Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Sunday, September 22, 2013

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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