The SEC has given the go-ahead for general solicitation ofprivate security offerings, opening the gates for vast amounts of financing not previously available.
Even before this, Rule 506 Reg D exemption was responsible formore than a billion dollars invested just in 2012 in start-ups and other businesses seeking angel financing and other accredited investor capital. Generally speaking, an accredited investor is someone with a $1 million net worth not including her or his residence, or $200,000 a year in individual income.
More than 37,000 Regulation D private placement offerings werefiled in the last 3 years, a time during which no general solicitation ofaccredited investors was permitted. Now the SEC is permitting general solicitation for even the smallest private deal. This will create a new manner of securities offerings altogether and Reg D offerings will explode in number and type.
Thisrevolutionary new version of Reg D allows for a new class of 506(c)offerings. They will remain “private offerings” but for the first time they can be advertised in print, social media, websites, radio,and any other form of public communication.
However, the SEC has also imposed new restrictions and requirementson those seeking accredited investors’ money.
For thefirst time a start-up cannot simply rely onrepresentations by a prospective investor that she or he qualifies as an accredited investor. Instead, thestart-up must actually verify specific investor information and be able to prove to the SEC that he orshe in fact took specific steps to verify that information.
Of course all issuers are still required to comply with state anti-fraud laws and the Securities Act of 1933. Also, the SEC may start requiring all issuers who want to rely on Reg D to send its enforcement division advance copies of all marketing materials they are using, includingsocial media posts and any other form of communication.
Ignoring this or other SEC rules or regulations means, among other things, that the issuer will have to return all the money at any time for any reason, even if there is no good cause otherwise--among other problems with non-compliance.
Lastly, awhole separate problem—seldom recognized—can still easily occur due to the SECdoctrine of integration. Most start-ups already know that if they sell to just one non-accredited investor, theylose the Reg D exemption. What many entrepreneurs and sometimes theirlawyers do not know is that if they conduct two separate private placements within 180days both Reg D offerings will be “integrated” intoone offering.
In other words, the last sale of the first Reg D offering must be 6 months earlier than the date of the new offering. If you have sold to only one non-accredited investor in the six months before your new Reg D offering, you may be in violation of the law. Even more problematic is the fact that you cannot sellsecurities to non-accredited investors in a follow-up private placement for atleast six months after you close the Rule 506 placement.