SEC Clarifications on Rule 506(c) Offerings

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It appears that general solicitation offerings under Rule 506(c) have taken off. In the period between September 23, when the rule became effective, through the first week of November, there were 170 offerings made under Rule 506(c), with $911 million in total sold securities, with an average offering size of $6.1 million compared to $22.8 million for Rule 506(b) (old Rule 506) offerings. Moreover, companies are using general solicitation to raise seven-figure amounts of money, which may prove to be an alternative to having to gain access to VCs and VC money through personal networks and introductions. The SEC has also taken the opportunity to clarify questions regarding Rule 506(c) offerings. Among the points raised, the SEC has stated that: – The rule hinges on whether the issuer took reasonable steps to verify that all its purchasers were accredited investors; it is not enough that all the purchasers happened to be accredited investors if the issuer took no reasonable steps to verify that. In fact, the rule is not violated if not all purchasers are accredited investors as long as the issuer took reasonable steps to verify and had reasonable belief that they were. (emphasis added) – Documentation used to verify accredited investor status must be current within three months of the sale of securities (not just within three months of the date of verification). Therefore, as a practical matter, verification should take place very close to the date of sale so that the verification does not fall out of date. – Attorneys and certified public accountants, for the purposes of the rule, can be licensed in good standing in a jurisdiction outside the United States. – Even if the issuer intends to commence a Rule 506(c) offering, as long as no general solicitations have been made it may revert to an old-style Rule 506(b) offering (although if it has already filed a Form D stating its intention to undertake a Rule 506(c) offering, it must amend that filing to state it will perform a Rule 506(b) offering). Of course, if the issuer is conducting a Rule 506(b) offering, it may at any time decide to undertake a Rule 506(c) offering, making amendment to Form D as applicable. But again, once a general solicitation is made, the issuer is stuck in a Rule 506(c) offering. – Section 4(2) of the Securities Act (the fact-specific, catch-all “private offering” exemption) is not available to issuers who use Rule 506(c).