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.
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.