On September 23rd something very important happens.
For the first time since we’ve been alive (at least, most of us), private companies will be able to generally solicit and generally advertise their all accredited investor Rule 506 securities offerings.
Yes, if you want, subject to certain conditions, you can run an ad in the newspaper, buy a TV spot, or even put up a roadside sign.
A big note of caution, however: Please be aware that the SEC has issued proposed rules which might become effective shortly after September 23rd (we don’t know yet when and if they will become effective) that may change all sorts of things–Advance Form D filings, legends, filings of offering materials with the SEC, etc. Also, always consult a securities attorney before generally soliciting your securities offerings. There are a variety of reasons that you might not want to generally solicit your offering even though you can, such as an inability to fall back on 4(a)(2), state securities law complications, and other problems which I won’t summarize here, but feel free to email me if you would like to discuss.
Advertising Regulation D securities offerings hasn’t been legal since, well, forever.
But in the JOBS Act the Congress directed the SEC to repeal its regulations prohibiting general solicitation and general advertising:
1) in all-accredited investor Regulation D Rule 506 offerings
2) provided that the issuer took “reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.”
New SEC Government Investor Rules
What are “reasonable steps”?
Well, it depends. If your investors are individuals, you will be deemed to have taken reasonable steps if you use one of four (4) methods of verifying accredited investor status summarized below.
You don’t have to use one of the below four methods with respect to individual investors, but you may prefer to.
In anticipation of September 23rd, please keep the following in mind:
(1) If you generally solicit, you are going to have to check a box on your Form D indicating that you generally solicited your offering.
(2) You won’t be able to rely on just a certification from your investor that he/she/it was accredited. You will have to take reasonable steps to verify that they are accredited.
(3) You will have to keep good records so that you can prove that you took reasonable steps to verify that your purchasers were accredited. (As the SEC said: “Regardless of the particular steps taken, because the issuer has the burden of demonstrating that its offering is entitled to an exemption from the registration requirements of Section 5 of the Securities Act, it will be important for issuers and their verification service providers to retain adequate records regarding the steps taken to verify that a purchaser was an accredited investor.”)
(4) If you generally solicit, you are very likely giving up an important legal fall back position, Section 4(a)(2), the non-public offering securities law statutory exemption.
(5) The SEC has proposed new rules on generally solicited offerings that threaten to upset the whole deal Congress struck, and which everyone is so excited about. And so you might not want to do anything on September 23rd except wait until the regulations shake out.
The Four Methods
For individual investors, you will be deemed to have taken reasonable steps if you use one of the following four methods.
1) For investors accredited on the basis of income, you review their tax returns, a Form W-2, a Form K-1, or a Form 1099 for the two (2) most recent years and obtain from them a written representation that they have a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year.
2) For investors accredited on the basis of net worth, you review one or more of the following types of documentation dated within the prior three (3) months and obtain a written representation that all liabilities necessary to make a determination of net worth have been disclosed:
(i) With respect to assets: bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments, and appraisal reports issued by independent third parties; and
(ii) With respect to liabilities: a consumer report from at least one of the nationwide consumer reporting agencies.
3) You obtain a written confirmation from one of the following persons that they have taken reasonable steps to verify that the purchaser is an accredited investor within the prior three (3) months and have determined that such purchaser is an accredited investor:
(i) A registered broker-dealer;
(ii) An investment adviser registered with the Securities and Exchange Commission;
(iii) A licensed attorney who is in good standing under the laws of the jurisdictions in which he or she is admitted to practice law; or
(iv) A certified public accountant who is duly registered and in good standing under the laws of the place of his or her residence or principal office
4) For accredited investors who purchased your securities before September 23, 2013, and who continue to hold such securities, for any new purchases in your 506(c) offering, you obtain a certification by such person at the time of sale that he or she qualifies as an accredited investor.
September 23rd will be an exciting day. But before you get too excited, please also be aware that on the same day, September 23rd, the comment period on new SEC rules expires. Those rules are going to potentially take away a lot of the gains represented by the rules I just described above. I wrote a piece in the Wall Street Journal on this. You can find that piece here: Time to Advertise Your Private Offering? Not So Fast.
For additional information on how the proposed rules might work and interplay with the rules that go live on September 23rd, you might find this letter from the SEC Chair helpful. In it, she says this:
You also expressed concern that the issuance of the July 10th rule proposal may have created uncertainty among some issuers and market participants as to whether the new Rule 506(c) exemption, which permits general solicitation, can be used once it becomes effective. The Commission approved the adoption of Rule 506(c) on July 10, 2013, and the rule will be effective on September 23, 2013. Once effective, issuers will be able to rely on the Rule 506(c) exemption for securities offerings as long as they comply with the conditions ofthat exemption. Issuers are notrequired to complywith any aspect ofthe Commission’s July 10th rule proposal until such time as the Commission may approve a final rule and such rule becomes effective. Should the Commission ultimately decide to adopt final rules, I expect these rules would consider the need for transitional guidance for ongoing offerings that commenced before the effective date of any final rules, as it did when it adopted the Rule 506(c) exemption.