Corporate Finance & Securities

General Solicitation and Why 506(c) Matters to Your Startup

There has been a lot of buzz within the investment community about equity crowdfunding for both accredited investors under 506(c) and for non-accredited investors under Title III of the JOBs Act and recently enacted state law exemptions, including the crowdfunding bill recently passed (but not yet enacted) in Washington.

The main feature of both types of crowdfunding is the company’s ability to spread the news about the investment through the community, by advertisement and public broadcast.

Historically, or rather from the early 1930s until last year, you could not spread the news about such a “private placement” generally, as doing so by default made the offering “public,” triggering onerous securities regulations that can be incredibly expensive to comply with. Instead, investors learned...

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Corporate Finance & Securities

SEC Issues Guidance on Securities Offerings Under Rule 506(b) and Rule 506(c)

Last Thursday, the SEC issued Compliance and Disclosure Interpretations (C&DIs) related to securities offerings under Rule 506. Specifically, the C&DIs address the issue of Rule 506 offerings that began prior to September 23, 2013, which was when the new Rule 506(c) exemption became effective.

As we’ve discussed in prior articles, as of September 23, 2013, companies can now use general solicitation to raise funds from investors under the new Rule 506(c). The new Rule 506(c) was detailed in the Securities Act Release No. 9415. In the release, the SEC pointed out that for offerings that had already commenced under Rule 506(b) (the classic Rule 506 that does not allow general solicitation), an issuer could choose to continue the offering under Rule...

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Corporate Finance & Securities

Our Thoughts on the Proposed Crowdfunding Rules

Last week the SEC released proposed rules for non-accredited investor crowdfunding, which would let unaccredited investors (anyone) participate in securities offerings. What this means in plain English: when and if these proposed rules are enacted, companies will be able to raise up to one million dollars by selling stock to anyone willing to buy it, and for the first time they won’t have to do an IPO to be able to reach these investors.

Background Currently, to sell stock, companies have to:

File a registration statement and go through an IPO process that is generally prohibitively costly for all but the most successful companies; or Conduct a private placement offering that only accredited investors (individuals with $200k in annual income or over $1mm in...

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Corporate Finance & Securities

Helpful Guide for General Solicitation and Start-up Fundraising

Joe Wallin, editor at Startup Law Blog, recently collaborated with Lauren Hakala, editor at Practical Law Company, on a guide that discusses the law, guidance and open questions on what activities constitute general solicitation or advertising in the context of transactions relying on the Rule 506 safe harbor from Securities Act registration. For those interested in learning more about the changing landscape of startup capital raising, you should check out this guide.

Specifically, the guide provides information about:

Implications of Using General Solicitation Public Website, Social Media and Print or Broadcast Mentions of Offerings Online Funding Platforms Product Advertising and Business Announcements Demo Days, Pitch Events and Other Meet-Ups

Check out the full article here.

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Corporate Finance & Securities

SEC Examining Accredited Investor Standard

Last Friday SEC Chair Mary Jo White explained in a letter responding to Representative Scott Garrett, that the SEC “has begun a comprehensive review of the accredited investor definition.” Mr. Garrett had written to Ms. White at the end of October, asking for a review of the accredited investor definition as mandated by Dodd-Frank. Ms. White’s correspondence to Mr. Garrett suggests that a major overhaul of the accredited investor standard could be in the works.

Letter From Chair White by Steve Quinlivan

Background Generally the Rule 506 private placement market is restricted to accredited investors. As Mr. Garrett...

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Corporate Finance & Securities

Investor Verification Services Offer Simple Affordable Solution for Companies Using Advertising to Raise Funds

A recent Wall Street Journal article discussed the “murky” waters that have become the regulations surrounding the JOBS Act and the lifting of the ban on general solicitation for raising funds in a private placement. The article highlights some of the issues with the new regulations and points out that many small, privately-held companies are not taking advantage of the opportunity to raise capital using general solicitation because of the uncertainties associated with the new rules. One “hurdle” that the article points to is the requirement for companies to take “reasonable steps to verify” that investors are accredited investors—individuals with annual income of at least $200,000 (or $300,000 joint income with his or her spouse), or at least $1M in...

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Corporate Finance & Securities

Early Numbers Show that Companies are Using Rule 506(c) to Raise Funds

If you are as curious as we are about the consequences of the new Rule 506(c), I’ve got some good news for you. There’s some early data that points to how issuers are taking advantage of the recent SEC rule changes.

Keith Higgins, the newly appointed director of the SEC’s Division of Corporate Finance, recently commented on the preliminary effects Rule 506(c) on the investment landscape. For those of you that have been following the JOBS Act and its various moving parts, you are well aware of Rule 506(c) and the fact that the SEC lifted the ban on general solicitation for securities offerings. For the rest of you, here’s a primer on Rule 506(c) and the lifting of the ban...

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Corporate Finance & Securities

Income Verification & Deferred Compensation: What’s included in income calculation?

Companies offering securities under new Rule 506(c) (which allows issuers to advertise the securities offering) must take “reasonable steps to verify” that all purchasers are accredited investors. One of the ways an individual qualifies as an accredited investor is by having annual income for the last two years exceeding $200,000 or a joint annual income (with spouse) for the last two years exceeding $300,000, and the individual must have a reasonable expectation that he or she will meet these thresholds in the current year.

Do you include deferred compensation, 401k contributions, and other fringe benefits as income? If you take a look at your W-2’s you’ll see that box 2 “wages, tips, other compensation” does not include some forms of deferred...

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Corporate Finance & Securities

Joint Net Worth Standard for Accredited Investor Verification

Only accredited investors can participate in private placements offered pursuant to the new Rule 506(c) which allows founders to utilize advertisements to solicit investment their company. A potential investor and his or her spouse qualify as accredited investors as defined in Rule 501 of Regulation D if their joint net worth exceeds one million dollars.

The text of the rule states the following individuals qualify as accredited investors:

“Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000.”

On the face of it, the language is a bit ambiguous. Does “joint net worth” mean community property–assets that are jointly owned? Or does it mean that the wealth of both spouses can be aggregated for determining whether the...

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Corporate Finance & Securities

A New Way to Solicit Investment in Private Funds, 506(c) “Crowdfunding”

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As of September 23, managers of hedge funds and other types of private funds can publicly solicit investment for their funds. As part of the JOBS Act, there’s a new way to conduct “private placements”.

Private placements are the offering of securities without the filing of a registration statement. Filing a registration statement, sometimes called “going public”, is an (often prohibitively) expensive process and requires annual and quarterly public disclosures, including information many funds would consider to be trade secrets.

Before the provisions of the JOBS Act were enacted, private funds could only offer interests in the fund to individuals with which the fund operators had an existing relationship. Now, if funds comply with all...

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