Yesterday, the SEC took a big step in finally making the JOBS Act (or at least a portion of it) a reality for businesses trying to raise capital. One of the biggest problems with the private offerings has been the difficulty in finding investors. General solicitation / advertising has always been a no-no unless there was a public, registered offering. With the introduction of new Rule 506(c), that all changes (albeit with some important caveats).
Prior to the approval of 506(c), most exempt private offerings required that businesses raising capital have a "pre-existing substantive relationship" with anyone that invests in that business's private offering. That means no advertising, no website investor solicitation, no flyers, no social media....you get the point. It made it difficult and time consuming to find potential investors by severely limiting the pool of potential investors to which a business had access.
With the SEC's approval of the final rule on July 10, 2013, certain types of private offerings will be permitted to employ general solicitation and advertising to offer securities and solicit potential investors - no more requirement to have a "pre-existing substantive relationship" with investors. It is important to note that, although yes the regulation has been approved - it is not effective until 60 days after publication in the Federal Register.
There are, of course, a few hoops businesses will need to jump through in order to employ general solicitation and advertising without going awry of federal securities rules and regulations. Of course, you should consult with an attorney to help craft a private offering structure and documents that comply with the new regulations. That being said, in a nutshell, in order to employ general solicitation / advertising in a private offering:
The determination of the reasonableness of the steps taken to verify an accredited investor is an objective assessment by an issuer. An issuer is required to consider the facts and circumstances of each purchaser and the transaction. What this likely means is that a widely posted social media solicitation would likely require a higher degree of assessment than a post to pre-screened network of accredited investors.
An individual investor (the requirement for entities is different) is considered accredited if:
In the past, it was enough to have a reasonable belief that either of these conditions were true - and to simply get a signed representation from the investor. Now "reasonable steps" are required. Luckily, the SEC provided a "non-exclusive" list of methods that issuers may use to satisfy the verification requirement for individual investors, which include:
The new rule also amends Form D, which is the notice that issuers must file with the SEC when they sell securities under Regulation D. The revised Form D adds a new check box that indicates if an issuer is claiming the new Rule 506 exemption that would permit general solicitation or general advertising.
The SEC also approved a rule disqualifiing felon and other "bad actors" from Rule 506 offerings. This blog post won't get into that, but take a look, and be sure to discuss with your attorney.
The SEC is also proposing some significant changes to Form D for private offerings that choose to employ general solicitation and advertising. Any changes there will take awhile as right now it is just a proposed rule, but certainly something to keep an eye on.
As always, you should consult an attorney with experience in these matters.