What should you do before generally soliciting?

Generally SolicitingWhat happens on September 23rd?

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:

  1. Advance Form D filings 15 days before any general solicitation.
  2. Lengthy legends on all written general solicitation materials.
  3. Filing with the SEC all written general solicitation materials before their first use.
  4. 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.
  5. A lengthier Form D, with a lot more information disclosed.
  6. 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.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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  • Gary Jay Brooks

    Thanks for the update. I have a question for you.

    If you wanted to be one of the first companies to legally solicit, could you assume at 12:01 am Sept 23rd, I could file form D with my election for 506(c). Submit my marketing material. Then exactly on Oct 1st at 12:01am 15 days after filing Form D. I could send out my marketing material?

    • http://startuplawblog.com/joewallin Joe Wallin

      No need to submit marketing materials the SEC, yet. That is part of the proposed rules.

      • Gary Jay Brooks

        How about my timing? Are my assumptions correct; or can I file form D 506(c) election 15 days before Sept 23rd, and start a marketing campaign the day of Sept 23rd?

        • http://startuplawblog.com/joewallin Joe Wallin

          15 day advance filing is part of the proposed rules too.

  • http://biznik.com/ Lara Feltin

    Have they defined what is included in “general solicitation materials” yet? What are these exactly — my business plan? Do you know if I can continue to revise and update my materials after I submit them, or do I need to resubmit new versions? And lastly, do you know if these materials can be submitted electronically, or if they need to be printed and mailed by certified mail? Thank you! :)

    • http://startuplawblog.com/joewallin Joe Wallin

      Lara, so, no solicitation materials will have to be filed with the IRS under the rules that go live Sept 23rd. Under the proposed rules, yes–but we don’t know when those rules will go live and what they will look like.

    • Jason_DaCruz

      Would these be the ‘advertisements’ of Rule 206 under the Advisers Act? There’s quite a bit of guidance out there, but the definition is very broad and geared more towards the traditional PPM/pitchbook/one-pagers/etc. that traditional and alternative managers use.

  • Jake Durell

    Hi Joe,

    I would like to save my clients the time and money of creating a prospectus until we have had some conversations with accredited investors and can agree on some key terms. What kind of prospectus and disclosures need to be prepared and can they wait until it looks more likely that a transaction will go through? As long as I warn clients that they are closing themselves off to certain groups of investors for a while, can they just throw a simple ad indicating an interest in equity discussions? Do they have to specify a valuation?


    • http://startuplawblog.com/joewallin Joe Wallin

      Jake, I’d be happy to talk about this on the phone if you like. 206 757 8184