Executive 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.
