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Historically, the biggest difference between a registered public
offering and a private placement of securities in the United States
has been the prohibition of general solicitations and general
advertising in connection with a private placement. This
distinction is about to change and will mark a sea change in the
way individual companies and funds can raise capital under the
private placement exemption provided by Regulation D.
Most offerings of securities in the United States for private
companies and for funds are conducted under an exemption from
registration known as Regulation D. Private placements are far less
expensive and can be conducted more rapidly than public offerings
because there is no SEC review. One of the limitations under
private placements, however, has been the strict rules against
general solicitations and advertising which has limited the way
private offerings are conducted and has essentially prevented
on-line private placements. Under the JOBS Act passed earlier this
year, Congress mandated the SEC to change the rules governing
private placements to permit general solicitations and advertising
if the securities are purchased only by Accredited Investors. The
SEC has proposed the new rules (to be known as Rule 506 (c) under
Regulation D) and the comment period for the new rules has ended.
We anticipate that the final rules will be announced by the SEC in
the next 30 – 60 days. Under the proposed new rules, we
believe that there will be a tremendous opportunity to raise
capital on-line from Accredited Investors and that it may make
sense to start planning for this opportunity now.
Under the proposed new Rule 506 (c) under Regulation D, a
private company or a fund can raise capital directly
on-line provided that "the issuer must take reasonable
steps to verify that the purchasers of the securities are
Accredited Investors." According to the SEC's proposal,
whether the steps taken are reasonable would be an objective
determination, based on the particular facts and circumstances of
each transaction. In essence, this would be a "principle based
test" and not a "strict bright-line rule based
test." In making a determination of Accredited Investor status
of potential investors, issuers would consider a number of factors,
including:
the nature of the purchaser and the type of Accredited Investor
that the purchaser claims to be;
the amount and type of information that the issuer has about
the purchaser; and
the nature of the offering, such as the manner in which the
purchaser was solicited to participate in the offering, and the
terms of the offering, such as the minimum investment amount.
Interestingly, one of the examples provided by the SEC as a
reasonable step to verify the accredited status of a purchaser
would be third-party verification by the purchaser's attorney,
accountant, or broker dealer. Combined with a thorough investor
questionnaire, this type of verification should, in most cases, be
considered a reasonable step.
Under Regulation D, individual investors are considered
"Accredited Investors" if they have a net worth of $1
million (excluding the equity value of their primary residence) or
income of $200k per year (or $300k with their spouse). Most private
placements in the United States are already limited in practice to
Accredited Investors as the disclosure rules can be more broadly
construed if limited to this class of investors. With the new Rule
506, companies and funds will now be able to reach this class of
persons directly on-line from their website or by e-mail.
Please contact us if you would like to learn more about this new
method of conducting private placement offerings.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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