The JOBS Act of 2012 amended the rules for private placement offerings (aka “PPMs”) to allow people 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 current labeling of these types of investments.
This new type of offering that will allow advertising and general solicitation will be known as a Rule 506 (c) Offering. Under this new law, the person 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 current 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.
The SEC has proposed regulations on the new rule and it should be implemented in the next month or two. A new Rule 506 (c) Offering requires the same documents and SEC filings as the current PPMs. These documents include a Regulation D filing to the SEC, an offering memorandum, accredited investor questionnaires, and numerous other company documents.
All other prior offering rules are still available under law including those rules that allow an issuer to raise money from up to 35 unaccredited investors per offering but that offering must remain private and the new advertising rules would not apply. So, moving forward, those seeking to raise large amounts of 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.