In 2012, the JOBS Act amended the rules for private placement offerings (aka “PPMs”) to allow companies to advertise and solicit their offerings to prospective investors. Under prior law, a PPM could not be marketed or solicited to people whom the offeror did not have an existing relationship with. Hence, the use of the word “private offering” in the labeling of these types of investments.
This new type of offering allows advertising and general solicitation and is known as a Rule 506 (c) Offering. Under Rule 506 (c), the company raising money could create a website soliciting the funds, or they could hold seminars or meetings with potential investors and could solicit the investment of funds from those in attendance. This is a significant change to the prior offering rules that clearly prohibit such activities.
Under the new Rule 506 (c) Offering there is one hitch: the person raising funds may only accept funds from accredited investors. An accredited investor is someone who has $200K in annual income ($300K if married) or $1M in net worth (excluding equity in home). The accredited investor status must be documented by the investor or certified by a third party such as an accountant or financial planner. This verification rule is a new requirement for Rule 506 (c) Offerings and is ALWAYS required if you make general solicitation and marketing efforts for investors.
Under the traditional Rule 506 offering, now known as Rule 506 (b), you may not make general solicitations for investors and that is the major downside. However, you may raise money from up to 35 unaccredited investors per offering and that is something you cannot do under the new Rule 506 (c). Keep in mind, the offering must remain private. So, moving forward, those seeking to raise money under Regulation D approved offerings have two options. First, raise money under the current rule and you can accept up to 35 unaccredited investors but are restricted from advertising. Or, second, only accept money from accredited investors but be allowed to advertise the offering. You don’t get both options in one (advertising and unaccredited investors) but at least you now have another option in being allowed to advertise and solicit under the new rules.
Here’s a quick chart the outlines the two Rule 506 Options. The key differences are highlighted below.
|Rule 506 (b)||Rule 506 (c)|
Total Amount You Can Raise
|Offering Docs Required|
|Offering Memorandum, Sec Form D Filing, State Securities Filing, Company LP or Operating Agreement, Investor Suitability Quest.|| |
Offering Memorandum, Sec Form D Filing, State Securities Filing, Company LP or Operating Agreement, Investor Suitability Quest.
|Accredited Investors|| |
Un-limited accredited investors and up to 35 unaccredited investors who are sophisticated enough to invest.
|Accredited investors only. Unlimited accredited investors. Must verify they are accredited.|
|Marketing of Offering||Must remain private. Can only market to persons with an existing relationship.|| |
Marketing and general solicitations are allowed. You amy market via websites, e-mail campaigns, and at events or meetings.