» Will Rule 506 C Decrease Your Investor Pool?
The Securities and Exchange Commission created Rule 506(c) last year, pursuant to the requirements within the JOBS Act. Rule 506c of Regulation D allows businesses to advertise their private offering. This is the first time that people have been able to advertise their offerings under Regulation D. Previously, you could only advertise a deal after it had been closed. While they may get you an investor list for the next round, it does nothing for the here and now. The passing of Rule 506c levels the playing field by allowing for advertising today, when you need it.
In order to advertise your private offering you have to only work with accredited investors. Other rules under Reg D, encourage working with accredited investors but allow for a limited number of non-accredited investors. This could cause you to lose some personal investors but isn’t a major problem in the scheme of things. The largest challenge with this new rule is how it changed the certification process for accredited investors.
When an investor wants to put money into a private placement that is using Reg D Rule 504, Rule 505, or Rule 506(b) they can self-certify that they are accredited. That means they can fill out a form, list their income and assets, and make a personal statement that they meet the qualification standards. When a private offering is advertised and issued under Rule 506c an investor can no longer self-certify. They have to provide documented evidence that they meet the criteria. This can include bank statements, tax returns, a current credit report and more. A big question you have to ask is whether or not your investors will be excited enough about your opportunity to go through the hassle of proving their accreditation. Whether concerned about privacy or extremely busy, verifying all of your income and assets for the past three years is no easy task.
In order to be considered “accredited” an investor needs to have made $200,000 alone or $300,000 with a spouse for the past two out of three years, and anticipate that income continuing through the current year. They can also have a net-worth of over $1 million, excluding their primary residence. The challenge comes when the investors you are working with own a business or rental properties that give them high tax write offs. They may indeed be accredited but by writing off too many expenses, could appear that they do not meet the threshold.
As someone issuing a private offering, you need to carefully evaluate where you plan on getting your capital from. If the group is concerned about privacy, or unlikely to give their personal financial information, using Rule 506c could shoot you in the foot by discouraging potential investors. Further, if you plan on getting investments from a lot of businesses owners they may not make enough money on paper, even though they actually do receive it.
If, however, you plan on obtaining most of your investment dollars from people that you do not know and don’t live locally, advertising is probably your only option. While the verification factor may still intimidate, if you don’t have a group of contacts this could be your only option for raising money under Reg D.