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Last year, as part of its “JOBS Act” (Pub. Law 112-106, 4/5/12), Congress directed the SEC to amend its very popular Rule 506 by removing the long-standing prohibition on public solicitation and advertising in private offerings of securities.

This was a stupendous change. Small companies seeking outside investor financing must qualify for exemption from expensive federal and state registration requirements. Exempt in this context means private and private has always meant no public solicitation of investors. It’s never been otherwise. Which means that, unless you already have wealthy contacts, you are at a serious disadvantage in the private equities market. Changing this rule will represent a major sea change for small company capitalization, once the new law goes into effect.

But the problem is, it keeps not going into effect.

The legislation did not actually change the no solicitation rule, it just instructed the SEC to do so. Hence, until the SEC issues final regulations, we are stuck with the old rule which restricts small business access to capital. To be fair, the SEC did act, last summer, with proposed rules (SEC Rel. No. 33-9354), eliciting extensive commentary from market participants and professionals, but then the process bogged down, despite the appeals of many in Congress and elsewhere that the SEC finalize its rules so that financial life for small business can go forward.

The delay reflects policy differences about investor disclosure and issuer regulation, and the opposition especially of state securities regulators, concerned that expanded solicitation will encourage fraud. We’ve also had the resignation of an SEC Chair, a Division Chief, and numerous staff, and now the pending appointment of a new SEC Chair, which have delayed things even more, despite SEC assurances of going forward on the matter. We now have three possibilities, any of which could happen:

1. The SEC could end up adopting its rules pretty much as they are.

2. The SEC could end up adopting its rules, but with substantial revisions in response to comments. The big issue has been how companies verify that investors are financially accredited, the major condition for being allowed to solicit and advertise. The proposed rules leave it up to the company to decide how to verify that. That might change, perhaps with SEC guidelines or “safe harbor” rules that would assist companies in safely doing so.

3. The SEC could scrap its proposed rules and start over, the thinking among a number of practitioners. We would then face a new rule proposal and a new comment period, thus putting off even longer the benefits of expanded investor solicitation. With a new rule, any number of issues may end up on the table. These might include:

• Whether advertising should be regulated. The likeliest requirement would be that companies’ advertisements be filed with the SEC, or at least that Form D be filed before advertisements can be used. Less likely, but possible, would be that general guidelines on the contents of advertising are issued.

• Whether the Form D filing would be a condition to the exemption.

• How extensive an inquiry must be made in determining accredited investor status and whether the SEC should provide concrete guidance.

• Whether the definition of accredited investor as to individuals be changed, for instance by increasing income requirements, which could have the effect of choking off capital for some firms.

Once we have a final SEC rule, we’ll review its requirements and set out some ideas foryou to use in your capital raising.

Until then, we wait . . .