On Friday, Beverly Evans of Davis Brown Law Firm stopped by to talk to us about the recent SEC Amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act to implement section 201(a) of the Jumpstart Business Act.  This was the part of the act that many in the startup community had been anxiously awaiting as it refined the way that fundraising was going to happen for startups.

Beverly explained that securities regulation was initially designed to create a level playing field for those investing/taking the risk.  Unless an exemption is available, the Securities Act requires registration of all securities being sold and the process is designed to protect investors by providing them the information necessary to make informed investment decisions.

Prior to the recent SEC amendments, companies raising funds often relied on the private offering exemption provided by Rule 506.  Disclosure of material information about the company is always required, but under existing Rule 506, the form and detail of the information was not prescribed if all of the investors were accredited.  Accredited Investor definitions according to the SEC include: a natural person who has individual net worth, or joining net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person; a natural person with income exceeding $200,000 in each of the two most recent years or joining income with a spouse exceeding $300,000 for those year and a reasonable expectation of the same income level in the current year; or a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

Often investors were asked to complete a simple form self-asserting that they were accredited.  The company would approach potential investors only in a private setting and could not engage in any General Solicitation.  The company would file a Form D at the commencement of the offering and notice filing in states where their investors resided.

After the amendment, the process of registering is pretty much the same and you still have to fill out Form D, but you cannot rely simply on your investors’ certification that they are accredited.  Further verification is required.  The SEC has provided examples of verification that it would consider adequate, including  two years of tax returns, including W-2s, 1099 etc AND a written rep from the investor that he/she has a reasonable expectation or reaching that income level for the current year; bank statement, brokerage statement or report from nationwide consumer reporting agency AND a written rep from the investor that all liabilities necessary to determine net worth are disclosed in the statement or report; written confirmation from a registered broker-dealer, investment adviser, licensed attorney or certified public accountant in good standing. There are a number of issues you should consider before engaging in Public Solicitation in reliance upon new Rule 506 ©- which becomes effective September 23, 2013- for example, the SEC can treat two or more offerings as one.  Once you engage in General Solicitation you cannot accept funds from non-accredited investors until you are safely beyond the 6-month integration period.  Offers/sales made more than six months after the completion of a Regulation D offering will not be integrated.   And while there are no specific disclosure/information requirements in a 506(c) offering, you are still obligated to provide the enough information for your potential investors to make an informed decision.

The following link is a few things you should think about before you decide to engage in General Solicitation.

Rul 506(c) Considerations