(Newswire.net — September 27, 2013) Washington, DC — Companies may now use internet solicitations, mass mailings, website banner and more to attract investors into “private” securities offerings. Thus, 80 years of securities laws requiring that “non-public offerings” or “private placements” remain “private” have been overturned. The new rules affect securities offerings under Rule 506 of SEC Regulation D and are effective as of September 23, 2013. Companies seeking to raise capital under the Rule 506 exemption from securities registration requirements can now make public solicitations in order to cast a wide net for investors, although companies seeking to utilize these more public “manner of offering” rules may only sell securities to accredited investors and must satisfy heightened compliance requirements, including new “bad boy” disqualification rules.
Companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC and state securities administrators or rely on exemptions from registration. In the past, all of these exemptions prohibited companies from engaging in general advertising or solicitation of the securities offerings.
The new rules were mandated by the Jumpstart Our Business Startups Act (JOBS Act). However, while Congress directed the SEC to remove the ban on general advertising and solicitation, the staff of the SEC have not been so willing to upset 80 years of securities laws that held advertising to be inconsistent with private placements.
Rule 506 (the most widely claimed exemption from registration) offerings may now be conducted using general advertising and solicitation. The issuing company may then only accept subscriptions from “accredited investors.” Accredited investors are individuals who meet certain minimum income or net worth levels, or institutions such as trusts, corporations or charitable organizations that meet certain minimum asset levels.
SEC “bad boy” prohibitions ─ disqualifying provisions that previously applied only to other SEC exemptions from registration ─ will now apply to SEC Regulation D Rule 506 offerings. Issuers seeking to raise capital now have an increased compliance burden to ensure that their officers, directors, other senior management or persons holding more than twenty percent (20%) of the issuer’s equity securities do not have prior securities law violations or other disqualifying bad acts as those “bad boys” will prohibit the issuer from relying on SEC Regulation D Rule 506.
Issuers seeking to engage in general advertising and solicitation under a Rule 506 offering will now have increased motivation to strictly comply with all conditions of the Rule 506 registration exemption, since the fact of general advertising and solicitation will destroy reliance on nearly all other federal and state exemptions from registration. Stated differently, raising capital through general advertising and solicitation is largely an election to rely exclusively on Rule 506 and precludes reliance on “alternative” or “secondary” exemptions should there be a problem with another aspect of the Rule 506 offering.
The legislative and regulatory history, as well as public comments from state securities administrators and certain SEC commissioners, suggests that the SEC and state securities administrators are less than thrilled with the new rules. The prevailing seems to be that the new advertising rules will lead to increased fraud on investors. Industry experts expect that the SEC and state regulators may scrutinize Rule 506 offerings which utilize general advertising and solicitation much more closely. The SEC has also published proposed rules intended to enhance the SEC’s ability to better evaluate Rule 506 offerings. As proposed, these rules will require the filing of a Form D before the issuer engages in general solicitation; require written general solicitation materials used in Rule506 offerings to include certain legends and other disclosures; and require the submission, on a temporary basis, of written general solicitation materials used in Rule 506 offerings to the SEC.
According to Mark A. Cotter, a securities expert with the law firm of Ray Quinney & Nebeker
“issuers with seasoned management and technical/ operational sophistication will be less likely to pursue intentional advertising and solicitation to raise capital. The better path being a traditional private placement with investors with whom a bona fide, preexisting relationship is already in place.” Mr. Cotter continues: “Nonetheless, a number of issuers will find the general advertising and solicitation opportunity to be advantageous.”
One thing is certain: we will all receive an increased level of investment solicitations since general advertising and solicitation is now allowed. Protecting you money may have just become that much harder.