“Exemptions” Are The Most Important Piece Of The Private Equity Pie

Many companies think that the regulations that cover private equity markets are avoidable. This mentality is all too common, just look at the Securities and Exchange Commission press releases. Often readers will find several announcements per week of companies the SEC has penalized for skirting various laws. When conducting raises using private equity it is crucial to use an exemption such as Rule 506(c) in order to avoid the often cumbersome process of registering securities. Ignoring or avoiding these regulations will often result in serious consequences as we will discuss below.

Recently a company that will remain unnamed was charged by the SEC for several cases of false and misleading statements in relation to an unregistered security offering and the sale of digital assets. Not only did they fail to use an exemption, they also misled investors about the success and value of their company. Likely taking advantage of the hype and bullishness that many investors have for digital securities presently.

Disclosing truthful information about your company and the ways it does business is important in establishing a trusting relationship with your investors. This company failed to do so on multiple occasions including falsifying revenues, the size of their business, and their user base. As a consequence, the company had to destroy its digital assets and remove them from any trading platform. Additionally, they are now banned from selling digital assets in the future. Finally, a hefty civil penalty in the millions was ordered by the SEC.

Avoiding regulations is not worth it and will result in the painful consequences described above. Every company should strive to conduct themselves with the best possible business ethics and do everything they can to follow the regulations set forth by the SEC.

One of the main benefits of using Rule 506(c) is that it permits you to generally solicit for investors which can increase your funding and make it easier to meet or exceed your goals. The only caveat is that you must take reasonable steps to ensure that all of your investors are accredited investors. This is why many funds use third-party services to conduct accredited investor verifications in a hassle-free and unbiased manner. To find out more about private equity and the regulations that dictate those markets tune into the VerifyInvestor.com blog.

Updated 7/25/2023

In the wake of recent SEC penalties for non-compliance with private equity regulations, it has become increasingly evident that utilizing exemptions is a crucial aspect of fundraising in this market. The case of the unnamed company charged by the SEC serves as a stark reminder of the serious consequences that can arise from ignoring or avoiding these regulations. Falsifying information and failing to disclose truthful details not only led to the destruction of their digital assets and a ban on future sales but also resulted in a hefty civil penalty in the millions. This cautionary tale emphasizes the importance of transparency and ethical conduct when engaging with investors.

One of the most attractive exemptions available to companies in private equity fundraising is Rule 506(c), which allows for the general solicitation of investors. The key to its successful implementation is ensuring that all investors are accredited, which can be facilitated through third-party services providing unbiased verification. By adhering to the regulations and conducting business with integrity, companies can build trust with investors and avoid the painful repercussions faced by those who cut corners.

Remember, compliance with regulations is not just a box to check; it's an essential element of maintaining credibility and safeguarding the future of your business in the competitive private equity landscape.