SEC Adopts Rules to Permit General Solicitation
and Advertising in Certain Private Securities
Offerings, Adopts the “Bad Actor”
Disqualification and Proposes New Private
Offering Filing and Disclosure Requirements
July 11, 2013

On July 10, 2013, the Securities and Exchange Commission adopted (i) amendments to Rule
144A under the Securities Act of 1933, as amended, and Rule 506 of Regulation D under theSecurities Act to permit use of general solicitations and general advertising in private securities
offerings made pursuant to these rules, subject to the satisfaction of certain conditions, and (ii)amendments to Rule 506 to disqualify certain “bad actors” from conducting private placements
in reliance upon this rule. The rulemaking eliminating the ban on general solicitations andgeneral advertising implements Section 201(a) of The Jumpstart Our Business Startups Act, theso-called JOBS Act, enacted last summer and the rulemaking relating to the disqualification ofbad actors implements Section 926 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act enacted in July 2010. In addition to the final approval of these new rules, inresponse to concerns relating to possible abuse of the offering flexibility afforded by theelimination of the prohibition on general solicitation and general advertising for certain privateplacements and in order to better monitor the usage of Rule 506, the SEC proposed
amendments to Rule 506 that, if adopted, would impose new filing and disclosure requirements
on private offerings made in reliance upon this rule.1
A summary of the newly adopted and proposed rules follows. Readers who are interested in
the possible impact of the rule changes on private investment funds should also refer to ourseparate memorandum that considers the adopted and proposed rules from the perspective ofprivate investment funds.2
For the full text of the release adopting the amendments to eliminate the prohibition on generalsolicitations and general advertising in connection with private offerings made in reliance upon Rule
144A and Rule 506, please see: http://www.sec.gov/rules/final/2013/33-9415.pdf. For the full text of
the release adopting the amendments imposing the bad actor disqualification, please see:
http://www.sec.gov/rules/final/2013/33-9414.pdf. For the full text of the release proposing new filingand disclosure requirements in relation to rules, please see:
http://www.sec.gov/rules/proposed/2013/33-9416.pdf.
1

2 Our memorandum “SEC Adopts Rules to Eliminate Prohibition Against General Solicitation andAdvertising in Certain Private Securities Offerings; Also Proposes New, Related Investor Protection
Requirements – Private Investment Funds Perspective” can be accessed at our Firm website at thefollowing address: http://www.stblaw.com/siteContent.cfm?contentID=4&itemID=80&focusID=1629.

Memorandum – July 11, 2013

RULE 144A
Rule 144A is a non-exclusive safe harbor from the registration requirements of the Securities Act
for resales of certain restricted securities to “qualified institutional buyers”, or so-called QIBS.
The SEC has amended Rule 144A to eliminate restrictions on offerings pursuant to this rule andto only require, in addition to the other Rule 144A conditions that remain unchanged, thatsecurities are sold to a QIB or to a purchaser that the seller and any person acting on behalf ofthe seller reasonably believes is a QIB. As a result, upon the effectiveness of the amendments,there will be no offeree restrictions applicable to Rule 144A transactions and Rule 144A
transactions may be conducted using general solicitations, provided that the purchasers in suchtransactions are all reasonably believed to be QIBs.

RULE 506
Rule 506 is a non-exclusive safe harbor under Section 4(a)(2) of the Securities Act, which
exempts transactions by an issuer “not involving any public offering” from the registration
requirements of Section 5 of the Securities Act. Under new clause (c) of Rule 506, generalsolicitation and general advertising will be permitted in connection with private securities
offerings made in reliance upon this rule provided that the following conditions are met:the issuer has taken reasonable steps to verify that the purchasers of its securities areaccredited investors;

all purchasers of securities are accredited investors, either because they fall within one of
the enumerated categories of persons that qualify as accredited investors or the issuer
reasonably believes that they do, at the time of the sale of the securities; and

all terms and conditions of Rule 501, Rule 502(a) and Rule 502(d) have been satisfied.

The SEC has stated that whether the steps taken by the issuer to verify the accredited investor
status of the purchaser are “reasonable” is an objective test, based on the particular facts andcircumstances of each offering and each purchaser. Factors that issuers should consider under
this analysis include: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 toparticipate in the offering and the terms of the offering, such as the minimum
investment amount.

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Memorandum – July 11, 2013

In response to comments seeking greater guidance on what would constitute “reasonable”
verification, the SEC has included in the amendments to Rule 506 a non-exclusive list of
methods that issuers may use to verify that a natural person is an accredited investor:
if the purchaser’s accredited investor status is premised on meeting the accredited
investor income test,3 reasonable verification can be establishing by review of copies ofan IRS form that reports the income of the person and receipt of a written representationthat the person reasonably expects to earn an amount meeting the accredited investor
income test in the current year;

if the purchaser’s accredited investor status is premised on meeting the net worth test,4
reasonable verification can be established by obtaining, within the preceding threemonths, representations from the purchaser and review of, with regard to assets, bankstatements, brokerage statements and certain other specified documentation and, withrespect to liabilities, a credit report of a national consumer reporting agency;

if either the income or net worth test is being employed, receipt of a written
confirmation from a registered broker-dealer, SEC-registered investment adviser,
licensed attorney or certified public accountant that such entity or person has taken
reasonable steps to verify the purchaser’s accredited investor status; orin regard to any person who purchased securities in an issuer’s Rule 506(b) offering as
an accredited investor prior to the effective date of Rule 506(c) and continues to holdsuch securities, for the same issuer’s Rule 506(c) offering, obtaining a certification bysuch person at the time of sale that he or she qualifies as an accredited investor.

Form D was also amended to add a separate checkbox for issuers to indicate whether they areusing general solicitation or general advertising in a Rule 506 offering.
The existing safe harbor for private offerings not using any general solicitation or generaladvertising is unchanged by the new rules and these safe harbors may be relied upon without

3 The definition of accredited investor in Rule 501 includes any natural person who had an individual income inexcess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of$300,000 in each of those years and has a reasonable expectation of reaching the same income level in the currentyear.
4 The definition of accredited investor in Rule 501 includes any natural person whose individual net worth, or joint

net worth with that person's spouse, exceeds $1,000,000. For purposes of calculating net worth: (A) the person's
primary residence is excluded as an asset; (B) Indebtedness that is secured by the person's primary residence, up tothe estimated fair market value of the primary residence at the time of the sale of securities, is excluded as a liability(except that if the amount of such indebtedness outstanding at the time of sale of securities exceeds the amountoutstanding 60 days before such time, other than as a result of the acquisition of the primary residence, the amountof such excess shall be included as a liability); and (C) Indebtedness that is secured by the person's primaryresidence in excess of the estimated fair market value of the primary residence at the time of the sale of securities is
included as a liability.

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Memorandum – July 11, 2013

regard to the accredited investor verification requirement applicable to Rule 506 private
placements conducted with general solicitations or general advertising.

BAD ACTOR DISQUALIFICATION
Under the bad actor disqualification rule approved by the SEC, an issuer will not be able to relyon Rule 506, regardless of whether the offering is made using general solicitations or generaladvertising pursuant to Rule 506(c), if the issuer or any other person covered by the rule5 had a“disqualifying event.”6 The rule will not apply if the issuer can show that it did not know and,using reasonable care could not have known, that a covered person with a disqualifying event
participated in the offering. Additionally, the SEC may grant waivers from disqualification
under certain circumstances including a change of control and absence of notice andopportunity for hearing. The rule applies only to disqualifying events that occur after its
effective date, but disqualifying events that occurred prior to the effective date must be
disclosed to investors.

PROPOSED AMENDMENTS TO PRIVATE OFFERING RULESThe SEC has also approved proposed rules which, if adopted, would impose new filing anddisclosure requirements on private offerings conducted using general solicitations or generaladvertising in reliance upon Rule 506(c). Under the proposed rules, issuers would need to filean “Advance Form D” at least 15 days prior to first use of general solicitation or generaladvertising for the offering and an amended Form D would need to be filed within 30 days after
the termination of the offering. The proposed rule would also expand the information required
to be disclosed in Form D filings and require disclosure of, among other things, the number ofpurchasers who qualified as accredited investors under its different bases, the types of generalsolicitation or general advertising used or to be used, the methods used or to be used to verify
accredited investor status.
5

Covered persons include predecessors of the issuer, affiliated issuers, directors and certain officers, generalpartners and managing members of the issuer, 20% beneficial owners of the issuer, promoters, investment managers
and principals of pooled investment funds, persons compensated for soliciting investors as well as the generalpartners, directors, officers and managing members of any compensated solicitor.

6A disqualifying event includes the following: (1) criminal convictions occurring within ten years of the proposedsale of securities in connection with the purchase or sale of a security, a false filing with the SEC or the conduct ofcertain types of financial intermediaries; (2) court injunctions and restraining orders occurring within five years of
the proposed sale of securities in connection with the purchase or sale of a security, a false filing with the SEC or theconduct of certain types of financial intermediaries; (3) final orders from the Commodity Futures Trading
Commission, federal banking agencies and certain other regulators that bar the issuer from associating with aregulated entity, engaging in the business of securities, insurance or banking, savings association or credit union
activities or are based on fraudulent conduct issued within ten years before the proposed sale of securities; (4)certain SEC disciplinary orders relating to brokers, dealers and their associated persons; (5) SEC cease-and-desist
orders relating to violations of certain anti-fraud provisions and registration requirements of the federal securities
laws; (6) SEC stop orders and orders suspending the Regulation A exemption issued within five years before theproposed sale of securities; (7) suspension or expulsion from membership in a self-regulatory organization (“SRO”)
or from association with an SRO member and (8) U.S. Postal Service false representation orders issued within five
years before the proposed sale of securities.

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Memorandum – July 11, 2013

In addition to new filing and disclosure requirements, the proposed rules would also mandate
the use of specified legends in any written materials constituting a general solicitation orgeneral advertising, including, among others, legends indicating that the offering is limited toaccredited investors, that the securities are subject to legal restrictions on transfer and resale
and that investing in the securities involves risk and investors should be able to bear the loss of
their investment. Additional legend and disclosures would also be required for private fundwritten general solicitation materials. Issuers would also be obligated to temporarily submit
written general solicitation materials to the SEC via a website for two years. This website
would be different from the SEC’s public EDGAR website and, as proposed, the submitted
materials would not be publicly available.
The proposed rules would also amend Rule 507 which currently disqualifies an issuer fromusing Regulation D (offerings under Rules 504, 505 or 506), if the issuer, or a predecessor oraffiliate, has been enjoined by a court for violating the Form D filing requirements in Rule 503.
As proposed, Rule 507 would be amended so that, in addition to the current disqualifications,an issuer would be automatically disqualified from relying on Rule 506 for a new offering for
one year if the issuer, or any predecessor or affiliate of the issuer, did not comply, within thepast five years, with Form D filing requirements in a Rule 506 offering. This one-year period
would commence following the filing of all required Form D filings or, if the offering has been
terminated, following the filing of a closing amendment.
In addition, Rule 507, if revised as proposed, would provide that no exemption under Rule 506
would be available for an issuer if the issuer, any of its predecessors or affiliates have been
subject to any order, judgment, or decree temporarily, preliminary or permanently enjoining
such person for failure to comply with the proposed legending requirements or the proposed
temporary requirement that written materials used in general solicitations or generaladvertising pursuant to Rule 506 be submitted to the SEC.

***

Please contact any of the members of our Capital Markets group for more information.
This memorandum is for general information purposes and should not be regarded as legal advice. Pleasecontact your relationship partner if we can be of assistance regarding these important developments. The
names and office locations of all of our partners, as well as our recent memoranda, can be obtained fromour website, www.simpsonthacher.com.
The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who authored it arerendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of this publication to
any person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability inconnection with the use of this publication.

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Memorandum – July 11, 2013

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