On June 10, 2013, in response to the Jumpstart Our Business Startups Act (“JOBS Act”) which was enacted by Congress in 2012, the Securities and Exchange Commission (“SEC”) amended its rules to allow companies seeking to sell securities in private placements to publicly advertise their offerings. This means that a company will be able to advertise the sale of its securities by, for example, advertising in newspapers or websites. Previously, a company could only sell securities in a private placement to investors that had a “pre-existing,” “substantive” business relationship with the company.
When the amended rules becomes effective, a company will be able to raise money through general solicitation and advertising, as long as 1) all purchasers of the offering are “accredited investors”, and 2) the company has taken reasonable steps to verify that the investors are “accredited investors.” While the definition of “accredited investor” remains unchanged, the SEC has added a requirement that issuers must take reasonable steps, prior to any sale in a private placement through general solicitation, to verify that purchasers are accredited. This requirement must be satisfied, even if all purchasers are in fact, accredited investors.
For purposes of these rules, an accredited investor is generally:
- A bank, insurance company, registered investment company, business development company, or small business investment company;
- An employment benefit plan meeting certain requirements;
- A charitable organization with assets exceeding $5 million;
- A director, executive office, or general partner of issuer;
- A business where all equity owners are accredited investors;
- A person with an individual, or joint with spouse, net worth exceeds $1 million (excluding the value of the primary residence);
- A person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000; or
- A trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases are made by a sophisticated person.
PRACTICAL COUNSEL: The amended rules represent a welcome change to companies looking to raise capital as it opens up previously unavailable ways to solicit investors. However, companies should be aware that compliance with the new general solicitation rules will be difficult and, in most cases, require the assistance of legal counsel, and that other recent amendments to the SEC’s private placement rules may also impose additional requirements for successful general solicitation private placements. Accordingly, while you will have greater options to advertise if you are looking to raise capital for your business, you will need to ensure that your fundraising efforts are guided by knowledgeable legal counsel.
General Counsel, P.C. – Every Business Needs a General Counsel: Led by Norman Eule, General Counsel’s Business and Tax Practice Group has over 40 years of professional experience in counseling business owners on all aspects of commercial transactions. Our attorneys have extensive experience representing a wide range of local, regional, and national companies and business ventures. If you have any questions regarding the effect of the new solicitation rules on your company, or any other business law related questions, please contact Norman L. Eule.