able to rely on either the general exemption from registration under Section 4(a)(2) of the Securities Act or the specific safe harbor under Rule 506, with flexibility to select one or the other exemption if the characteristics of an offering changed as it progressed. With the change in the rules, the initial determination as to which exemption to rely upon will become paramount, as once any general solicitation occurs, an issuer will be foreclosed from relying on the general exemption under Section 4(a)(2) and will be required either to comply with the filing and disclosure requirements of the new Rule 506 or to structure the offering as a resale of securities in reliance on 144A. Reasonable Steps to Verify Accredited Investor Status The newly adopted rules provide for several methods by which an issuer may take reasonable steps to verify that a purchaser of its securities is an accredited investor: a principles-based method of verification and four additional, non-exclusive methods of verification that will be deemed to satisfy the verification requirement of Rule 506(c). However, neither of these methods will be deemed to satisfy the verification requirement if the issuer or its agent otherwise has knowledge that a purchaser is not actually an accredited investor. MILBANK CLIENT ALERT: Securities Group JULY 19,

4 The principles-based method provides that the determination of whether steps taken are reasonable may be based on a case-by-case objective determination of the particular facts and circumstances of each purchaser and transaction. To that end, the SEC provided a non-exclusive list of factors that an issuer following the facts and circumstances method should consider, including: the nature of the purchaser and the type of accredited investor that the purchaser claims to be; the amount and type of information that the issuer has about the purchaser; and the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount. The stronger the support is under one factor indicating that a purchaser is an accredited investor, the fewer steps needed by the issuer to conclude that it has taken reasonable steps to verify the purchaser s accredited investor status, and vice versa. As an example of application of these factors, the SEC noted that if an issuer solicits new investors through a website accessible to the general public or through a widely disseminated or social media solicitation, the issuer would not have taken reasonable steps to verify accredited investor status if the issuer required only that a person check a box in a questionnaire or sign a form, absent other information about the purchaser indicating accredited investor status. In contrast, the SEC acknowledged that if a minimum investment amount requirement is so high such that only accredited investors could reasonably be expected to meet it, then it may be reasonable for the issuer to take no steps to verify accredited investor status other than to confirm that the purchaser s cash investment is not being financed by the issuer or by a third party. In response to commenters calls for greater certainty regarding what the SEC deems reasonable steps following publication of the proposing release, the SEC four additional, non-exclusive methods of verification in its adopting release: a nonexclusive enumerated list of procedures: review copies of Internal Revenue Service documentation of reported income 4 for the two most recent years demonstrating that a person meets the income test in the definition of accredited investor, and obtain a written representation from such person that he or she has a reasonable expectation of reaching the necessary income threshold during the current year; 4 Such documents include but are not limited to Form W-2 ( Wage and Tax Statement ), Form 1099 (reports of various types of income), Schedule K-1 of Form 1065 ( s Share of Income, Deductions, Credits, etc. ) and a copy of a filed Form 1040 ( U.S. Individual Income Tax Return ). MILBANK CLIENT ALERT: Securities Group JULY 19,

5 review specified documentation dated within the prior three months to confirm assets and liabilities 5 showing that a person meets the net worth test in the definition of accredited investor, and obtain a written representation from such person that all liabilities necessary to make a determination of net worth have been disclosed; obtain written confirmation from a third party (including but not limited to a registered broker-dealer, SEC-registered investment adviser, licensed attorney or certified public accountant) that it has verified the person s accredited investor status within the prior three months; and obtain a certification from an existing investor who previously invested in the issuer s Rule 506(b) offering prior to the effective date of Rule 506(c) and who remains an investor of the issuer. Private funds and other issuers contemplating a Rule 506(c) offering should consider whether their current procedures for verifying accredited investor status are sufficient for the reasonable steps inquiry described above or whether representations and questionnaires included in their subscription documents will need to be changed. No Changes to Reasonable Belief Standard The SEC confirmed in the adopting release that the reasonable belief standard incorporated in the current definition of accredited investor remains unchanged. Thus, in the event that an issuer sold securities in reliance on the new Rule 506(c) to a person who in fact was not an accredited investor, the issuer would not lose the ability to rely on the proposed Rule 506(c) exemption for that offering, so long as the issuer reasonably believed that all purchasers were accredited investors under the existing standard and had taken reasonable steps to verify their status as required under the new rules. Amendment to Form D The adopted rules also amend Form D, the notice that issuers must file with the SEC when they rely upon an exemption provided by Regulation D, including Rule 506. The revised form will add a separate box for issuers to check if they are claiming the new Rule 506(c) exemption that would permit general solicitation and general advertising. Any issuer engaged in an offering under Rule 506(b) or 506(c) must check a box on Form D indicating whether it is relying on Rule 506(b) or 506(c). An issuer that checks the Rule 506(c) box in anticipation of undertaking general solicitation may amend its 5 Such documents include bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports issued by independent third parties in the case of assets, and credit reports from a nationwide consumer reporting agency in the case of liabilities. MILBANK CLIENT ALERT: Securities Group JULY 19,

6 Form D filing to check the Rule 506(b) box instead if it later decides to conduct the offering in accordance with Rule 506(b). Private Offerings Without General Solicitation While an issuer may now make a Rule 506(c) offering using general solicitation or general advertising, the SEC confirmed that the existing Rule 506(b) safe harbor for offerings not using general solicitation or general advertising remains unchanged and remains available as is without the need to comply with the new verification requirement. As before, such offerings may be extended to up to 35 non-accredited investors so long as the issuer meets the information requirements of Rule 502(b). AMEDMENTS TO RULE 144A Rule 144A provides an exemption from the registration requirements under the Securities Act by permitting the offer or sale of an unlimited amount of securities by a person other than an issuer to an unlimited number of QIBs or to any person whom the seller and any person acting on behalf of the seller reasonably believe is a QIB. While existing Rule 144A does not specifically include a specific prohibition on general solicitation or general advertising, the existing requirement that any offer or sale be limited to QIBs has had the same practical effect. The SEC has amended Rule 144A to no longer require that an offer be made only to QIBs or any person reasonably believed to be a QIB. Instead, the amendment to Rule 144A will exempt offers and sales made pursuant to the terms of the exemption so long as the only sales made are to QIBs or any person reasonably believed to be a QIB. This change has the effect of allowing general solicitation under Rule 144A so long as actual sales are limited to QIBs and persons whom the seller and any person acting on behalf of the seller reasonably believe to be a QIB. Issuers whose securities are being offered under Rule 144A will also be able to include information in their offering press releases that is currently prohibited by Rule 135c of the Securities Act, including the names of the underwriters and comments by management regarding the offering. In addition, the adopting release confirms that the use of general solicitation in a resale from an initial purchaser to an investor in reliance on the 144A safe harbor will not affect the issuer s ability to rely on an exemption under Section 4(a)(2) of the Securities Act in connection with its sale of securities to an initial purchaser. Restrictions on general solicitation will continue to apply to Section 4(a)(2) offerings outside the scope of Rule 506(c). This is particularly relevant for sales by issuers directly or through agents, where the sales do not qualify as Rule 144A resales and are not conducted under Rule 506(c), even if such sales are limited solely to QIBs. As is the case in Rule 506(c) offerings, the general rules and regulations regarding liability for communications and the general antifraud provisions of the U.S. securities MILBANK CLIENT ALERT: Securities Group JULY 19,

7 laws remain applicable to any communications made in reliance on the amendments to Rule 144A. NO INTEGRATION WITH CONCURRENT REGULATION S OFFERING Securities offered in offerings conducted pursuant to Rule 506 or Rule 144A are often simultaneously offered in offerings conducted in reliance on the exemption from registration provided by Regulation S. Offerings conducted pursuant to Regulation S require that there be no directed selling efforts in the United States. In its adopting release, the SEC confirmed that, consistent with the historical treatment of concurrent Regulation S and Rule 506/Rule 144A offerings, concurrent offshore offerings that are conducted in compliance with Regulation S will not be integrated with domestic unregistered offerings that are conducted in compliance with amended Rule 506 or Rule 144A. As a result, the use of general solicitation or general advertising in connection with a U.S. offering does not constitute directed selling efforts for purposes of a Regulation S offering. II. DISQUALIFICATION OF BAD ACTORS FROM RELIANCE ON RULE 506 SAFE HARBOR The newly adopted rules also prohibit offerings involving felons and other bad actors from relying on the safe harbor under Rule These rules implement Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ), enacted in July COVERED PERSONS The amendments to Rule 506 apply the disqualification provisions required under the Dodd-Frank Act to the following categories of persons: the issuer, any of its predecessors or any affiliated issuer; any director, executive officer, other officer participating in the offering 7, general partner or managing member of the issuer; any beneficial owner of 20% or more of any class of the issuer s outstanding voting equity securities, calculated on the basis of voting power; any investment manager of an issuer that is a pooled investment fund, any of such investment manager s directors, executive officers, other 6 The adopting release is available at The related fact sheet issued by the SEC is available at 7 The SEC clarifies in the adopting release that participation in an offering would require more than transitory or incidental involvement and could include participating in due diligence activities, the preparation of disclosure documents and communication with the issuer, prospective investors or other participants in the offering. MILBANK CLIENT ALERT: Securities Group JULY 19,

8 officers participating in the offering, general partner or managing member, and any of such general partner s or managing member s directors, executive officers or officers participating in the offering; any promoter connected with the issuer in any capacity at the time of sale; and any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with sales of securities in the offering (such as a placement agent), and any of such person s directors, executive officers, other officers participating in the offering, general partner or managing member. DISQUALIFYING EVENTS The disqualifying events in Rule 506(d) that affect the availability of the Rule 506 safe harbor include the following: criminal convictions related to securities offerings or SEC filings; court injunctions and restraining orders related to securities offerings or SEC filings; final orders of federal and state regulators; SEC disciplinary orders; SEC cease-and-desist orders; suspension from securities self-regulatory organizations; SEC stop orders and Regulation A exemption suspensions; and U.S. Postal Service false representation orders. Disqualification from reliance on Rule 506 will only be triggered if such event occurs after the amended rule becomes effective. Any disqualifying event that occurred within the relevant time period before the amended rule becomes effective will need to be disclosed to purchasers in advance of sales under Rule 506, unless the issuer establishes that it did not know and reasonably could not have known of the existence of the event. As a result of this disclosure requirement, issuers will need to conduct diligence with respect to all covered persons as to whether any qualifying events occurred during the relevant look-back periods, whether or not they occurred prior to the new rule s effectiveness, to determine whether disclosure is necessary. REASONABLE CARE EXCEPTION New Rule 506(d) includes a reasonable care exception that provides that an issuer subject to a disqualifying event can still rely on Rule 506 for offerings in which the MILBANK CLIENT ALERT: Securities Group JULY 19,

9 issuer establishes that it did not know and, in the exercise of reasonable care, could not have known of the disqualification. In order to take advantage of this exception, an issuer would need to make a factual inquiry into whether any disqualifications existed, the nature and scope of which will vary based on the circumstances of the issuer and the other offering participants. The SEC notes in the release that it expects issuers to have significant knowledge of their officers as a result of the employment relationship, and factual inquiry through questionnaires or certifications, perhaps accompanied by contractual representations, covenants and undertakings, may be sufficient in some circumstances, particularly if there is nothing to suggest the involvement of bad actors. The SEC also anticipates that placement agents and other financial intermediaries will develop procedures to assist issuers in undertaking a sufficient factual inquiry. As a practical matter, issuers may want to consider implementing initiatives to monitor their own covered persons on an ongoing basis as well as diligence covered persons related to other offering participants in connection with a contemplated offering. For example, issuers could add questions regarding disqualifying events to their D&O questionnaires and include these questions in questionnaires or annual certification forms to be administered to shareholders meeting the 20% threshold. When undertaking a Rule 506 offering, issuers may require placement agents and other offering participants to represent, through a questionnaire or placement agent agreement, that they are not and have not been within the relevant time periods subject to a disqualifying event or that they have fully disclosed any disqualifying events that have occurred or may occur with the passage of time. Placement agents in Rule 506 offerings should also work with their counsel to undertake a diligence review of the issuer to ensure appropriate disclosure of prior disqualifying events. Such diligence may include making inquiries of all covered persons with respect to all regulatory actions that constitute disqualifying events in an initial document request list and following up through diligence sessions as needed. Placement agents can monitor their own history of disqualifying events through internal procedures and provide any relevant information to the issuer. Placement agents and investment managers may also want to solicit information regarding potential employees past disqualifying events given the potential impact on their participation in Rule 506 offerings. Finally, for continuous, delayed or long-lived offerings, such as those conducted by hedge funds and other pooled investment funds, updating the factual inquiry on a reasonable basis (i.e., periodic updating) will constitute reasonable care. Such updates may include contractual covenants from covered persons bringing down initial representations, questionnaires, certifications, negative consent letters and periodic review of public databases. MILBANK CLIENT ALERT: Securities Group JULY 19,

10 WAIVERS The new Rule 506(d) allows for two types of waiver of disqualification: (1) waiver for good cause shown and (2) waiver as a result of a determination by the issuing authority. The SEC (specifically, the Director of the Division of Corporation Finance) may waive disqualification if it determines that the issuer has shown good cause that, given the circumstances, it is not necessary to deny the Rule 506 registration exemption. In the adopting release, the SEC notes that such circumstances may include, for example, a change of control, change of supervisory personnel, absence of notice and opportunity for hearing. Alternatively, disqualification may be waived if, before the relevant sale is made under Rule 506, the court or regulatory authority that entered the relevant order, judgment or decree advises in writing that such order, judgment or decree does not warrant disqualification. AMENDMENTS TO FORM D The signature block of Form D will be amended to include a certification applicable to issuers relying on a Rule 506 exemption that the offering is not disqualified from reliance on Rule 506 as a result of one of the events listed in Rule 506(d). III. PROPOSED AMENDMENTS TO REGULATION D, FORM D AND RULE 156 In connection with its elimination of the ban on general solicitation in connection with Rule 506 offerings, the SEC also proposed a package of amendments that would, if adopted, subject Rule 506 offerings conducted using general solicitation to significant new requirements. According to the SEC s proposing release, the proposed amendments are intended to enhance the Commission s ability to evaluate the development of market practices in Rule 506 offerings and to address concerns that may arise in connection with permitting issuers to engage in general solicitation and general advertising under the new Rule 506(c). 8 The SEC seeks public comments on the proposed rules for 60 days following the date of their publication in the Federal Register, expected to occur shortly. Following the review of comments, the SEC will determine whether to adopt the proposed rules. PROPOSED CHANGES TO FORM D Disclosure The proposed amendments to Form D would require an issuer to include additional information about offerings conducted in reliance on Regulation D, some of which 8 The proposing release is available at A related fact sheet issued by the SEC is available at MILBANK CLIENT ALERT: Securities Group JULY 19,

11 would be specific to Rule 506(c) offerings. Specifically, issuers conducting offerings under Rule 506(c) would be required to disclose: (1) the methods of general solicitation used or to be used (e.g., mass mailings, s, social media, etc.), (2) the methods used to verify the accredited investor status of purchasers and (3) the name and address of persons directly or indirectly controlling the issuer. All issuers would be required to disclose on Form D: (1) their website address, if any, (2) their trading symbol and CUSIP or other security identifier for the offered securities, (3) the number of accredited investors and non-accredited investors that have purchased in the offering, whether they are natural persons or legal entities, and the amount raised from each category of investor, (4) the percentage of offering proceeds that the issuer will use (a) to repurchase or retire its existing securities, (b) to pay offering expenses, (c) to acquire assets other than in the ordinary course of business, (d) to finance the acquisition of another business, (e) for working capital and (f) to discharge indebtedness, (5) whether any general solicitation materials were filed with the Financial Industry Regulatory Authority ( FINRA ) (if the issuer used a registered broker-dealer in connection with the offering) and (6) the name and SEC file number for each investment adviser who functions directly or indirectly as a promoter of the issuer (in the case of a pooled investment fund), among other things. Timing of Filing Under Rule 503 of the current Regulation D, an issuer offering securities in reliance on Rule 504, 505 or 506 must file a Form D with the SEC within 15 calendar days after the first sale of securities in the offering. The proposed amendments to Form D would also require the filing of a Form D in Rule 506(c) offerings at least 15 calendar days before the issuer engages in general solicitation as well as the filing of a closing amendment to Form D within 30 calendar days after the termination of any Rule 506 offering. As a result, issuers conducting Rule 506(b) offerings would need to file two Form Ds during the course of the offering process (one within 15 days after the first sale of securities and one within 30 days following the termination of the offering), and issuers conducting Rule 506(c) offerings would be required to file three Form Ds during the offering process (one 15 days prior to any general solicitation activities, one within 15 days after the first sale of securities and one within 30 days following the termination of the offering). One practical effect of this change is that issuers contemplating the use of general solicitation would be required to file a Form D before even commencing the offering and earlier than they would in the case of a 506(b) offering, which may dissuade some issuers from taking advantage of the ability to engage in general solicitation under Rule 506(c). MILBANK CLIENT ALERT: Securities Group JULY 19,

12 Disqualification for Failure to File As part of the set of proposals related to Regulation D and Form D, the SEC has proposed, through the addition of subsection (b) to Rule 507, that if an issuer or any of its predecessors or affiliates did not comply with Form D filing requirements in a Rule 506 offering within the last five years, then the issuer would be disqualified from relying on a safe harbor under Rule 506 for one year for any future offerings. This oneyear prohibition period would commence following the filing of all required Form Ds and would arise only as a result of missed Form D filings that occur after Rule 507(b) becomes effective. Although the SEC considered making the Form D filing a condition to Rule 506, it acknowledges that the consequences of the failure to file, which could result in a violation of Section 5 of the Securities Act (and the related put or rescission right of purchasers), would be disproportionate. PROPOSED AMENDMENTS RELATING TO GENERAL SOLICITATION MATERIALS Mandated Legends and Other Disclosures The SEC has also proposed adding a new Rule 509 to Regulation D, which would require written general solicitation materials used in a Rule 506(c) offering to include certain legends and other disclosures. Under the proposal, all general solicitation and general advertising materials would be required to include a legend disclosing that: the securities may be sold only to accredited investors, which for natural persons, are investors who meet certain minimum annual income or net worth thresholds; the securities are being offered in reliance on an exemption from the registration requirements of the Securities Act and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act; the SEC has not passed upon the merits of or given its approval to the securities, the terms of the offering or the accuracy or completeness of any offering materials; the securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and investing in securities involves risk, and investors should be able to bear the loss of their investment. Advertising materials used by private funds would be required to include the following additional legend stating that the securities offered are not subject to the protections of the Investment Company Act of Private funds whose general solicitation materials include performance data would be required to include a legend stating the following: MILBANK CLIENT ALERT: Securities Group JULY 19,

13 performance data represents past performance; past performance does not guarantee future results; current performance may be lower or higher than the performance data presented; the private fund is not required by law to follow any standard methodology when calculating and representing performance data; and the performance of the fund may not be directly comparable to the performance of other private or registered funds. Private funds whose written general solicitation materials include performance data would also be required to disclose the period for which performance is presented and include a telephone number or website through which an investor can obtain current performance data. The SEC is also soliciting comments on whether performance data in general solicitation materials provided under Rule 506(c) should be prohibited or restricted, as well as on whether other manner or content restrictions would be appropriate. The SEC s proposal would also make Rule 506 unavailable for any issuer if the issuer (or its predecessors or affiliates) has been subject to any order, judgment or court decree enjoining that person for failure to comply with Rule 509. Proposed Amendments to Rule 156 The SEC has also proposed amendments to Rule 156 that would extend the antifraud guidance contained in the rule to sales literature used by private funds. The scope of application of the current Rule 156 is limited to registered investment companies. The antifraud provisions of the Securities Act and Exchange Act already apply to the offer and sale of securities issued by an investment company or a private fund; the SEC notes that the proposed amendment would simply provide guidance to private funds regarding the types information that are susceptible to fraudulent or misleading statements based on its investment company sales literature. Proposed Requirement of Submission of Written General Solicitation Materials The proposed amendments also include a proposed Rule 510T, which would require the submission, on a temporary basis, of any written general solicitation or advertising materials used in a Rule 506(c) offering to the SEC no later than the date of first use. These materials would be submitted through an intake page on the SEC s website and would not be filed on EDGAR or otherwise made public. The SEC notes in the proposing release the importance of the SEC s ability to assess the market practices through which issuers would solicit potential investors in reliance on Rule 506(c). In MILBANK CLIENT ALERT: Securities Group JULY 19,

14 order to assess market developments prior to the adoption of Rule 510T, the SEC will allow issuers to voluntarily submit written general solicitation materials used in Rule 506(c) offerings once Rule 506(c) becomes effective. As proposed, the new Rule 510T would expire two years after its effective date. Consistent with the proposed Rule 509 legend requirement, the SEC proposes making Rule 506 unavailable for any issuer if the issuer (or its predecessors or affiliates) has been subject to any order, judgment or court decree enjoining that person for failure to comply with Rule 510T. REQUEST FOR COMMENT ON ACCREDITED INVESTOR DEFINITION Section 413(b) of the Dodd-Frank Act requires the SEC to undertake a review of the definition of an accredited investor as applied to natural persons four years after the enactment of the Dodd-Frank Act (i.e., July 2014) and once every four years thereafter. Although the proposing release does not set forth any proposed amendments to the definition, the SEC states that it has begun a review of the definition as it relates to natural persons, including the consideration of any necessary changes once the new Rule 506(c) takes effect and the question of whether net worth and annual income are the appropriate tests, as well as the appropriateness of their current thresholds. The SEC has solicited comments regarding these questions as well as the proposals discussed above within 60 days of publication in the Federal Register. Global Securities associate Mindy Allen assisted in the preparation of this Client Alert. MILBANK CLIENT ALERT: Securities Group JULY 19,

15 SECURITIES GROUP Please feel free to discuss any aspects of this Client Alert with your regular Milbank contacts or any of the members of our Securities Group. If you would like copies of our other Client Alerts, please visit our website at and choose Client Alerts under News. This Client Alert is a source of general information for clients and friends of Milbank, Tweed, Hadley & McCloy LLP. Its content should not be construed as legal advice, and readers should not act upon the information in this Client Alert without consulting counsel Milbank, Tweed, Hadley & McCloy LLP. All rights reserved. Attorney Advertising. Prior results do not guarantee a similar outcome. BEIJING 79 Jianguo Road, Chaoyang District, Beijing China Edward Sun esun@milbank.com HONG KONG 30/F Alexandra House, 18 Chater Road 10, Central Hong Kong Dieter Yih dyih@milbank.com Joshua Zimmerman jzimmerman@milbank.com LONDON 10 Gresham Street, London EC2V 7JD England Timothy Peterson tpeterson@milbank.com Peter Schwartz pschwartz@milbank.com NEW YORK One Chase Manhattan Plaza, New York, Ny Carlos Albarracín calbarracin@milbank.com James Ball jball@milbank.com Paul Denaro pdenaro@milbank.com Rod Miller rmiller@mibank.com Stuart Morrissy smorrissy@milbank.com Marcelo Mottesi mmottesi@mibank.com Robert Mullen rmullen@milbank.com Arnold Peinado apeinado@milbank.com SÃO PAULO Rua Colombia, 325, Jardim América, São Paulo Brazil Andrew Jánszky ajanszky@milbank.com Tobias Stirnberg tstirnberg@milbank.com SINGAPORE 12 Marina Bay Financial Centre, #36-03 Tower 3, Singapore Naomi Ishikawa nishikawa@milbank.com Giles Kennedy gkennedy@milbank.com TOKYO 21F Midtown Tower, Akasaka, Minato-ku, Tokyo Japan Timothy Mackey tmackey@milbank.com WASHINGTON, DC 1850 K Street, NW, Suite 1100, Washington, DC Glenn Gerstell gerstell@milbank.com MILBANK CLIENT ALERT: Securities Group JULY 19,