In 2012 Congress passed the JOBS Act, which mandated the creation of a new offering exemption under the Regulation D 506 program that would allow for general advertising of an offering to accredited investors. The rules went into effect on September 23, 2013. Prior to the passage of the JOBS Act (and the subsequent promulgation of the rules) advertising of private placements was not allowed and companies selling securities (“Issuers”) were limited to soliciting people only in their personal contacts list (hence the term “rolodex round”) unless the Issuers worked through a broker/dealer firm.
The traditional 506(b) offering is still alive and well and can be used by companies to raise capital.
This new exemption is termed “506(c)” and is widely known as the “general advertising” 506 program. All terms and conditions of Rules 501 (definitions), 502(a) (integration with other offerings), and 502(d) (securities are “restricted securities” for purposes of Rule 144) must be satisfied.
The Regulation D 506(c) program will retain many of the characteristics of the current 506(b) offerings. However, there are some notable changes:
- Advertising and general solicitation of investors is allowed;
- Participating investors must be “accredited” investors per the Regulation D Rule 501 definitions;
- Accredited investors must provide proof or an approved third party verification that they meet the accredited standard for income and/or net worth (instead of just “checking a box” certifying that they are accredited like many securities attorneys interpret the 506(b) offering requirements);
- The SEC filing process will be adjusted to include a “pre-filing” of Form D with a 15-day waiting period prior to advertising being allowed for the offering.
There are some other small adjustments to execution aspects of the offering as well.
The SEC adopting release clarifies that, as required by the JOBS Act, Rule 506(c) will be treated as a “private placement” exemption even though general solicitation is permitted under the Rule; however, the statutory “private placement” exemption otherwise provided by Section 4(a)(2) of the Securities Act (commonly referred to as “Section 4(2)” before the re-codification of the Securities Act necessitated by the JOBS Act) continues to be conditioned on the absence of general solicitation. Because offerings conducted under Rule 506(c) are deemed by the JOBS Act to not involve a public offering, hedge funds, private equity funds, and similar “private” funds may sell their securities using general solicitation under Rule 506(c) without losing the ability to satisfy the exemptions from registration under the Investment Company Act that are conditioned on the fund not making a public offering of its securities.
The Bradshaw Law Group’s 506(c) Offering Preparation Services
We are currently preparing 506(c) exempt offerings. We provide flat fee services for these offerings and will even create a funding platform and a unique website specific to your offering.
Email Gilbert Bradshaw at gil@bradshawlawgroup.com.
