Last week the SEC issued its proposed regulations to allow for public advertising and general solicitation in Rule 506 offerings.

As way of background, at this point when companies are trying to raise funds in a private offering, they typically rely on Rule 506 of Regulation D of the Securities Act of 1933, which allows for an unlimited amount of funds to be raised and minimal disclosure requirements if the securities are sold to accredited investors.  Offering undertaken pursuant to Rule 506 also preempt state securities laws, except those relating to fraud and notice filing (and notice filing fee) requirements.  While all of the above makes Rule 506 the “go to” securities law exemption, the main reason it was originally allowed is because it has historically only been able to be used in private offerings, where the issuer (or the broker acting for the issuer) had a pre-existing relationship with the investor.

The JOBS Act, which I’ve discussed, contained a provision which would require the SEC to promulgate regulations to allow general solicitation and advertising in Rule 506 offerings, provided that all purchasers in such offering are accredited investors.

The proposed regulations seem to do what the JOBS Act directed, allow for public advertising and solicitation in Rule 506 offerings.  It appears that any public advertising will be allowed, including over the Internet and World Wide Web.  This is good news as some people were concerned that this would be more restricted.

The proposed regulations do seem to put a more stringent requirement on issuers to verify that all investors are accredited, although it is not very clear.  Typically, securities lawyer’s require investors to complete a questionnaire with their subscription agreement prior to accepting them in the financing round. The questionnaire requires that the investor answer various questions about income, employment, investing experience and items of that sort which allows the company and the lawyer to determine that the investor is indeed accredited.   The new regulations seem to imply that this will no longer be enough, but they are not overly clear on the point.  It appears that companies will now need to do more due diligence on each investor to verify this, by looking at tax returns and other methods.    I’m sure the SEC will be flooded with comments.  Click this link if you’d like to comment yourself.

Another interesting, and helpful point, is that issuers seeking to do Rule 506 offerings the old fashioned way in a truly private placement, will still be allowed to do so and sell to a certain number of non-accredited investors.  This will be helpful if the SEC comes up with a more stringent way for companies to have to verify the accredited investor status of persons or entities lookign to invest in a 506 offering.

Keep in mind that this is distinct from the much anticipated Crowdfunding regulations that are slated to come out in the beginning of 2013.  The crowdfunding regulations will allow companies to sell equity over Internet portals to accredited and unaccredited investors.  The proposed regulations with respect to Rule 506 only allow for public advertising and sale to accredited investors without a portal (although, one may be able to be used).