William Carleton, of McNaul Ebel Nawrot & Helgren PLLC
Gary Jay Brooks, a loyal reader of this blog, left the following comment this morning to an older post about the implementation of new Rule 506(c), which is the version of Rule 506 that will permit, on and after September 23, general solicitation as long as all purchasers are accredited investors and as long as the issuer takes reasonable steps to verify the accredited status of the purchasers:
"Are we going to wake on the 23rd with new rules? or are you saying you are positive that we will have lag time and we will all have to adjust midstream?"
Gary's question is so central to the new rule set for startup seed financing that I thought I'd venture an answer as today's post.
First off, I have no inside information as to whether there will be lag time between September 23 and any action the SEC might take on proposed rules that would, if finalized as proposed, greatly complicate, shall we say, the utility of Rule 506(c).
But we all have this useful letter from SEC Chair Mary Jo White to Representative Patrick McHenry, dated August 8, 2013.
On July 10, when the SEC both approved final Rule 506(c) and proposed new rules hemming in the prospective Rule 506(c), it occurred to me that there might not be any lag. I thought it was possible that the SEC would act to make the proposed rules, or some variant of them, final (or perhaps "interim final"), on or about the same day that new Rule 506(c) became effective. And I suppose it may yet be possible that there will be no lag, or only a brief lag.
But Chair White's letter seems to suggest she is at least anticipating there may well be a lag. Here is the pivotal paragraph from her letter that bears repeated reading:
"You also expressed concern that the issuance of the July 10th rule proposal may have created uncertainty among some issuers and market participants as to whether the new Rule 506(c) exemption, which permits general solicitation, can be used once it becomes effective. The Commission approved the adoption of Rule 506(c) on July 10, 2013, and the rule will be effective on September 23, 2013. Once effective, issuers will be able to rely on the Rule 506(c) exemption for securities offerings as long as they comply with the conditions of that exemption. Issuers are not required to comply with any aspect of the Commission's July 10th rule proposal until such time as the Commission may approve a final rule and such rule becomes effective. Should the Commission ultimately decide to adopt final rules, I expect these rules would consider the need for transitional guidance for ongoing offerings that commenced before the effective date of any final rules, as it did when it adopted the Rule 506(c) exemption."
It's the reference to "the need for transitional guidance for ongoing offerings" under new 506(c) "before the effective date of any final rules," which implies that there could well be a lag.
Chair White's statement above also directly answers, I think, the first part of Gary's question, i.e., yes, we will wake, September 23, with a new rule, and "issuerw will be able to rely on the Rule 506(c) exemption for securities offerings as long as they comply with the conditions of that exemption."
I wish I could say that the "conditions of that exemption" are as straightforward and familiar as complying with old Rule 506, soon to be known as Rule 506(b), but unfortunately I cannot say that. That's due to the verification requirement which Congress mandated and which the SEC dutifully included in final Rule 506(c). I think every issuer thinking of utilizing Rule 506(c) on September 23 is going to have to consult with a lawyer about how to satisfy the verification requirement.