You can generally solicit your private company securities offering under Rule 506(c) of Regulation D.
What are the drawbacks?
- 1. You can only accept “accredited investors.”
- What is an “accredited investor”? Generally this means a person who has made $200,000 a year for the last two years and expects to make the same in the current year, or with spouse $300,000; or a greater than $1M net worth excluding primary residence.
- 2. You have to take reasonable steps to verify the accredited investor status of your investors, and keep records that you did so. You can no longer rely on a simple certification from the investor.
- 3. You have to indicate on your Form D that you generally solicited.
Are there are any other catches?
The SEC has proposed rules that will make general solicitation of offerings much more complex. We don’t know when and if those rules will be made final, and what those rules will look like in their final form.
If the rules become final in the form in which they were proposed, the following will be required:
- Advance Form D filings 15 days before any general solicitation.
- Lengthy legends on all written general solicitation materials.
- Filing with the SEC all written general solicitation materials before their first use.
- A 1 year penalty if you miss a deadline and don’t cure it within 30 days (you only get one cure per offering). Meaning, you won’t be able to use Reg D Rule 506 for an entire year after the offering in which you miss the deadline.
- A lengthier Form D, with a lot more information disclosed.
- A terminating amendment to your Form D at the end of your offering.
What should you do before generally soliciting?
Always consult with a lawyer before generally soliciting your private company securities offering under Rule 506 of Regulation D. I know you would expect a lawyer to say this, but there are caution signs all over this road. And lots of dangerous road conditions. This path is not to be taken lightly.
For example, if you generally solicit, you are probably giving up a key legal fall back position (what is referred to as the Section 4(a)(2) exemption). And if you generally solicit and don’t completely and totally comply with the rules, not only may you not have a federal securities law exemption, you won’t be able to rely on the federal rules to preempt state law as well.