You Can Now Generally Solicit for Rule 506 Offerings, But Do You Want To?

Beginning yesterday, September 23rd, companies could make general solicitations in offering securities under Rule 506 — this particular provision is under Rule 506(c). This change comes as a result of last year’s JOBS Act, which also provided the IPO on-ramp rules as well as the equity crowdfunding that we’re still waiting for. However, the SEC has made clear that the old way of raising money under Rule 506 is still intact (now under Rule 506[b]) and available for companies to use. As of right now, the only additional requirements for companies who want to generally solicit under Rule 506(c) is that all sales must be made to accredited investors only, and companies now must take proactive steps to verify the accredited status of investors (referring here to natural persons). There’s no required method for verification, but the SEC does provide several methods that they have designated as being acceptable, such as: 1) reviewing government records of net worth or income, such as 1040s, W-2s, 1099s, Schedule K-1s, etc.; 2) reviewing private third-party statements of net worth or income, such as pay stubs, bank statement, or brokerage account reports; 3) obtaining written verification from a registered broker-dealer or investment advisor, licensed attorney, or certified public accountant; or 4) written verification from the investor himself or herself if he or she was an investor in the issuer’s previous Rule 506 offering. Any other verification methods are subject to the approval of the SEC, should they choose to investigate, and so are undertaken at the issuer’s risk. Issuers must also indicate on their Form D filing that they made a publicly advertised offering. However, the SEC has also proposed additional requirements for making a general solicitation offering under Rule 506(c). These additional requirements include: 1) attaching legends to all general solicitation materials; 2) forwarding copies of all general solicitation materials to the SEC; 3) filing an advanced Form D with the SEC at least 15 days before the first general solicitation; 4) updating Form D filings whenever changes are made to the offering; and 4) filing another Form D within 15 days of the conclusion of the offering (either because the round closes or fails — under Rule 506(b) a Form D is only required after the first sale). Companies would only get one opportunity to correct any noncompliance with these requirements within 30 days of the failure to comply; any other noncompliance would be punishable by barring the issuer from using Rule 506 (either [b] or [c], it appears) for one year. These proposed rules are not yet in effect as they still have to be voted on by the Commission; the SEC has received quite the uproar from the startup community, and there is currently a recommendation to extend the comment period for these rules (which ended on September 23rd as well). So if you start a general solicitation, you don’t have to comply with these proposed rules — yet. It is important to note that once an issuer starts a Rule 506(c) offering by making the first general solicitation, it cannot change to a Rule 506(b) offering. Therefore, if you are in the midst of a Rule 506(c) offering, and the SEC adopts these proposed rules or something like them, they may require issuers making Rule 506(c) offerings to comply with them. Most startups are opposed to the increased regulatory burden that these proposed rules pose, so any startups looking to make a Rule 506(c) offering now or in the near future must weigh the risk of having to comply with onerous regulatory requirements in the midst of their offering.

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