Marketing Your Regulation D, Rule 506(c) Offering: Tips for Attracting Accredited Investors

Rule 506(c) of Regulation D (“Reg. D”) of the federal Securities Act of 1933 (“Securities Act”) offers issuers the tremendous advantage of being able to generally solicit investors to sell their securities without having to register those securities with the Securities and Exchange Commission (SEC).

Being able to advertise and market your 506(c) offering is exciting. Marketing generates leads and helps raise capital to fund your endeavors.

And yet, marketing a Rule 506(c) securities offer can be a daunting task.

Why?

Because raising capital is always a difficult undertaking. And if you are raising funds by way of a Rule 506(c) exemption, you must target only accredited investors.

Nevertheless, a good marketing strategy can be used effectively to attract accredited investors to invest in your Regulation D Rule 506(c) offering. By combining traditional marketing with digital marketing, you can reach a broader audience and find the accredited investors you are looking for.

The importance of marketing cannot be understated. In today’s marketplace, investors have almost limitless opportunities to invest. Rule 506(c) and marketing to accredited investors both require unique marketing approaches. Issuers, founders, or start-ups looking to offer a Rule 506(c) investment must create and implement a strategic marketing plan that not only targets only accredited investors, but in all other ways complies with the federal securities laws. 

Among other things, as we will discuss below, this demands a complete understanding of Rule 506(c)’s requirements. It also requires knowing which type of investor you want to target, how investors think, where to find them, and how to appeal to them.

Ultimately, the search for accredited investors necessitates creating a disciplined approach to finding the right investor for your offer and presenting your best case for funding.

Background

The Securities Act governs the offer and sale of securities. It requires that all securities either be registered with the SEC or come within an exemption.

Before the enactment of the Jumpstart Our Business Act (“JOBS Act”) in 2012, the law did not allow issuers to generally solicit or advertise private placement offerings. In accordance with the JOBS Act, the SEC amended Rule 506 of Reg. D and bifurcated it into two exemptions: Rule 506(b) and Rule 506(c).

Each rule has its own specific requirements, giving it unique advantages and disadvantages. 

Rule 506(b) allows an issuer to raise an unlimited amount of capital and to sell its securities to an unlimited number of accredited investors, but to no more than 35 unaccredited investors. The rule also prohibits the use of general solicitation or advertising of the offer.

In contrast, Rule 506(c) allows an issuer to raise an unlimited amount of capital and allows the use of general solicitation and advertising of the offer, but it does not allow the sale of securities to any unaccredited investors. Each investor participating in the offering must be verified as an accredited investor. To ensure that there are no unaccredited investors participating in the offering, the law requires issuers to take “reasonable steps to verify” the accredited investor status of each investor.

Luckily, issuers may use third party services to conduct the painstaking process of verifying an investor’s accredited status.

Before You Market Your 506(c) Offering, Make Sure the Offer Fully Complies with the Law’s Requirements.

However, before you market your 506(c) offering, you must ensure the structure of your offer complies with the letter of the law.

Rule 506(c) allows an issuer to:

• raise an unlimited amount of money under Rule 506(c),

• sell your securities to an unlimited number of accredited investors and only accredited investors,

• advertise and solicit your offerings as long as all participating investors are accredited investors and you have taken “reasonable steps to verify” their accredited status.

• In addition, the law requires an issuer to:

• take reasonable steps to verify the accredited status of each investor,

• ensure that all investors get relevant and truthful information that will allow them to make a reasonable decision (this often takes the form of using a Private Placement Memorandum (PPM)),

• be available to answer purchasers’ questions,

• ensure that there are no “bad actors” involved in the offering.

The ability to advertise your securities provided by Rule 506(c) is a powerful tool. It allows you to use any marketing channel you want — newspapers, radio, television, social media, the internet — to advertise your offer. You can even commission solicitors to act on your behalf to advertise your offering and increase sales.

BUT

If you fail to comply with the law in any particular way, you will lose the right to advertise your offer and could be subject to severe penalties.

So, for example, if you fail to take reasonable steps to verify the accredited status of even one investor, you could lose your right to advertise under 506(c). Similarly, if even one “bad actor” is on your team, you will lose the safe harbor that Rule 506(c) provides.

Be cognizant of the fact that the look-back period for “bad actor” status is in most cases, at least 5 years.

Finally, bear in mind that the purpose of registering securities with the SEC is to prevent fraud and misrepresentation so that investors can make an informed decision. Thus, it is essential that all of your marketing materials are accurate and truthful.

• Do not exaggerate the offering.

• Do not make misleading statements.

• Do not exaggerate the potential for return on investment.

• Make sure that all marketing materials are up-to-date and as accurate as possible.

This is a complex and complicated area of law and any misstep on the part of an issuer can be fatal to the entire offering. Before you advertise, consult with a securities lawyer and other professionals who can help you. Do your own due diligence and get reliable advice regarding the law’s specifications, your duties, and the interface of state securities laws as well.

And Don’t Forget to File Your Form D.

Although under Rule 506(c) your securities offering will be exempt from the SEC’s registration requirements, you still must notify the SEC of your offering and establish that it is exempt under Rule 506(c).

To do this, you will need to file a Form D within 15 days of making your first sale.

Since the SEC does not require ongoing reports for a 506(c) offering, you will not need to file any other reports after completing your Form D filing.

With all that said, let’s now take a look at some simple ways of marketing your 506(c) offering to attract accredited investors.

Tips for Attracting Accredited Investors.

Start With the SEC’s Definition of Accredited Investor.

If you are raising capital through a Rule 506(c) offering, you already know that you can sell only to accredited investors and that failing to do this can ruin the entire offering.

You also know that once you have your investors, you need to take “reasonable steps” to verify that each and every investor is indeed an “accredited investor.”

Therefore, it makes sense to begin your marketing research with the SEC’s definition of “accredited investor” in mind. According to the SEC, an accredited investor can be an individual or an entity, but the investor must meet specific criteria aimed at confirming that the investor has the financial ability and experience to understand — and withstand — the risks of investment.

Because the SEC recently amended its definition of accredited investor, far more individuals and entities can now participate in a Rule 506(c) offering.

Some entities, like business development companies or registered investment funds, automatically qualify as accredited investors.

Do Some Research.

Before you can develop a marketing strategy for advertising your Rule 506(c) offer to accredited investors, you need to know who your target audience is.

In this case, it is accredited investors. But which ones? Especially now that the SEC has expanded its definition of “accredited investor”, there are various types of investors to market your offer to.

Among others, accredited investors can be:

• high-net-worth individuals

• high-income individuals

• banks, insurance companies, registered investment companies

• employee benefit plans

• trusts, estates, charitable organizations

• family offices,

and more.

So how do you know who to target?

Start by identifying and researching the type of accredited investor that suits your business and offering best. Understanding the various metrics used by the different types of investors is also very helpful. For example, institutional investors are interested in companies that offer stocks within particular markets. Other investors, like business investors, look for opportunities that match their interests or that they believe will be successful.

Create Content to Attract Accredited Investors.

After you have identified the accredited investors you want to attract, you need to take action to attract them. One way you can do this is by creating a niche marketing strategy.

A niche marketing strategy involves creating content, such as blog posts, videos, or podcasts that are specifically tailored to the interests of the accredited investors you want to attract. Bear in mind that this won’t bring instant gratification. This is a long-term approach to attracting accredited investors for future investments. Your aim is to build an audience that will be interested in your Rule 506(c) offering when you make it. You build interest in your offering by creating content (blogs, articles, videos, etc.) tailored to your target audience’s needs and interests.

The idea is to generate interest and create trust and engagement to attract accredited investors to your business.

Create and Maintain a Dynamic Business Website.

Along with creating quality content, having a website where you can highlight that content is a way to attract accredited investors to your business.

Your website is the face of your company. You can use a website to build trust, showcase your offerings, and provide the detailed investment information accredited investors are looking for.

Ensure that your website is visually attractive, easy to navigate, engaging, informative, and helpful to accredited investors.

Leverage Your Social Media Accounts

If you are looking to attract accredited investors for your Rule 506(c) offering, leveraging your social media accounts is an effective way to do that. Use your LinkedIn, Facebook, and other social media accounts to attract accredited investors to your offering.

Network, Network, Network.

Another very helpful strategy for attracting accredited investors is to tap into your network to find them. Research and engage with investor groups that fit your business best and then attend their meetings.

Activities like attending seminars and networking events are instrumental in helping issuers to meet and connect with potential accredited investors.

You can also use online professional platforms designed to help professionals connect (for example, LinkedIn), to expand your ability to attract accredited investors.

Trust, But Verify.

Marketing your Rule 506(c) offering is critical to raising capital. But your approach must be a thoughtful one. Issuers must balance attracting accredited investors with ensuring that their offering complies with all of the exemption’s legal requirements.

To that end, you cannot simply hope that your efforts are attracting accredited investors. You must ensure that they are.

Verifying accredited investor status requires obtaining, reviewing, and analyzing tax returns, financial statements, certifications, credentials, and other complex documents that establish an investor’s accredited status. Depending on the size of your offering, this can be a cumbersome and expensive process for an issuer to undertake.

Luckily, the law allows issuers to work with third-party verification services to make the process of verifying accredited investor status a far less daunting task. At VerifyInvestor.com we offer Rule 506(c) accredited investor verification services. As a leading resource for verification of accredited investor status in accordance with the federal law, we make it easy for issuers to ensure that every single investor participating in their offering truly is an accredited investor. Our services are simple, confidential, secure, and reliable.