On July 10, 2013, the Securities and Exchange Commission (“SEC”) issued two final rules that dramatically change the landscape of Rule 506, a federal exemption to registration available to an issuer selling securities to an unlimited number of Accredited Investors and up to 35 Experienced and Sophisticated Investors provided it does not engage in general solicitation or general advertising. First, as set forth in Release No. 33-9414, the SEC amended Rule 501 and Rule 506 to prohibit certain “bad actors” from offering and selling securities. Second, as set forth in Release No. 33-9415, the SEC generally lifted the solicitation ban previously placed on Rule 506 offerings and sales when the securities are sold solely to Accredited Investors and reasonable steps are taken to verify the Accredited Investor status. The SEC was instructed to implement these final rules by Congress pursuant to the Dodd-Frank Act and the JOBS Act. So, it was not a matter of if but rather when and how the new Rule 506 would read. The effective date is September 23, 2013.
This Q and A on Rule 506 Changes was drafted by Jonna E. Stratton, an Associate with GKH, and past Director of the Division of Corporation Finance of the former Pennsylvania Securities Commission (now part of the Pennsylvania Department of Banking and Securities).
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DISCLAIMER: This does not serve as a comprehensive narration of the amendments and you are encouraged to consult with your advisors. This synopsis does not serve as or constitute legal advice and is not intended, and may not be used, to avoid penalties that may be imposed on a taxpayer. Please contact GKH’s Corporate Practice Group at 717.291.1700 for additional information.