Resources

IA Checklist

Missouri Investment Adviser Application Checklist

Missouri Securities Division Audit Unit Information

IA Switch Pre-Registration Exam Report

IA Switch Final Report

Presentation on IA Switch Issues

No Action Letter

No-Action Determination Concerning Private Fund Advisers

IA Switch Letter to IA Firms

December 2011 Letter to Switching Investment Advisers

Pension Administrators No-Action Letter

No-Action Determination on Pending Application at Switch Deadline


Advisory Releases

Advisory Release AR-13-01:

SEC Issues Final Rules Ending Ban on General Solicitation in Connection with Regulation D, Rule 506 Securities

The Commissioner of Securities ("Commissioner") is issuing this advisory release to alert Missouri's business and investing community to recently issued rules related to the Jumpstart Our Business Startups Act ("JOBS Act") that allow for general solicitation in connection with the offer or sale of Regulation D, Rule 506 securities ("506 securities").

On July 10, 2013, the U.S. Securities and Exchange Commission ("SEC"), in response to the JOBS Act, released two rules amending Rule 506 of Regulation D. The first release amends Rule 506 to allow a person to generally advertise securities for sale even though those securities are not registered with the SEC or state securities regulators if that person follows certain steps. (Click here to read the first release.) The second release amends Rule 506 to prohibit some people from using that exemption. Briefly, the new Rule 506(d) disqualifies an issuer from relying upon Rule 506 entirely if the issuer or any of its "covered persons" are subject to a "triggering event." (Click here to read the second release.) The final rules became effective September 23, 2013.

Rule 506(c)

Historically, 506 securities had to be offered privately- only to family, friends, or close associates- and without using advertising. This way of offering securities remains unchanged: you can still use Rule 506(b) to privately sell 506 securities.

But, new Rule 506(c) now offers an alternative approach, allowing general solicitation (i.e. advertising) as long as you take steps to qualify for the exemption.

To qualify for the Rule 506(c) exemption, you must take "reasonable steps" to verify that each purchaser is an accredited investor. (Click here for an SEC discussion of "accredited investor.") The SEC identified a few different "reasonable steps" issuers can use to verify that a purchaser is accredited, such as by obtaining: the investor's IRS forms from the last two years reporting the investor's income (if qualifying on the basis of income); the investor's bank statements, brokerage statements, or other documents showing assets qualifying the person as an accredited investor; or written confirmation from a registered broker, CPA, or licensed attorney confirming that such third-party professional has, within the past three months, taken reasonable steps to verify and has determined that the investor is accredited.

Although helpful, the list of verification methods above is not exhaustive. To determine whether an issuer has taken "reasonable steps" the SEC will employ a facts-and-circumstances test evaluating, among other things, what the issuer knows about the purchaser.

In addition to allowing general solicitation, the SEC also amended its existing rules to limit the availability of Rule 506.

Rule 506(d)

Under new Rule 506(d), an issuer is disqualified from selling 506 securities if the issuer or one of its "covered persons" is subject to a "triggering event." This disqualification applies to issuers selling 506 securities with or without general solicitation.

For Rule 506(d), "covered persons" generally includes any person that either has the ability to control the issuer or is involved in soliciting potential investors. Examples of an issuer's "covered persons" may include the following: predecessor issuers, affiliates, directors, executive officers, or shareholders owning 20% or more of the issuer's securities.

The disqualifying "triggering events" are more narrowly drawn, focusing primarily on conduct that is investment-related. An issuer will be disqualified from selling its securities under Rule 506 if one of its covered persons is subject to, among other things: a final order issued by state securities regulators; an investment-related felony or misdemeanor criminal conviction; or certain SEC orders.

Rule 506(d)'s disqualification provisions apply to triggering events that occurred on or after September 23, 2013. If a covered person of the issuer committed a triggering event before September 23, 2013, that issuer may still rely upon Rule 506, but must provide each purchaser, at a reasonable time before the sale, a written description of the triggering event.

As with any security offered in Missouri, the anti-fraud provisions of the Missouri Securities Act of 2003 apply to 506 securities. Because issuing securities is a complex process requiring a sophisticated understanding of state and federal securities laws, all issuers should consult with an attorney before initiating the process.

Integration

Issuers seeking minimal regulatory requirements and maximum exposure to potential investors may be enticed by the SEC's Rule 506 amendments. However, if they are currently relying upon another exemption, they could face unintended consequences- including violating Missouri's securities laws- if they decide to change their approach mid-offering.

For instance, Missouri's Limited Offering Exemption exempts from registration the securities of an issuer as long as the securities are sold privately to a small number of purchasers (for more information on the Limited Offering Exemption, click here). Because general solicitation is prohibited under the Limited Offering Exemption, issuers that wish to reach out to a larger pool of potential investors may think it better to abandon the Limited Offering Exemption and begin offering their securities pursuant to Rule 506.

Unfortunately, doing so may trigger a securities-law principle known as "integration" that protects the public from broad-based and unexamined offerings. Specifically, some bad actors attempt to get around the requirements of the Limited Offering Exemption (namely, that the securities be sold to 25 or fewer purchasers) by making several small offerings close in time, and then claiming the exemption for each. To counteract that and protect investors, securities laws "integrate" ostensibly exempt offerings when they are close in time. That is, securities regulators will look at the several offerings as a single offering and evaluate whether that single offering is still exempt. Because the offerings frequently target as many investors as possible, the integrated offering will often not qualify. In that case, the issuer will have to find another exemption to cover the offerings or be found to have violated the securities laws.

However, integration is not limited to offerings claiming the same exemption. Several offerings close in time that claim different exemptions and that have different requirements- such as the Limited Offering Exemption and a Rule 506 offering- may also be integrated. Accordingly, before offering securities under the new Rule 506 exemption, issuers should take caution and ensure that recently offered securities would qualify under Rule 506 as well.

Filing Form D

Although Rule 506 has changed, the filing process with the Securities Division remains the same. MO 15 CSR 30-54.210(2)-(5) outlines the filings required by the Commissioner for issuers relying upon Rule 506 in Missouri, including: one paper copy of the Form D filed with the SEC; a filing fee of $100; and a cover letter stating the date on which the first sale of securities occurred in Missouri.

Issuers already relying upon Rule 506 may be required to file a Form D amendment in order to generally solicit under Rule 506(c). Issuers should also note that these filing requirements may differ in other states and with the SEC.




Subscribe

Subscribe to the Missouri Securities Division e-newsletter.

  • September 6, 2012
    The Commissioner of Securities has issued an Advisory Release alerting Missouri's investment advisers and others to a recent report on the Investment Adviser Registration "Switch." Read the release here, and the Report here.

  • July 3, 2012
    The Commissioner of Securities has issued an Advisory Release concerning pending investment adviser registration applications after the Dodd-Frank Act "Switch" deadline. Read the release here.

  • May 17, 2012
    The Commissioner of Securities has issued an Advisory Release concerning a no-action letter and the April 26 rulemaking concerning Missouri Private Fund Advisers. Read the release here.

  • April 26, 2012
    The Commissioner of Securities has issued an advisory release concerning a rulemaking related to an exemption from registration for certain advisers to private funds. Read the release here.

  • March 23, 2012
    The Commissioner of Securities has issued an advisory release on the fast-approaching deadlines and best registration practices for investment advisers switching to state registration. Read the release here.

  • December 30, 2011
    The Commissioner of Securities sent a letter to Missouri Investment Advisers who may switch to state regulation in 2012 under the Dodd-Frank Act. Read the letter here .

  • December 15, 2011
    Advisory Release AR-11-07
    The Commissioner of Securities issued an advisory release summarizing NASAA’s coordinated review program for investment advisers switching to state regulation in 4-14 states. Read the release here.

  • July 20, 2011
    Advisory Release AR-11-04
    The Commissioner of Securities for the State of Missouri issued an advisory release summarizing a No-Action Determination issued in response to a request by an adviser to a private fund. Read the release here.


View all developments