Background
On July 10, 2013, the SEC approved Rule 506(c) in compliance with the Jumpstart Our Business Startups Act (the “JOBS Act”) to permit, to an extent, general solicitation and general advertising for certain Regulation D offerings (previously addressed here). However, thus far Rule 506(c) has been rarely used in the marketplace, with many commentators attributing the lackluster response to the rule’s limited scope. Most notably, Rule 506(c) was in conflict with commonly claimed Commodity Futures Trading Commission (“CFTC”) exemptions found under Rules 4.13(a)(3)[1] and 4.7[2] due to the additional restrictions imposed with respect to such exemptions on marketing exempt pools to the public.
However, the CFTC’s Division of Swap Dealer and Intermediary Oversight (“DSIO”) recently issued a letter harmonizing CFTC Rules 4.13(a)(3) and 4.7 with SEC Rule 506(c), thereby removing a roadblock to a CPO’s use of Rule 506(c).
The DSIO’s exemptive relief includes the following:
- For exemptions filed under CFTC Rule 4.13(a)(3), relief from the requirement that securities be “offered and sold without marketing to the public”;
- For reporting relief filed under CFTC Rule 4.7, relief from the requirements that (1) an offering be exempt pursuant to Section 4(a)(2) of the Security Act and (2) that securities be offered solely to qualified eligible persons (“QEPs”).
When does the relief take effect?
The exemptive relief is effectively immediately. However, the exemptive relief is intended as an interim fix and its provisions can be modified or revoked at the DSIO’s discretion.
What is the scope of the relief?
Relief is limited to CPOs conducting 506(c) offerings of CPOs and CPOs using 144A Resellers (i.e. entities reselling securities in reliance on a Rule 144A exemption). As such, it does not extend to other Regulation D, Regulation A or Section 4(a)(2) offerings.
Is the relief self-executing?
No. CPOs (both registered and exempt) must file notice with the DSIO verifying compliance with the substantive conditions of the relief. The notice should include, among other things, the CPO’s basic contact information, as well as specify whether the CPO intends to rely on the exemptive relief pursuant to Regulation 4.7(b) or 4.13(a)(3).
Is verification required for Investment Advisers?
Yes. The final rules require managers who opt into 506(c) general solicitation and general advertising to take reasonable steps to insure that all investors meet the accredited investor standard. While managers must establish their own verification process, the SEC lists two approaches to verification—(1) “principles- based” approached to verification using surrounding facts and circumstance, e.g. nature of the investor and size of the investment, or (2) specific examples of documentation that will provide sufficient verification that individuals meet the accredited investor test.
Conclusion
The CFTC’s exemptive relief extends the reach of Rule 506(c) to some CPOs claiming CFTC exemptions under Regulation 4.7 and 4.13(a)(3), provided the CPOs comply with applicable conditions of such relief (e.g. notice filing and investor verification).
Please feel free to contact us if you have any questions regarding the status of the JOBS Act or its potential impact on CPO marketing activities.
