House Votes to Eliminate General Solicitation Restriction From Rule 506

Yesterday was a big day for securities exemptions in the House of Representatives. In addition to passing the crowdfunding bill I already blogged about. the House passed a bill directing the SEC to eliminate the prohibition on general solicitation or advertising from the Rule 506 exemption. A copy of the bill is available here. As with the crowdfunding bill, the vote was bipartisan and resounding (413-11).

The prohibition of general solicitation, as interpreted by the SEC staff, prevents issuers from offering securities to investors with whom they do not have a preexisting relationship. The policy reason for this restriction is unclear. If the purchasers to whom the issuer sells are accredited or sophisticated, as required by Rule 506, it’s unclear why it should matter whether the issuer or its selling agents knew those purchasers before the offering began. Securities practitioners and scholars have been calling for the elimination of the general solicitation restrictions for years.

This would be another welcome change if it becomes law. Kudos to Congressman Kevin McCarthy for introducing this bill.

-Steve Bradford