Share This

SEC Rule Changes for Private Placements

| James F. Verdonik James F. Verdonik

In July 2013, the U.S. Securities and Exchange Commission ("SEC") made the biggest changes to private placement capital raising rules since the SEC issued Regulation D more than three decades ago.

More than 90% of private securities offerings are affected by these changes.

The SEC's recent changes are a mixed blessing for businesses selling securities.  These changes include:

  • Prohibiting using Rule 506 if someone affiliated with your business or with your capital raising efforts has violated securities or other financial industry laws. 
  • Adding new Rule 506 (c), which allows you to advertise when you raise capital in a private placement.
  • Rule 506 (c) also requires you to take reasonable steps to independently verify that all people who buy securities are "accredited investors," if you advertise in your offering.

Our articles in this series about SEC Rule 506 private placements help you decide how you can use these new rules to raise the capital your business needs by balancing three competing factors:

  • Advertising effectiveness
  • Budget
  • Securities law compliance 

You have to get all three right to successfully raise capital.

Here's a list of our articles that discuss the primary issues you will face when you try to balance these three objectives in your capital raising efforts:

Tweeting Your Way to Securities Fraud in 140 Characters: What Do you Say in SEC Rule 506 (c) Advertising in Private Placements?  How do you decide what you say in your advertising?  How do you say it?  What current SEC and state advertising rules can you use to guide your advertising decisions?  Can you combine effective sales messages with complying with securities laws?  Or is it an either or choice?  What's the point of advertising if securities laws prevent you from selling effectively?

Choosing the Right Media for your Advertising: Don't Tweet when You Should Have LinkedIn  How do you advertise within your budget?  How do you identify your "sweet spot" target investors and the right media to reach them?  What social media tools can you use?  How do you attract accredited investors who meet SEC criteria for making investments? 

Would You Let Your Lawyer Run Your Sales Department?  How You Can Build the Right Team for Advertising in SEC Rule 506 (c) Private Placements  How do you build teams to help you do effective advertising while still complying with SEC and state anti-fraud rules?  What role should your sales team play?  What role should your lawyer play?  How do you choose a lawyer who can help you create effective advertising that also complies with securities laws?

Accredited Investor Verification: Will SEC Rule 506 (c)'s Permission to Advertise Cure Your Capital Woes or is its Accredited Investor Verification Requirement a Poison Pill? If you want to advertise your securities offering, you must take reasonable steps to verify that everyone you sell to is an "accredited investor."  You can't just rely on the investor checking a box that tells you it is accredited.  How much checking is "reasonable"?  How do you qualify for the "safe harbor" the SEC included in Rule 506 (c)?  What happens if you don't obtain the right type of proof that the people you sell securities to are "accredited investors?"  Why will some investors refuse to comply with your verification requests?  What can you do to reassure investors about privacy issues and make the verification process more convenient for investors?

SEC RULE 506 (c) Integration Pitfalls: Don't Use the SEC's New Advertising and Solicitation Private Placement Rule to Saw Off the Limb You are Sitting On  Why should you look before you leap into advertising?  What integration and related pitfalls does Rule 506 (c) create for businesses that choose to advertise or engage in general solicitations?  How do you sell securities to people who are not accredited investors under another SEC private placement exemption, if your advertising doesn't attract enough accredited investors to finance your business? 

Getting Caught: How Will the SEC Know I'm Advertising in a Rule 506 (c) Private Placement?  How will the SEC know about your advertising?  Why isn't it a defense that everyone else is breaking the rules?  How do you deal with the interim period when people are figuring out what the new rules let you do and don't let you do?

SEC's Bad Actor Rule: When You Lie Down with Dogs Expect to Get Fleas To use Rule 506 (with or without advertising), you have to verify that a long list of people who are affiliated with your business or with selling your securities offering haven't violated securities or other financial industry laws.  How do you make sure the SEC's Bad Actor Prohibition for Rule 506 private placements keep from cutting off your ability to raise capital? 

Identity Crisis at the SEC: Does Filing Your Private Placement Tweets with the SEC make Sense?  What road blocks to effective advertising in private placements is the SEC erecting?  Why are these blocking efforts doomed to fail?

Government Bouncer at the Capitalist Club: Who is Allowed to Be a Capitalist?  Why is the Government using Rule 506 (c) to decide who is allowed to be a capitalist?  Do you have what it takes to get past the Government bouncer standing in your way at the door to the capitalist club?  Why can't you be a capitalist, too? 

© 2016 Ward and Smith, P.A. For further information regarding the issues described above, please contact James F. Verdonik.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.

We are your established legal network with offices in Asheville, Greenville, New Bern, Raleigh, and Wilmington, NC.