News & Media
- National Dentex Corporation
- Public company merger with GeoDigm Corporation
- The Viridian
- 200-residential unit development, Boston, MA
- North American Logistics Group, LLC
- The preeminent Final Mile delivery company Logistics representation from startup to international operations
Advertising Your Private Placement
September 19, 2012
The Securities and Exchange Commission (the “SEC”) recently proposed rules to eliminate the prohibition against general advertising and solicitation in certain private placements of a company's securities. Under the SEC’s proposed rules, which arose out of this year’s JOBS Act, an issuer may use general solicitation and advertising to offer its securities under Rule 506(c) of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”).
In general, if an issuer offers or sells its securities it must either register the offering or rely on an exemption from registration. Under current law, most exemptions from registration prohibit companies from engaging in general solicitation or advertising when conducting a securities offering. The most commonly used registration exemption for private companies is Regulation D, Rule 506, which allows issuers to raise unlimited amounts of capital from any number of accredited investors and up to 35 non-accredited investors. However, a Rule 506 offering must comply with a number of restrictions including that neither the issuer nor any person acting on its behalf may offer the securities by any form of general solicitation or general advertising. Generally, the restrictions on general advertising and solicitation meant that the issuer or a person acting on its behalf must have a pre-existing relationship with an investor prior to offering the issuer’s securities. It also meant that an issuer could not offer its securities on its web site, in local media or on social media sites.
Proposed Rule 506(c) Could Liberalize Private Securities Offerings
The JOBS Act directed the SEC to amend Rule 506 of Regulation D to permit issuers to conduct general solicitations and advertising. The SEC's proposed rule opens up the avenues that an issuer may use when marketing its securities, including the use of the internet, general email distributions, social media, seminars, and local advertising; provided, the issuer complies with the new conditions set forth in proposed Rule 506(c) of Regulation D. If adopted, proposed Rule 506(c) would permit an issuer to conduct general solicitation and advertising in connection with a Rule D 506 offering if the issuer satisfies the following conditions:
- The issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors.
- All purchasers of securities are deemed accredited investors because either: (i) each purchaser satisfies one of the categories of persons who are accredited under existing Rule 501 of Regulation D; or (ii) the issuer reasonably believes that each purchaser meets one of these categories at the time of the sale of the securities.
- The exempt offering otherwise meets the terms and conditions of Rules 501, 502(a) and 502(d).
In determining the “reasonableness” of the steps, the SEC does not specify any particular method. Instead, the SEC has proposed a flexible rule under which an issuer is to consider the facts and circumstances of the transaction including the following:
- The nature of the purchaser and the type of accredited investor that the purchaser claims to be: A broker dealer that can be verified on the FINRA Broker Check services would require less verification than a person claiming accredited status on the basis of his or her household net worth in excess of $1,000,000.
- The amount and type of information that the issuer has about the purchaser: These could include publicly available information in filings with federal, state or local regulatory bodies, SEC filings for an officer of a public company, Form 990 series returns for 501(c)(3) organizations, W-2 forms for an individual purchaser, or third party verification of status as an accredited investor by a broker dealer, attorney or accountant.
- The nature of the offering, such as the manner in which the purchaser was solicited: Investors that come through social media solicitation would likely require greater verification measures than those investors that come through prescreened broker dealer or third party accredited investor lists.
- Minimum investment amount requirement: A high minimum amount could be relevant to issuer’s evaluation of the types of steps needed to verify accredited investor status.
The proposed rule did not amend the definition of accredited investor.
The SEC notes that regardless of the method used to verify the investor’s status as an accredited investor, the issuer bears the burden of showing that it is entitled to the private placement exemption. Thus, it is important for an issuer to retain adequate records that document the steps the issuer took to verify a purchaser’s status as an accredited investor.
Former Rule 506 Preserved as Separate Exemption
The proposed changes to Rule 506 preserve the existing portions of Rule 506(b) as a separate exemption. Thus, issuers will continue to be able to conduct private offerings under the existing portion of Rule 506(b) without the use of general solicitation and advertising and without the added verification rule.
Accomodations for Private Equity and Venture Capital Funds
Private equity and venture capital funds typically rely on Securities Act Section 4(2) and the Regulation D, Rule 506 safe harbor exemption when raising capital for their funds. In addition, these funds also rely on one of two exclusions from the definition of “investment company” under the Investment Company Act of 1940 (the “1940Act”), which enables the funds to be excluded from the registered mutual fund rules of the 1940 Act. The two exclusions are Section 3(c)(1) and Section 3(c)(7) of the 1940 Act. However, these exemptions are not available to the funds if they make a public offering of their securities. The JOBS Act provides that offers and sales under the revised Rule 506 shall not be deemed a public offering as a result of general advertising or general solicitation. Thus, the SEC has determined that a private equity or venture capital fund will be able to make a general solicitation under the amended Rule 506 without losing either of the two exclusions under the 1940 Act.
In connection with the proposed rule, the SEC is also amending Form D to add a separate box for issuers to check if they are claiming the new Rule 506(c) exemption that permits general advertising and solicitation.
This Alert is provided for information purposes only, and does not constitute legal advice. According to Mass. SJC Rule 3:07, this material may be considered advertising. ©2012 Posternak Blankstein & Lund LLP. All rights reserved.