Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Monday, September 23, 2013

General Solicitation and Advertising Now Permitted Under Rule 506(c)

As of today, September 23, Securities and Exchange Commission (“SEC”) rules implementing some provisions of the JOBS Act have become effective.  Among them is the new Regulation D Rule 506(c).
While the floodgates to raising capital will not open at the break of dawn, within a few weeks market observers and participants are likely to be subjected to a great deal of advertising of investments.

 Rule 506(c) and Advertising

Companies that choose to engage in private placements using Rule 506(c) are now free to use general solicitation and advertising to attract investors.  This is a major departure; in the past, no form of advertisement was allowed in connection with unregistered securities offerings.  The JOBS Act changed all that.  Small companies often have difficulty finding the investors they need to grow their businesses, because they don’t have a high profile and are often known in a relatively small local area.  The JOBS Act’s authors and supporters believed those companies should be able to reach out to people who might be  interested in taking a stake in their futures.
Businesses wishing to conduct Rule 506(c) offerings will have some new restrictions.  They must sell their securities only to accredited investors; no non-accredited investors may participate.  The number of  investors is unlimited, as is the amount of money the company may try to raise.  To a considerable extent, companies will bear the onus of establishing whether potential investors qualify as accredited.  The SEC has suggested several methods they may use to accomplish that.
They must also file Forms D fifteen days in advance of their first use of general solicitation for the offering. Although the electronic filing of a Form D has been strongly encouraged in recent years, it has not been compulsory.  In addition, any written materials to be used in advertising must be submitted to the SEC no later than the first day they’re used.
Rule 506(b) 
Companies that feel they can attract investors and the level of funding they need without going to the trouble and expense of advertising are free to use old Rule 506.  Its advantages are that it entails less reporting to the SEC, and that the participation of up to 35 non-accredited investors is permitted.
The choice depends on companies’ individual characteristics and needs.
What Will Happen 
Companies electing to launch private placements using Rule 506(c) are expected to verify whether participants are accredited investors or not because their solicitation will be broadly directed, not sent out only to those they know are qualified.  They can and will use a variety of media:  television and radio, print, Facebook and Twitter, and general internet advertising.
In a recent investor alert, the Financial Industry Regulatory Authority (“FINRA”) warned that “while the target audience will be accredited investors, the reality is that all investors—whether accredited or not—will likely be exposed to private placement sales pitches and advertising, for instance by Regulation D crowdfunding platforms, as never before.”
The SEC has not yet implemented new rules addressing the crowdfunding provisions of the JOBS Act.  For now, the public will have to deal only with a barrage of advertising from the companies themselves.
Be prepared:  it’s coming to a newspaper, radio, or computer near you soon, whether you’re interested in investing in a startup or not.
For more information please visit: Securities Lawyer 101

Sunday, September 22, 2013

General Solicitation and Advertising Now Permitted Under Rule 506(c)

Rule 506 l General Solicitation Countdown


Rule 506(c) will become effective in less than a month, on September 23, 2013.   The rule fundamentally changes how private placements will be conducted, by allowing issuers to engage in general solicitation and advertising if specific requirements are met. The SEC has confirmed that the Rule 506(c) exemption will not be forgiving for issuers who engage in general solicitation but fail to comply with its requirements.
Even one sale to a non-accredited investor will prevent the issuer from relying upon the exemption, making it a time bomb for issuers who fail to adopt proper compliance methods for their offerings.  The most significant compliance concern is that issuers make sales only to accredited investors. The advantages offered by  Rule 506(c) are significant for issuers who comply with its inflexible but adaptable requirements.
Pending SEC Proposals
In the adopting release implementing Rule 506(c), the SEC made proposals and provided some guidance about the steps issuers should take to confirm accredited investor status. These proposals include imposing disclosure and filing requirements for offerings made under Rule 506(c), and changing Form D.   Rule 506(c) will go into effect on September 23, with or without final action on the SEC’s proposals.
Rule 506(c) Generally
Both public and private companies can rely upon Rule 506. The exemption is commonly used in going public transactions to raise initial capital and obtain a shareholder base. Rule 506 allows issuers to raise an unlimited amount of capital and there are no limitations on the number of non-accredited investors who can invest. Rule 506(c) allows issuers to advertise their offerings so long as sales are made to accredited investors only.
Issuers should ensure that prior securities offerings made to non-accredited investors are not integrated with a Rule 506(c) offering or the exemption will could be lost.
Simultaneous Offerings Under Rule 506
Issuers can either conduct their offering under Rule 506(c) or sell to accredited investors. They cannot conduct simultaneous offerings to both accredited and non-accredited investors if general solicitation and advertising is used.  Issuers must also consider whether any prior Regulation D offerings made to non-accredited investors will be integrated with its Rule 506(c) offering making 506(c) unavailable. Rule 502 (a) of Regulation D provides a safe harbor from integration of Regulation D offerings, made six months before or six months after another offering.  If six months has not elapsed between offerings, the issuer should rely upon the 5 factors set forth in 502(a) to determine whether its prior Regulation D offering will be integrated.
Rule 502(a)’s integration factors include:
● Whether the offerings are part of a single plan of financing;
● Whether the offerings involve the same class of securities;
● Whether the offerings were made at or about the same time;
● Whether the same type of consideration was received in the offerings; and
● Whether the offerings were conducted for the same general purpose.
Once an issuer determines that no prior securities offerings are integrated with its Rule 506(c) offering it can proceed with its Rule 506(c) compliance strategy.  The first step should be to determine how it will confirm accredited investor status.
506(c) Accredited Investor Requirements
Issuers may only use general solicitation and advertising in their Rule 506(c) offerings if sales are made to accredited investors. Under the Securities Act an accredited investor must have either (i) a net worth of at least $1 million, not including the value of his or  her primary residence, or (ii) income of at least $200,000 in each year of the last two years or $300,000 together with his or her spouse if married and have the expectation to earn the same amount in the current year.
Confirming Accredited Investor Status
Rule 506(c) requires that issuers take reasonable steps to verify that Rule 506(c) investors are accredited. The SEC  has indicated that accredited investor status will be an objective determination by the issuer based upon the particular facts and circumstances. The SEC suggested the  methods below.
Income Requirement
The issuer should review tax forms, including W-2s, 1099s, K-1s, and 1040s, that report the purchaser’s income for the two most recent years. The issuer should also obtain written representations from the investor that he or she has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year.
Net Worth Requirement l Assets
The issuer should review bank, brokerage and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports that are no more than 3 months old.
Net Worth Requirement l Liabilities
The issuer should obtain reports from credit agencies. The reports would need to be dated within the prior three months.  The issuer should obtain written representations from the investor that all liabilities necessary to make a determination of net worth have been disclosed.
Third Party Confirmations
The issuer should request written confirmations from third parties such as broker-dealers, investment advisers, attorneys and certified public accountants, that such third party has taken reasonable steps within the prior three months to verify that the purchaser is an accredited investor.
Existing Investors
The issuer should ensure that accredited Investors who purchased prior to September 23 should certify that he or she remains an accredited investor.
The advantages offered by Rule 506(c) are significant for issuers who comply with its inflexible but adaptable rules for issuers who properly prepare for their offering by developing compliance strategies to ensure accredited investor status.
For more information please visit: Securities Lawyer 101

Accredited Investor Status Under Rule 506(c)


On July 10, 2013, the SEC adopted final rules as required by Title II of the JOBS Act, which directed the SEC to eliminate the ban on general solicitation and advertising for certain offerings conducted under Rule 506(c) of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”), provided the securities are sold only to accredited investors.
Under the amended rule, issuers can lose their ability to rely upon Rule 506(c) if they sell to even one non-accredited investor in their offering. As such, determining accredited investor status is critical.
This post summarizes how issuers can determine accredited investor status in Rule 506(c) offerings.

Rule 506(c) Requirements l General Solicitation & Advertising

Rule 506(c) allows an issuer to use general solicitation and advertising to sell its securities if the following conditions are met:
● The issuer must take reasonable steps to verify that investors are accredited investors;
● All investors are accredited investors, either because they come within one of the enumerated categories of persons that qualify as accredited investors or the issuer reasonably believes that the investor qualifies as an accredited investor, at the time of the sale of the securities; and
● Rule 501 and Rules 502(a) and 502(d)’s conditions are satisfied.
Factors in Determining Accredited Investor Status
The SEC provides a list of factors to consider when determining whether a purchaser is an accredited investor as required by Rule 506(c).
Nature of the Purchaser l Accredited Investor Status
The SEC sets forth the different types of accredited investors, including broker-dealers, investment companies or business development companies, employee benefit plans, and wealthy individuals and charities. Certain types of purchasers are more likely to be accredited investors.
Amount of Information Obtained l Accredited Investor Status
In its adopting release, the SEC pointed out that the more information an issuer obtains about a potential investor’s status, the fewer steps it would have to take to determine whether he or she was accredited, and vice versa.
 Nature of Offering l Accredited Investor Status
In many cases, the nature of the offering may be relevant in determining the reasonableness of steps taken to verify accredited investor status. For example, a widely solicited internet offering may require the issuer to take more steps to ensure compliance than an offering advertised to a limited number of pre-screened investors.
 Laundry List of Methods to Determine Accredited Investor Status
The final rule set out a non-exclusive laundry list of ways that issuers may satisfy Rule 506′s accredited investor verification requirement.
These include a review of:
● IRS forms such as tax returns for the two most recent years and written representations regarding the investor’s expected income level for the current year;
● Bank statements, brokerage statements and/or tax assessments, to determine assets, and a consumer report or credit report from at least one consumer reporting agency to assess liabilities;
 ● Written confirmation from a registered broker-dealer, registered investment advisor or CPA; and
 ● A certification for investors prior to adoption of Rule 506(c).
 Risks of Using General Solicitation and Advertising in Rule 506 Offerings
The SEC also indicated that if an investor provides false information to an issuer claiming status as an accredited investor, the issuer would not lose the ability to rely on the proposed Rule 506(c) exemption if the issuer took reasonable steps to verify that the purchaser was an accredited investor and had a reasonable belief that such purchaser was an accredited investor.  That is, however, a situation best avoided by companies engaged in Rule 506 placements.  It’s best for them to design a protocol that will enable them to identify genuine accredited investors with accuracy.  Inattention to detail could put the offering at risk and expose the issuer to Section 5 liability under the Securities Act. Additionally, the issuer could be forced to offer rescission to investors int he Rule 506 offering.
For more information please visit: Securities Lawyer 101

Rule 506 Roadmap


Private placement offerings under Rule 506 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) are a cost effective and relatively quick way for private companies to raise capital prior to their going public transactions.  According to the Securities and Exchange Commission (the “SEC”) Rule 506 is the relied upon by issuers more than any other exemption from registration. Recently approved Rule 506(c) fundamentally changes the way unregistered offerings may be conducted. While the rule imposes stringent requirements, these requirements are manageable for issuers putting effective  compliance strategies into place.
Effective on September 23, 2013, issuers will  be able to use general solicitation and advertising in Rule 506 (c) offerings made to accredited investors, making it easier for issuers to raise capital and obtain the necessary shareholder base for their going public transaction. This blog post addresses the common questions we receive about private placement offerings made in reliance upon Rule 506(c) under the JOBS Act.
Q. What is a Rule 506 offering?
A. Rule 506 of Regulation D provides issuers with a safe harbor from the registration requirements for certain private placement offerings.
Q. What are the maximum amounts that can be raised in  a securities offering conducted in reliance upon Rule 506′s safe harbor?
A.   Rule 506 does not limit the amount that can be raised.
Q. Can all companies rely on the securities exemption provided by Rule 506 of Regulation D?
A. Yes, Rule 506 is available to both private and public companies regardless of whether they are reporting with the SEC.  It is also available to both domestic and foreign issuers.
Q. Is there a limit on the number of purchasers who can invest in a Rule 506 Offering?
A.  No. After September 23, Rule 506(b) will allow issuers to sell securities to up to 35 non-accredited investors and an unlimited number of accredited investors. Rule 506(c) will allow issuers to sell securities to an unlimited number of accredited investors.
Q. How did the JOBS Act change Rule 506 offerings?
A.  The JOBS Act eliminated the prior prohibition against general solicitation and advertising in Rule 506 securities offerings, provided that the securities offered are sold only to accredited investors; however, the issuer is required to take “reasonable steps” to verify that all investors are accredited. After September 23, 2013, Rule 506 offerings being made without general solicitation will be conducted pursuant to Rule 506(b).
Q. Can an issuer conduct offerings under 506(b) and Rule 506(c) at the same time?
A.  Probably not if the securities are of the same class because it would be difficult if not impossible to prevent the general solicitation used in connection with a Rule 506(c) offering from impacting the simultaneous Rule 506(b) offering.
Q. Can an issuer conduct a Rule 506(b) offering after a Rule 506(c) offering?
Yes, once a Rule 506(c) offering has been completed, the issuer can conduct an offering under Rule 506(b) but the issuer should undertake an integration analysis.
Q.  Are there any new requirements that apply to investments in Rule 506 (b) offerings?
A.  The Dodd-Frank Wall Street Reform and Consumer Protection Act imposed bad boy provisions. The Dodd Frank Act requires the SEC to adopt rules that would prohibit the use of the Rule 506 exemption for any securities offering in which certain felons and other bad actors are involved. The new provisions prohibit issuers as well as underwriters, placement agents, directors, executive officers, and certain shareholders from participating in Rule 506 offerings, if they have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specified laws. This prohibitions apply to offerings conducted under Rule 506(c0.
Q. Can an issuer rely on the Section 4(a)(2) exemption in connection with a Rule 506 offering made after September 23?
A. Issuers may rely on the private offering exemption provided by Section 4(a)(2) if general solicitation and advertising are not used as an alternative to an offering made under Rule 506(b).  The Section 4(2) exemption cannot be used in a Rule 506(c) offering because general solicitation is used.
Q. In connection with a Rule 506 offering, is the issuer required to undertake investor verification steps ?
A. When general solicitation is used the issuer must take steps to verify accredited investor status. The issuer must demonstrate a reasonable belief that the investors in the offering are accredited investors. As a result, the issuer must some conduct diligence if it relies upon a third-party verification service. For offerings made in reliance upon Rule 506(b), issuers are not required to confirm accredited investor status.
Q. Are the securities sold in offerings made under Rule 506(b) and (c) restricted securities?
A. Yes, securities sold in Rule 506(b) and Rule 506(c) offerings are restricted securities. The changes to Rule 506(c) would not affect tradability or resales, because Rule 506 is available only to issuers.
Q. Do companies have to make a filing with the SEC if they conduct a securities offering under Rule 506 (c) of Regulation D?
A. While companies relying upon the Rule 506 exemption do not have to register their securities, they must file a Form D with the SEC.  This includes issuers conducting offerings under Rule 506(c). In these offerings, Form D requirements have been expanded to include among other things, disclosure of whether general solicitation and/or advertising is used in the offering.
For more information please visit: Securities Lawyer 101

The Distinction Between Rule 506(C) And Crowdfunding


The JOBS Act’s new rules permitting general solicitation and advertising in Rule 506 private placements will become effective on September 23, and there is still some confusion about the difference between crowdfunding and general solicitation and advertising in Rule 506(c) offerings. While Rule 506(c) becomes effective in two weeks, the crowdfunding rules have not been implemented by the Securities and Exchange Commission (“SEC”).
While the public, and perhaps even some companies, may think of advertising and crowdfunding as the same thing, for the SEC they are not.  Crowdfunding is generally defined as raising small amounts of money from many people, rather than large amounts from a few.  In recent years, it’s often been used to provide funding for disaster relief, political campaigns, and other “causes” of interest to many people.  It is a concept and a technique.  The SEC doesn’t regulate concepts,  but it does have jurisdiction over companies that choose to apply those concepts, and to those who participate in their application.

General Solicitation and Rule 506(c) 

Until now, companies have been forbidden to use general solicitation and advertising to promote their securities.  In less than two weeks, that will be permitted in conjunction with offerings of unregistered securities conducted pursuant to Regulation D.  Companies are not required to advertise, and if that is their choice, they may use the “old” Rule 506, which does not allow solicitation of any kind.  If they wish to advertise, they must use Rule 506(c).  In a Rule 506 placement, there may be an unlimited number of accredited investors, and up to 35 unaccredited investors.  The new Rule 506(c) permits advertising, but excludes non-accredited investors from participation.  In addition, issuers will be expected to make an effort to verify whether their accredited investors qualify for that status.  The SEC has suggested several methods they may use to accomplish that.
Companies using Rule 506(c) must also file Forms D fifteen days in advance of the first use of general solicitation for the offering.  While the electronic filing of a Form D has been strongly encouraged in recent years, it has not been compulsory.  In addition, any written materials to be used in advertising must be submitted to the agency no later than the first day they’re used.

Crowdfunding

The SEC has yet to implement new rules that will permit crowdfunding in Regulation D offerings.  Pressed for a date, spokespersons will only say “soon.”
The JOBS Act provides that “crowdfunding portals” or qualified broker-dealers may be used to raise money.  The companies receiving the money may not advertise on their own behalf; the issuer can only direct interested parties to the portal being used.  The portal operators’ job is only to match investors with issuers.  They cannot offer investment advice, solicit sales, or handle investors’ money.  They must register with the SEC and FINRA as investment portals.
If a company takes the crowdfunding route, it may raise no more than $1 million every 12 months from that offering or any other offering.  In other words, if an issuer uses crowdfunding, it may not float any other kind of offering to raise additional funds until a year has passed.
There will also be strict limits on how much an investor whose net worth is less than $100,000 can spend, which will be the greater of $2000 or 5% of his income.  If he’s worth more than that, there is still a maximum investment size of $100,000.
The company will have to provide additional information to the SEC, depending on the amount of money to be raised.  If its goal is, for example, $500,000 or more, audited financials will be required.

Implications for Issuers

General solicitation and crowdfunding will provide new ways for small businesses to attract investors; with luck, they will help them grow more quickly and easily than before.  But the rules are complicated, and a failure to understand them could result in securities laws violations.  Companies should seek advice from an qualified securities attorney before embarking upon the unknown.
Fore more information please visit: Securities Lawyer 101

Using the EB-5 Program With Rule 506(c) of Reg D


The EB-5 visa program was created by the U.S. Congress as part of the Immigration Act of 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors.
Under the EB-5 program, foreign investors can obtain EB-5 visas designated by the U.S. Citizenship and Immigration Services (USCIS) to gain lawful residency in the U.S. for themselves and their immediate family in exchange for a capital investment of at least $500,000 in a qualified U.S. business enterprise.
When securities are offered to foreign investors pursuant to the EB-5 program, Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”) is typically the securities exemption relied upon by the U.S. business enterprise.
Securities sold under Rule 506 are a cost effective and relatively quick way for private companies to raise capital prior to their going public transactions.  The exemption is commonly used in going public transactions to raise initial capital and obtain a shareholder base.
In the past, the 506 exemption prohibited any form of general solicitation or advertising in connection with the offering.  Beginning September 23, 2013, EB-5 issuers that rely on the Rule 506 exemption are no longer banned from general solicitation and advertising in Rule 506 offerings.  EB-5 issuers will be able to use broad-based marketing methods of advertising in Rule 506 (c) offerings made to accredited investors, making it easier for issuers to raise capital under the EB-5 program.  This new rule allows EB-5 issuers to engage in general solicitation, including public websites, social media, newspapers and television, if specific requirements are met. The SEC has confirmed that the Rule 506(c) exemption will not be forgiving for issuers who engage in general solicitation but fail to comply with its requirements.  EB-5 issuers still need to ensure proper compliance, particularly when choosing a credible EB-5 entity to invest in and verifying that foreign investors are accredited.
EB-5 Immigrant Investor Visa Requirements and Advertising of EB-5 Projects
To qualify under the EB-5 program, a foreign investor has two different options for the required investment amount.
1. The EB-5 investor must make an individual investment of at least $1 million in a qualified, for-profit U.S. business enterprise; or
2. The EB-5 investor need only invest a minimum of $500,000 as long as he/she chooses to create a business in a Targeted Employment Area (TEA) or in a rural area which has experienced high umemployment.
Additionally, the option chosen must result in the creation of full-time employment for at least 10 U.S. workers for a minimum of two years.  In addition to the strict proof and proper documentation compliance with these rules, EB-5 issuers must be mindful of potential pitfalls.  The most significant compliance concern is that issuers make sales only to accredited investors.
Under the regulations, the EB-5 program is capped at 10,000 visas annually. This number has yet to be reached.  In 2011, however, there was a significant increase in the number of EB-5 program participants and the EB-5 investment program has grown in popularity due to the efficiency in the application process and the creation of more EB-5 Regional Centers throughout the U.S.  EB-5 Regional centers are designated by the USCIS to administer EB-5 investment projects based on proposals for promotiong economic growth.  By investing through a Regional Center, the investor is relieved of the day-to-day troubles of running the business, and they are not responsible for the direct management of their investment.  As a result, the vast majority of EB-5 visas issued have been for applicants who invest through the EB-5 Regional Center.
EB-5 investment projects may only use general solicitation and advertising in their Rule 506(c) offerings if sales are made to accredited investors.  Even one sale to a non-accredited EB-5 investor will prevent the issuer from relying upon the exemption, making it a time bomb for issuers who fail to adopt proper compliance methods for their offerings. In the adopting release implementing Rule 506(c), the SEC made proposals and provided some guidance about the steps issuers should take to confirm accredited investor status. These proposals include imposing disclosure and filing requirements for offerings made under Rule 506(c), and changing Form D.   Rule 506(c) will go into effect on September 23, with or without final action on the SEC’s proposals.
Accredited Investor Requirements
Under the Securities Act, an accredited investor must have either (i) a net worth of at least $1 million, not including the value of his or her primary residence, or (ii) income of at least $200,000 in each year of the last two years or $300,000 together with his or her spouse if married and have the expectation to earn the same amount in the current year. 
The SEC has indicated that accredited investor status will be an objective determination by the issuer based upon the particular facts and circumstances. The SEC suggested the methods below:
1.Confirming Accredited Investor Status - The issuer should review tax forms, including W-2s, 1099s, K-1s, and 1040s, that report the purchaser’s income for the two most recent years. The issuer should also obtain written representations from the investor that he or she has a reasonable expectation of reaching the   income level necessary to qualify as an accredited investor during the current      year.
2. Net  Worth Requirement Assets – The issuer should review bank, brokerage and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports that are no more than 3 months old.
3. Liabilities – The issuer should obtain reports from credit agencies. The reports would need to be dated within the prior three months.  The issuer should obtain written representations from the investor that all liabilities necessary to make a determination of net worth have been disclosed.
4. Third Party Confirmations – The issuer should request written confirmations from third parties such as broker-dealers, investment advisers, attorneys and certified public accountants, that such third party has taken reasonable steps within the prior three months toverify that the purchaser is an accredited investor.
5. Existing Investors – The issuer should ensure that accredited Investors who purchased prior to September 23 should certify that he or she remains an accredited investor.
Using the EB-5 Program in conjunction with the Rule 506(c) exemption provides the issuer with a roadmap for a successful capital raising offering.  EB-5 issuers should ensure that prior securities offerings made to non-accredited investors are not integrated with a Rule 506(c) offering or the exemption will could be lost. Issuers should ensure compliance with the securities laws and regulations in the countries where EB-5 investors are located.
For more information please visit: Securities Lawyer 101

FINRA Issues Risk Alert For Rule 506 Private Placements


On September 17, 2013, The Financial Industry Regulatory Authority (“FINRA”) issued an investor alert concerning private placement offerings to caution investors about the risks involved in private placement offerings. FINRA cautions investors that private placements are risky and illiquid investments that can tie up their money for a long time.
A private placement is an offering of a company’s securities that is not registered with the Securities and Exchange Commission (the “SEC”) and is not offered to the public at large. Rule 506(c) which becomes effective next week  fundamentally changes the private placement offering process by allowing issuers to solicit if certain conditions are met. Most private placements are offered pursuant toRegulation D of the Securities Act of 1933.
Rule 506 of Regulation D currently allows companies to sell to up to 35 non-accredited investors and an unlimited number of accredite investors if certain conditions are met.  According to the Securities and Exchange Commission (the “SEC”) Rule 506is the relied upon by issuers more than any other exemption from registration. Recently approved Rule 506(c) fundamentally changes the way unregistered offerings may be conducted. While the rule imposes stringent requirements, these requirements are manageable for issuers putting effective  compliance strategies into place.
Effective on September 23, 2013, issuers will  be able to use general solicitation and advertising in Rule 506 (c) offerings made to accredited investors, making it easier for issuers to raise capital and obtain the necessary shareholder base for their going public transaction. Private placement offerings are a cost effective and relatively quick way for private companies to raise capital prior to their going public transactions but many are concerned new Rule 506(c) will increase fraud in unregistered securities offerings.
FINRA appears to be preparing investors for the increase in fraudulent offerings that many anticipate from Rule 506(c).
Gerri Walsh, FINRA’s Senior Vice President for Investor Education, stated, “Investors should understand that many private placement securities are issued by companies that are not required to file financial reports, and investors may have problems finding out how the company is doing. Given the risks and liquidity issues, investors should carefully assess how private placements fit in with other investments they hold before investing.”
FINRA is advising investors that if they are provided with a private placement memorandum or other offering document, they should carefully review it and make sure that statements by their broker are consistent with the information contained within the private placement memorandum. FINRNA provided investors with a series of tips to help determine if a private placement is right for them, including the following.
♦ Find out as much as you can about the company’s business and understand how and when you might liquidate your private placement securities.
♦ Ask your broker what information he or she was able to review about the issuing company and this private placement.
♦ Be extremely wary if you receive paperwork to sign about a private placement without having a personalized discussion with your broker about why such an investment is right for you.
♦ Be extremely wary of private placements you hear about through spam emails or cold calling. They are very often fraudulent.
For more information please visit: Securities Lawyer 101

Rule 506(C) Question and Answer

Private placement offerings under Rule 506 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) are a cost effective and relatively quick way for private companies to raise capital before, during and after a  going public transaction.  Rule 506(c) fundamentally changes the way unregistered offerings may be conducted. While the rule imposes stringent requirements, these requirements are manageable for issuers putting effective compliance strategies into place.
Effective on September 23, 2013, issuers will be able to use general solicitation and advertising in Rule 506 (c) offerings made to accredited investors, making it easier for issuers to raise capital and obtain the shareholders required in going public transactions. This blog post addresses the recent questions we have received about  Rule 506(c) and the JOBS Act.
Q. What are the maximum amounts that can be raised in  a securities offering conducted in reliance upon Rule 506(c)?
A.   Rule 506 does not limit the amount that can be raised.
Q. Question: Can my Company advertise its offering on September 23?
A: Yes,  if you comply with the requirements of Rule 506(c)
Q:  If my company is in the middle of a Rule 506 offering as of September 23rd, can it continue its offering but generally engage in general solicitation and advertising?
A:  Yes but once it engages in solicitation, it cannot accept funds from non-accredited investors.
Q: Do my Company have to file a Form D before it advertises its offering under Rule 506(c)?
A: As of now, issuers do not have to file a Form D prior to engaging in general solicitation or advertising.
Q: Does my company have to file its general solicitation and advertising materials with the SEC before generally soliciting? 
A: No, you do not have to file your general solicitation and advertising materials with the SEC before engaging in solicitations or advertising.
Q:  Can my Company sell to up to 35 non-accredited investors if it engages in general solicitation and advertising?
A: No. a company cannot engage in general solicitation and advertising if it accepts funds from even one accredited investor.
Q. Is there a limit on the number of purchasers who can invest in a Rule 506 Offering my company uses general solicitation and advertising?
A.  No. After September 23, Rule 506(b) will allow issuers to sell securities to up to 35 non-accredited investors and an unlimited number of accredited investors if general solicitation and advertising is not used. Rule 506(c) will allow issuers to sell securities to an unlimited number of accredited investors if general solicitation and advertising is used.
Q. How did the JOBS Act change Rule 506 offerings?
A.  The JOBS Act eliminated the prior prohibition against general solicitation and advertising in Rule 506 securities offerings, provided that the securities offered are sold only to accredited investors; however, the issuer is required to take “reasonable steps” to verify that all investors are accredited. After September 23, 2013, Rule 506 offerings being made without general solicitation will be conducted pursuant to Rule 506(b).
Q: Can I rely on an investor certification or declaration from an investor certifying that he or she is accredited? 
A: No.  You must take reasonable steps to verify the accredited investor status of all investors if you engage in general solicitation and advertising under Rule 506(c)
Q.  What are the new requirements that apply to investments in Rule 506 (b) offerings?
A.  The Dodd-Frank Wall Street Reform and Consumer Protection Act imposed bad boy provisions. The Dodd Frank Act requires the SEC to adopt rules that would prohibit the use of the Rule 506 exemption for any securities offering in which certain felons and other bad actors are involved. The new provisions prohibit issuers as well as underwriters, placement agents, directors, executive officers, and certain shareholders from participating in Rule 506 offerings, if they have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specified laws. This prohibitions apply to offerings conducted under Rule 506(c0.
Q. In connection with a Rule 506 offering, is the issuer required to undertake investor verification steps?
A. When general solicitation is used the issuer must take steps to verify accredited investor status. The issuer must demonstrate a reasonable belief that the investors in the offering are accredited investors. As a result, the issuer must some conduct diligence if it relies upon a third-party verification service. For offerings made in reliance upon Rule 506(b), issuers are not required to confirm accredited investor status.
Q. Are the securities sold in offerings made under Rule 506(b) and (c) restricted securities?
A. Yes, securities sold in Rule 506(b) and Rule 506(c) offerings are restricted securities. The changes to Rule 506(c) would not affect tradability or resales, because Rule 506 is available only to issuers.
Q. Do companies have file a Form D with the SEC if they conduct a securities offering under Rule 506 (c) of Regulation D?
A. While companies relying upon the Rule 506 exemption do not have to register their securities, they must file a Form D with the SEC.  This includes issuers conducting offerings under Rule 506(c). In these offerings, Form D requirements have been expanded to include among other things, disclosure of whether general solicitation and/or advertising is used in the offering.

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