Overview

The new Rule 506 changes everything. The SEC has lifted an 80-year ban on general solicitation and start-ups and other Issuers for the first time can use public advertising to sell private offerings. Startups are now able to use advertising and general solicitations to fund private placements! The new Rule 506 may prove to be the answer to the prayers of startups frustrated with existing fund sourcing platforms. But it also has hidden dangers that will cause many issuers to continue to use the old Rule 506. Among the new Rule 506 strengths, observe: The amount that can be raised is unlimited There is no requirement for review of the offering under any Blue Sky laws (state securities regulations) There is no review of the offering by the SEC Solicitations can be online or offline Solicitations can be made to anyone! Sales (as opposed to solicitations) must be to accredited investors, and issuers must be able to verify that any actual investor is accredited. Also, proposed rules will require issuers to send the SEC all marketing copy; as of this writing, however, there is no need to send copies of solicitation materials to the SEC (or to state regulators). Soon you will start to see the following: Emails asking if you might be interested in learning about investing in someone's project Videos of founders and entrepreneurs soliciting your interest in their projects Links on websites inviting you to click through to learn more about an investment Mobile apps with increasingly creative solicitation Private placement memorandum and related offering documents continue to be mandatory. Q: How has verification occurred until now? Issuers have relied on the investor's representation that he or she is an accredited investor under one of the categories in rule 501(a). Q: How will verification occur now? Under the new rules, issuers must take reasonable steps to verify the accredited investor status. New Rule 506(c) (2) (ii) includes several non-exclusive methods to satisfy the verification requirement such as: reviewing any IRS form that reports the purchaser's income for the two most recent years and obtaining a signed statement from the purchaser that he or she has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year, or reviewing bank, brokerage or other statements, and a consumer report from at least one of the nationwide consumer reporting agencies dated within three months, and obtaining a written representation from the purchaser that all liabilities necessary to make a determination of net worth have been disclosed, or obtaining written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney or certified public accountant that the issuer has taken reasonable steps to verify the purchaser's accredited investor status. Note that there is a grandfather provision in new Rule 506(c) (2) (ii) (D). For existing investors who were accredited investors in a Rule 506(b) offering prior to the effective date of Rule 506(c), a self-certification of accreditation status at the time of sale in a new offering by the same issuer under Rule 506(c) will satisfy the verification requirement in Rule 506(c). Q: What is general solicitation? General solicitation or general advertising includes using websites accessible to the general public, using a widely disseminated email or social media campaign, or using print media, such as a newspaper or magazine ad. Issuers are not required to use general solicitation and may continue to engage in private placements as they did under old Rule 506 under new Rule 506(b). Form D is being revised to add a box that must be checked by those issuers who use general solicitation or general advertising in the offering.

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