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August 5, 2013Executive Summary
General Solicitation Ban Removed.
The JOBS Act has mandated that The SEC add a new section to permit general solicitation. However, this is only permitted if:
a) all purchasers are accredited investors, and
(b) the issuer takes reasonable steps to verify accredited investors.
Furthermore, the SEC has adopted rules that disqualify “Bad Actors” from taking advantage of the Rule 506 private placement safe harbor.
Verifying Accredited Investor Status: Reasonable Steps
The SEC has identified four possibilities for investors to be reasonably verified that are summarized as follows:
1) Two years of tax records.
2) A third party identification of the value of the investor’s assets and liabilities.
3) A written confirmation from a registered broker-dealer that confirms the person is an accredited investor.
4) A previous qualified investor that can guarantee that the person continues to qualify as an accredited investor.
Written records of these steps should be consistently maintained for each investor.
Another consideration to be taken is an extremely high minimum investment amounts (which only accredited investors would likely be expected to make).
There are no more easy forms. A simple “check a box questionnaire” or “sign a quick form” without other information about the accreditor is just not sufficient.
Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings
Another group of people who are not allowed to work in the industry, “Bad Actors,” has also been recognized by the SEC. Simply put, the term “Bad Actor” applies to people who fit into the following category(s):
ü A misdemeanor, felony, or criminal conviction in a specific area
ü Restraining orders or court injunctions
ü Final orders issued
ü Specific SEC disciplinary orders
ü SEC cease and desist order
ü Suspension or expulsion from membership
ü Stop orders applicable to a registration statement
ü U.S. Postal Service false representation
The aforementioned guidelines apply to nearly every person involved in the offering, including 3rd party promoters or solicitors. Though the task may not be an easy one, the responsibility of identifying Bad Actors is on the Insurer and they simply must take all precautions and measures to make sure all Bad Actors are verified from the beginning.
Other Items Discussed:
On a temporary (two-year) basis, all written solicitation materials must be turned in to the SEC before they are used. Furthermore, copies of transcripts of all solicitation materials along with a log of when and how materials were disseminated should be maintained by issuers.
You are required to put in your legends (i.e. your footer) in any written communication that this constitutes a general solicitation in any Rule 506(c) offering.
If you fail to comply with and are subject to any order, judgment, or court decree you can be banned from future offerings forever.
Making Sense of All of This: My Opinion
In the past, you as an issuer were strictly limited and prohibited from discussing an offering with the public. Basically, you had to be approached by the individual and had to have a prior working relationship with that individual before you could even discuss an offering. You could be present in a conference or room but you had to keep quiet unless you were spoken to first.
For companies that were looking to raise capital through a private placement, the prior ban nearly eliminated their chances of raising capital. The ban killed and stopped most private placements under Reg. D, 506.
Fortunately, the administration came to the conclusion that the ban was indeed a Job Killer, and as part of Obama’s JOBS Act, they have taken steps to ease-up on the regulations. However, the lifting of the ban still has big hurdles to overcome in order to qualify potential investors. Before all of this, it was simple to just ask questions to investors through a questionnaire with check boxes to determine if they were qualified or not.
Now, however, the issuer is going to have to take reasonable steps to verify that an investor is indeed qualified. Frankly, I’m not certain that an investor will feel conformable with providing two years of tax returns or allowing me to check their credit in order to see if they are qualified.
It is unclear at this point if the new 506(c) will make it easier for General Solicitations. However, I am going to try and move forward and develop the new procedures and see if we can overcome these obstacles.
When you read the new regulations and take a step back to ponder the reasoning, it appears that the Obama Administration actually realizes that the ban was a Job Killer. Yet, their response to lifting the ban may not be a quick fix to the problem. It’s as if they are saying, “Ok, you can go and solicit to the public, but you greedy fundraisers need to be punished and we need more oversight on what you are doing and we need to see your marketing materials before you use them.” It seems that the administration does have a grasp on the problem but they do not have a grasp on the solution.
