Any exchange of money for a certificate, share, or other promise of future benefit constitutes the sale of securities, and that means registration is required with the Securities and Exchange Commission. There are tools that provide exemptions under a range of scenarios, but you still need to be properly registered with the appropriate authorities.
Perhaps you’re thinking that’s okay, because you’ve heard that the SEC has changed the rules and lifted the ban on general solicitation. And maybe you’re thinking that this is a veritable advertising free-for-all and you can publicize, advertise, direct-mail drop your investment opportunity to your heart’s content. But, you’d be wrong.
Let’s talk about Regulation D for a moment.
Rules 504 and 505
Most startups and smaller businesses embarking on a campaign to raise capital rely on one of the safe harbors from exemption offered under Regulation D. Rules 504 and 505 still require compliance at the state level as well as federally, so they’re not as popular as Rule 506.
This is the rule most commonly engaged by companies because it permits an issuer to raise unlimited funds from an unlimited number of (accredited) investors. Within 506 are two parts: 506(b), where general solicitation remains prohibited, and 506(c), which permits general solicitation including public advertising.
If your initiative relies on any other rule under Regulation D other than 506(c) it would be wise to double check that you understand exactly what is considered prohibited general solicitation. You risk losing your exempt status if you cross the bounds of the general solicitation prohibitions of the other rules under Regulation D.
What does ‘general solicitation’ include? Any published ad in newspaper, television, magazines, the Internet, radio, and even in-person gatherings such as seminars or pitch meetings. Unless you are relying on a 506(c) exemption, you must therefore limit promotion of your investment opportunity to those with which you have a pre-existing relationship. While Rule 506(b) actually allows for up to 35 non-accredited investors, most companies prefer to take only accredited investors because the legal compliance burden is less. You’ll want to be careful to only accept subscriptions from investors that you’ve pre-qualified as accredited investors.
Preventing the general public from accidentally discovering your investment information by securing the information behind password protection will also help ensure your exempt status is not at risk due to infringement of the prohibition against general solicitation present in Regulation D rules other than 506(c).
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