Reg D Changes…Finally

One mandate of the JOBS Act was that Regulation D, the safe harbor for private placements, be changed so that issuers could generally solicit (advertise) to accredited investors.  That change was supposed to be implemented by September, 2012 but the SEC took their time and the change was just approved.  The modifications to Rule 506 for sales to accredited investors now require a Form D filing before any general solicitation is made, and requires more information to be disclosed, including some special legends (old 506 required no specific disclosure when selling only to accredited investors).  The new informational requirements include things such as:  Identification of the issuer’s website, expanded information on the issuer, the securities offered, the types of investors in the offering, the use of proceeds from the offering, information on the types of general solicitation used, and the methods used to verify the accredited investor status of investors.  Advertising materials would have to be filed as well.  One important change to the definition of accredited investor, which had been kicked around a long time, but was included in Dodd-Frank was that primary residences are now excluded from an accredited investor’s net worth.  So the number of accredited investors in California fell by 90%.  The need to verify accredited status just got much harder too, with methods ranging from looking at your investor’s tax return, to receiving confirmation from their broker or accountant.  Supposedly Rule 506 has not otherwise been affected and issuers can continue to use it as they would otherwise.  We’re not sure that will work out so well.  In any case, as always, we have more social tinkering and what is mandated by one hand is made illegal by the other.  The new rules will be subject to a 60 day comment period and then will become effective.  Only time will tell if this makes capital formation easier without increasing fraud activity.

-- Paul David Marotta