SEC Makes Major Changes to the Way Companies Can Solicit New Investors

A long-awaited component of the Jumpstart Our Business Startups (“JOBS”) Act reached fruition earlier this month when the SEC adopted its final rule changes for offerings that use Rule 506 of Regulation D.

Under Rule 506, issuers, such as privately-held companies, public companies and hedge funds, are able to offer securities to investors without registering those securities with the SEC. But until now, these offerings could only be made to accredited investors with “existing business relationships” with the issuer.

The new Rule 506(c) opens up the ability for issuers to use “general solicitation” to reach accredited investors, a step many believe will improve capital markets access for a large number of smaller emerging growth companies. “General solicitation” means issuers will be permitted to advertise their offerings to the general public using print, social media, websites, radio, television, and other means when the new rules take effect in September.

While Rule 506 has always required that participating investors be accredited (individuals with $1 million net worth, not including their residence, or $200,000 a year in income), previously certification of that status remained the investor’s responsibility. This changes under the new Rule 506(c). Issuers who choose to use Rule 506(c) will now have the responsibility of taking reasonable steps to verify each participant’s accredited investor status.

Another change that affects both Rule 506(b) and Rule 506(c) offerings is the exclusion of “bad actors.” This means anyone (e.g. an officer, director, 20% shareholder, or compensated solicitor) that has had a “disqualifying event,” such as a securities-related violation, would be unable to make an offering using either rule.

According to Cheryl Conner at Forbes, more than 37,000 Regulation D offerings have been executed since 2009, and the existing Regulation D exemption was responsible for $1.3 trillion in funding in 2012.

It stands to reason that by making it easier for private and public companies to share opportunities with the investment community, these new rule changes will lead to improved capital formation dynamics, providing a positive impact to emerging growth companies – a segment of the economy that is key to driving innovation and long-term job growth.