- July 25, 2013
- Posted by: John Fischer
- Category: Accredited Investors
The seemingly archaic rules of the SEC are often a source of mystery and frustration for companies, especially companies that are trying to get off the ground by raising money. Until now, claiming an exemption under Reg D caused a company to be subjected to sever limitations, most specifically when it comes to the general solicitation or advertising a private placement. For the past 80 years companies that claimed exemption to the registration regulations under Rule 506 were prohibited from advertising their offering through mass media including newspapers or on the internet. Additionally they were limited in the number of non-accredited investors they could accept. Much of that is changing, thanks to the Jumpstart Our Business Startups Act passed by Congress in Aprils 2012.
The Act, specifically adopted by Congress with the intent of limiting the regulatory red tape and removing some of the hoops, instructed the SEC to do away with the prohibition on advertising private placements. The hope being that by making it easier to advertise an offering, more small business will be successful in raising money, thereby greatly increasing their chances of success. This would help to enhance the already growing, albeit slowly, economy with the creation of jobs. The SEC has and continues to adopt changes that are going to be important for businesses to be aware of in the coming months, in line with this Act of Congress.
The most important change is that companies will be able to solicit investors with a wider net by advertising. However, there is a caveat in the language of the JOBS Act that requires the company making the private placement to take reasonable steps to ensure that the investors met the SEC’s criteria of being accredited investors. After taking feedback from a variety of sources the SEC’s new rule proposal includes these steps to meet that requirement –
Under the new rule proposed, the issuer would be required to file an advance notice of the offering 15 days before making it publicly available, and again at the conclusion of the offering. This changes the current regulations, which requires the issuer to file a Form D, no later than 15 days after the first sale of securities in the offering. The issuer would be further required to update the information contained in form D within 30 calendar days of the conclusion of the offer and also indicate that the offer had ended.
The new proposal would require the issuer to provide additional information above and beyond the current identification requirements on form D. The will include the issuer’s website, more detailed information on the issuer, the offered securities, the types of investors participating in the offering, the use of the funds, information on the types of general solicitation (advertising) used, and the methods used to verify the accreditation status of the investors.
New rules would require the issuer to include cautionary statements and legends in any written advertising (general solicitation) materials. The legends are intended to serve as information to potential investors that the offering is for accredited investors only, while also being required to seek public comment. Because of these and other requirements, the SEC is making it a requirement under the new proposal that all advertising be submitted to the commission via an intake page on the SEC’s website for the first two years of the new rules.
Current guidelines about misleading statements with regard to private placement would also extend to all sales literature for the purpose of Federal law. Any issuer who fails to file form D would be out of compliance and be disqualified from using the exemption under Reg D.
The proposed changes and new regulations are currently in the SEC’s 60 day phase where they are open to public comment. Overall the JOBS act and this new regulatory environment will be very helpful to businesses that need investment dollars. Just make sure to abide by the new regulations that accompany the changes allowing you to advertise. Not following them could cause you to be disqualified from using the Reg D exemption.
We hope this article was helpful in understanding the changes to rule 506 and what it means for your private placement.