Private Equity Cowboy Country Tricks
Who said no? All 50 state securities regulators, SEC and FINRA staff . . . for over 80 years they all said no. No public offerings of private equity in any way, shape or form. Public offerings of a private placement?
Rule 506(c) has become ground zero for best and worst practices under the JOBS Act.
Rule 506(c) allows anybody to pitch any deal to anyone, basically. Small businesses and other exempt issuers raising private capital no longer have to worry about traditional “SEC merit review.”
So relax, Reg D issuers. No SEC staffer will even look at your file unless there is something so unusual that it causes a flagging. To see how your competitors and predecessors have done their EDGAR filing. (Sometimes they say more than they need to about their plans).
You can say and do almost anything other than fraud or deceptive practices. Just tell the truth and you are good to go.
Otherwise, most of you probably know this drill already:
- File with EDGAR to get your Regulation D Form, copies of which you will need to “notice file” the states within 15 days after each closing.
- Use Regulation D’s Rule 506(b) to solicit mostly non-accredited investors, including employees, friends, family members, neighbors and colleagues.
- Convert the exemption into a Rule 506(c) offering and solicit as many US investors as you wish.
Practice tip: An exempt offering can go from 506(b) to 506(c) but not from 506(c) to 506(b). Still, there are practical reasons to simply use 506(c) from the get-go.
Usually (not always despite what you may be told elsewhere) sales of Rule 506(c) investment interests can be made only to accredited investors. But meanwhile and here is the point, online marketing of your company or mere idea can be done to anyone and everyone in all 50 states, Canada and Mexico. Rule 506(c) has expanded the permissible audience of U.S. investors beyond the securities lawyers comprehension of what could be possible. If that were not enough, Regulation S also now offers expedited advantages for companies attractive to non-U.S. investors (think real estate).
The JOBS Act created disintermediation business models sometimes allowing issuers to avoid or minimize the costs of securities licensees and lawyers.
Outlier marketing approaches are now possible. A Texas real estate developer used Rule 506(c) to raise a $20 million REIT in ten weeks on Craigslist, Silicon Valley legend has it.
Remember, this is the wild west. You can do almost anything as long as there is no fraud or deception. Just tell the truth and you are good to go, even though there is no longer merit review by SEC staff. By the way, keep in mind that unhappy private equity investors tend to call their state’s securities regulators before they even think about the SEC or FINRA.
You can say or do almost anything to find and close on early stage investors as long as you tell the truth.
You can qualify for a Rule 506(c) exemption from registration if you follow a few simple rules.
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