The Securities and Exchange Commission (“SEC”) has recently approved final rules that have eased the restrictions against general solicitation and advertising in private placements of securities. Under previous SEC rules, if a company wanted to raise capital by selling stock, it could either register the offering with the SEC, a lengthy and expensive process, or rely on one of the exemptions from registration.
The most widely used exemption was Rule 506 under Regulation D, which allowed the sale of an unlimited amount of securities to an unlimited number accredited investors (individuals with net worth of $1 million or more (not including residence) or $200,000 annual income for past two years), and up to 35 non-accredited investors.
As a “safe harbor” exemption, Rule 506 was a fairly company-friendly exemption as there were very few formal disclosure obligations if securities were being sold to accredited investors only. One of the main prohibitions in qualifying for the Rule 506 exemption, however, was that the sale of the securities could not be accomplished through a general solicitation or general advertising. This essentially limited companies to relying on finding investors through institutional investors, such as venture or private equity funds, or networks of interested, high-net worth individuals, such as angel groups.
Under the recently approved final SEC rules, companies can now sell securities through a general solicitation or advertising and qualify for the Rule 506 exemption provided that the existing terms of Rule 506 are satisfied, the sale is to accredited investors only, and the company has taken reasonable steps to verify that the purchasers are accredited investors. Reasonable steps include consideration of the nature of the purchaser and the type of accredited investor the purchaser claims to be, how much information the company has concerning the purchaser, the nature of the offering, how the purchaser was solicited and the amount of investment. A company can satisfy its obligations by reviewing tax forms of the purchaser for the past two years, bank and brokerage statements, credit reports, or obtaining written confirmation from an attorney, CPA or registered broker-dealer that the person has taken reasonable step to verify the purchaser is an accredited investor.
Finally, the new SEC rules disqualify an offering from Rule 506 exemption if certain “bad actors” are involved. Disqualifying involvement can range from being an officer, director or 20% or more shareholder of the company, to being compensated in some way in connection with the offering. A bad actor is someone guilty of a felony or misdemeanor or subject to an SEC order involving the sale of securities, acting as an underwriter, broker-dealer or adviser, or fraudulent or deceptive conduct. The “bad actor” disqualification will not apply if the company can establish that it did not know, in the exercise of reasonable care, that there was a “bad actor” involved in the offering.
While the new rules allow companies to go out and advertise as broadly as they want to sell stock, it remains to be seen whether and to what degree companies will take advantage of these new rules.

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