Optima Law Group Blog

Opportunities and Landmines: Changes In Rule 506 and Reg D

On September 23, 2013, major changes to the SEC’s Rule 506 went into effect that create new opportunities and impose new burdens on companies (issuers), especially start-ups, looking to raise capital to grow their ventures. Companies that rely on Rule 506 as an exemption for their securities offerings MUST be alerted to these recent changes and remain vigilant in order to stay compliant.

On the opportunity side, in the past, companies were barred from public soliciting and/or advertising (i.e., general solicitation). Now, companies can potentially advertise the sale of their stock under the new Rule 506(c). Your company can engage in general solicitation—for example, advertising on television or the Internet—if the following strict requirements are met:

  1. The offering can only be made to accredited investors;

  2. Your company must take reasonable steps to verify that all purchasers of the securities are accredited investors;

  3. Your company must comply with new Form D filing requirements; and

  4. Advertising materials with proper legends must be submitted to the SEC in advance of the solicitation.

While it is an exciting time for companies raising capital, the SEC rules on this subject are still developing. Our recommendation is to proceed cautiously and allow time for further development of the rules. The SEC has not yet clarified what constitute “reasonable steps to verify that all purchasers of the securities are accredited investors,” and the opportunity for general solicitation is tempered by restrictions that could burdensome for your company. 

Next time, I will be continuing this series and highlighting another recent, major development that affects each and every company’s offering that relies on a Rule 506 exemption.