F E aT U R E D a R T I c L E
How to Use the New General Solicitation Rule for Private Placements to Raise Capital
T
he Securities and Exchange Commission (“SEC”) has finally adopted Rule 506(c) of Regulation D, which is the regulation used by most companies, both private and public, for Private Placement Offerings. Rule 506(c) repeals the absolute ban on general solicitation in private securities offerings. So mark your calendar for effective September 23, 2013, companies will be able to use general solici-
n BY MITcH GOLDSMITH,
caMILLa MERRIck, aND NaNcY caSS
80
Micro-Cap Review Magazine
tation and advertising to offer their securities in private placements to investors, subject to the limitations set forth in the rule. Certain specifics cannot be overlooked, such as the requirements that all purchasers must be Accredited Investors and the issuer company must document that it has taken reasonable steps to verify the investors’ accredited status. The significance of the lifting of this ban cannot be overstated. In effect, the SEC has created an entirely new form of public offering not subject to registration under the Securities Act of 1933. Although offerings made under Rule 506(c) are technically considered a private placement, by lifting the ban on general solicitation and advertising, companies now can widely advertise their 506(c) securities offerings across all kinds of media – on television, in newspapers, and, most importantly, over the internet. Proponents believe Rule 506(c) will make it easier for companies to raise money since they can contact a broader range and larger pool of investors. In this article, we take a closer look at what the new Rule 506(c) means for securities offerings and, more specifically, what companies need to consider when deciding whether to proceed under Rule 506(c), the steps for complying with the rule and opportunities afforded for advertising.
comPly wiTh The rule As noted above, there are two important
requirements for a company to take advantage of Rule 506(c). First, companies may only use the general solicitation afforded by Rule 506(c) when selling securities to accredited investors. This does not mean that companies must have actual knowledge that an investor is accredited. Rather, the company, after taking reasonable steps to verify accredited investor status (see below), must have a reasonable belief that the investor is accredited. Second, companies also must take reasonable steps to verify that purchasers are accredited investors. Whether the steps taken by the company to verify the investor’s accredited status are “reasonable,” will be determined based on the facts and circumstances of each sale. Importantly, companies may no longer rely on investor representations in subscription documents, so having the investor simply check a box in an investor questionnaire is no longer sufficient.
whaT are “reasonable sTePs” The SEC has been unwilling at this time to articulate exactly what constitute “reasonable steps” to verify an investors’ accredited status, but noted in its adopting release various methods for verifying investor status, including a so-called “principle based” method and four other non-exclusive methods. Under the “principle based” method, companies should consider, among others, the
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