The majority of capital raised through private offerings, also known as private placement memorandums, is done through Rule 506 of Reg D. Companies and Issuers like Rule 506 because it provides the ability to raise an unlimited amount of capital, allows for up to 35 non-accredited investors to participate, and is avoids Blue Sky laws. The benefits have made this an extremely attractive vehicle for raising capital, over $1 billion per year.
The JOBS Act required the SEC to enact a regulation that would allow businesses to advertise their private offerings to Accredited Investors. This is designed to level the playing field between large hedge funds and non financial issuers, while exposing opportunity to investors that never would have seen it otherwise. It is a win-win for the investment and business community. The SEC passed this in July and on September 23rd Rule 506c was open for business. The challenge is the SEC has extended the comment period and is working out the final guidelines for Rule 506c. While technically companies should be able to advertise, there is a risk associated with doing something during this time period. Businesses who aren’t careful may get caught in the political crossfire.
Some guidelines are clear about Rule 506c…. at least for now.
- Companies must file a Form D prior to advertising their offering. This is a huge change, and failure to comply could impose a penalty of not allowing a company to raise capital for a full year.
- Advertisements must be submitted to the SEC prior to being used. Make sure that you submit exact copies of your ads. Examples don’t cut it when your business is acting as an SEC test case. Do not put out any ads that have not been sent to the SEC first.
- Advertisements must say for Accredited Investors only. Do not risk appearing that you are trying to raise capital from non accredited investors.
Many companies want to know if they should skip 506c while the regulators work out the kinks. If you have a network of people you will be raising capital from, or intend to buy accredited investor leads and cold call, stick with Rule 506b. You can raise money like you always have and skip the liability that comes from being the first mover. If you have a SEC attorney that can review all of your material or work with a marketing company that has met with the SEC for clarification, you are okay to go forward with advertising under Rule 506c. Otherwise, you may want to wait until the dust settles in November. By then the comment period will be over and hopefully the SEC will have issued its final determination on Rule 506c.