A persistent piece of myth that I have been hearing of late is that an issuer that terminates a Rule 506(b) offering must observe a 30-day “cooling-off period” before launching a Rule 506(c) offering employing general solicitation. I have seen it repeated by lawyers and clients alike. It is wrong! Since March 15, 2021, the answer has been sitting in plain text in Rule 152(b)(4) under the Securities Act of 1933: a terminated or completed Rule 506(b) offering may be followed immediately by a Rule 506(c) offering, with no waiting period of any kind.
THE 2021 FRAMEWORK REPLACED THE OLD RULES OF THUMB
In its harmonisation rulemaking, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Exempt Offerings, Release No. 33-10844 (Nov. 2, 2020), 86 Fed. Reg. 3496 (Jan. 14, 2021), effective March 15, 2021, the Securities and Exchange Commission swept away the old integration patchwork, including the five-factor facts-and-circumstances test and the six-month safe harbour of former Rule 502(a), and replaced it with a single unified framework in Rule 152.
A word about integration – this is the doctrine that essentially states that two separate offerings relying on different exemptions are deemed to be one offering because the offerings were structured in a way to evade the rules and therefore now no exemption applies and the offerings are in violation of Securities laws. This is doctrine that applies also to structuring investment funds and so on.
Rule 152(a) states a general principle of integration that applies only “[i]f the safe harbors in paragraph (b) of this section do not apply.” Rule 152(b) then opens with language that should end most debates before they begin: “No integration analysis under paragraph (a) of this section is required, if any of the following non-exclusive safe harbors apply.” If an offering fits within any one safe harbour, then there is no integration!
THE PLAIN TEXT OF RULE 152(b)(4)
The fourth safe harbour reads, in full:
“Offers and sales made in reliance on an exemption for which general solicitation is permitted will not be integrated if made subsequent to any terminated or completed offering.”
As follows, Rule 506(c) is an exemption for which general solicitation is permitted. A Rule 506(b) offering that has been terminated is “any terminated or completed offering.” The only temporal condition is sequence, meaning the Rule 506(c) offering must commence after termination, not separation in time. There is no 30-day requirement because the Commission did not write one.
If any doubt remained, the neighbouring safe harbours eliminate it, because they demonstrate that the Commission knew exactly how to impose a 30-day condition when it wanted one. Rule 152(b)(1) is the general-purpose safe harbour for offerings separated by “more than 30 calendar days.” Rule 152(b)(3)(iii) protects a registered offering that follows a general solicitation offering only if the prior offering “terminated or completed more than 30 calendar days prior to the commencement of the registered offering.” Against that backdrop, the absence of any waiting period in paragraph (b)(4) is not an oversight. It is a deliberate drafting choice. Reading a 30-day condition into paragraph (b)(4) rewrites the rule.
From a policy standpoint, this works because the accreditation requirements is the governor for Rule 506(c) that prevents funny business of selling securities that through general solicitation to non-accredited investors (this is of course not considering Reg CF and Reg A). As follows, there is nothing to cool off from.
WHAT “TERMINATED OR COMPLETED” ACTUALLY REQUIRES
The safe harbour does however require a genuine termination. Rule 152(d)(1) deems a Regulation D offering terminated when the issuer and its agents “ceased efforts to make further offers to sell” under the offering. In practice, we build this into the Rule 506(b) offering documents and issue a termination of the offering supplement along with the requisite filings. We then launch a subsequent Rule 506(c) offering with new offering materials requiring accreditation verification and a new set of filings.
However, it is worth pointing out that the preamble to Rule 152 denies the safe harbours to any transaction or series of transactions that, although in technical compliance with the rule, is “part of a plan or scheme to evade the registration requirements” of the Securities Act. A sham termination followed by continued quiet offering activity under the old private placement memorandum invites exactly that argument. And once general solicitation begins, there is no going back to selling unverified accredited or non-accredited investors under the terminated offering. You can’t do it in reverse in other words from 506(c) to 506(b) without being subject to cooling off requirements to avoid integration.
BOTTOM LINE
An issuer may terminate a Rule 506(b) offering today and commence a Rule 506(c) offering tomorrow. Rule 152(b)(4) says so expressly, the surrounding safe harbours confirm that the omission of a waiting period was deliberate, and no integration analysis under Rule 152(a) is even required. The 30-day cooling-off period requirement as applicable from a Rule 506(b) to a Rule 506(c) direction is a myth.
Asher Ang
Partner
Kelley Clarke PC
