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Blog

Rule 506(c) and the Opportunities It Enables to Raise Capital

Mihir Gandhi

Regulation D is one of the Securities and Exchange Commission’s regulations governing exemptions for private placements. These exemptions benefit private companies looking to raise capital without going through the time and expense of a full public offering. The hottest rule under Reg. D, and a key part of the changes brought by the JOBS Act, is Rule 506(c).

General Solicitation

Rule 506(c) makes it permissible for private placement issuers to generally solicit in order to market and generate interest among investors. This significantly reduces barriers small businesses faced previously when trying to ‘spread the word’ about their efforts to raise capital. Selling securities, whether by private small business, startups, or large private firms, can now be done free from the former shackles of marketing only to investors already in the rolodex. Anyone is fair game in the world where general solicitation and advertising are permitted.

Crowdfunding

A crowdfunding campaign can be considered a form of general solicitation. The very nature of crowdfunding is distribution, dissemination and availability of campaign information to the crowd. It’s often done online, through social media and other grassroots means. (Check out our blog “Is Crowdfunding For You” for information on which type of crowdfunding might work for your company).

Advertising

Not sure your intended audience is going to become aware of your campaign via online crowdfunding? No problem. Purchase an ad in a newspaper, magazine, on radio or TV, if your budget permits. It’s now okay under Rule 506(c).

Beware the Catch

Go ahead and advertise, but know that your investors must all be verified as accredited investors at the time they make the investment. As issuer, it is your responsibility to take “reasonable steps” to verify the accredited status of every purchaser of your offering. These reasonable steps are prescribed by federal law.

An Accredited Investor

Accredited investors will meet one or more of these sample criteria (list incomplete):

  • Registered investment company, bank, or insurance company

  • Tax exempt charitable organization with assets more than $5 million

  • Partner, director or executive officer of the entity selling the securities

  • Individual with $200,000 in earned annual income (or $300,000 with a spouse)

  • Individual, alone or together with spouse, having $1 million or more in net worth.

Reasonable Steps

The ‘reasonable steps’ that Rule 506(c) requires an issuer to take to verify that each investor is accredited may include:

  • a review of tax returns, brokerage or bank statements

  • a review of consumer credit reports

VerifyInvestor.com is a secure, confidential and safe method of investor accreditation verification, for both issuers and investors. Visit us today to get started.