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July 30, 2014

A Major Change for Traditional Private Placements: General Solicitation and General Advertising Coming Soon

On April 5, 2012, President Obama signed into law the JOBS (Jumpstart Our Business Startups) Act (H.R. 3606), a package of bills aimed at easing the regulatory burdens on private and newly public companies during the capital-raising process. One part of the JOBS Act will remove the ban on general solicitation and general advertising for private offerings of securities under Rule 506 of Regulation D. In addition to easing regulation of these private offerings, removing the ban will likely facilitate the raising of early-stage capital online.

The Securities and Exchange Commission (SEC) will have 90 days to publish rules that will govern the new Rule 506. Rule 506, which contains no limits on offering size, is the most widely relied upon rule used for private offerings that are exempt from registration under Section 4(2) of the Securities Act of 1933.

Currently, it is generally accepted that due to the ban on general solicitation and general advertising, Rule 506 offerings must rely on the premise that sales and offerings of unregistered securities are being made to those investors for which the issuer or intermediary has a preexisting relationship. Once the SEC’s revised rules go into effect, issuers will no longer need this preexisting relationship to solicit investors under Rule 506. The only significant limitation is that all purchasers must be “accredited investors.” At this point in time, it is unclear what limits, if any, the SEC may impose on “advertising.”

We believe the new Rule 506 will facilitate raising capital online. Undoubtedly, it will make private offerings less burdensome and should pave the way to make capital raising easier for early-stage companies.

Unlike crowdfunding, in a Rule 506 private placement there is no limitation on the size of the offering or how much one individual can invest. Further, no broker or intermediary is required under the law, as enacted. The SEC may, however, add requirements regarding the use of broker dealers and/or intermediaries. By limiting the purchasers to “accredited investors,” Congress did stop short of “democratizing” the capital-raising process for all potential investors. For individuals, “accredited investors” generally include investors with at least $1 million in net worth, individually or jointly with a spouse (excluding the equity value of the primary residence), and/or at least $200,000, individually, or $300,000, jointly with a spouse, in annual income for at least two years.

We will keep you posted on the final SEC rules, which should be published within the next 90 days.

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About this Author

Daniel I. DeWolf, Mintz Levin Law Firm, Corporate Attorney
Member

Daniel is Co-chair of the firm’s Venture Capital & Emerging Companies Practice. In addition to his active legal practice, he is an adjunct professor of law at the NYU Law School and he has a wealth of experience in private equity and venture capital, having co-founded Dawntreader Ventures, an early stage venture capital firm based in New York.

Daniel's practice focuses on representing emerging technology companies, venture capital, private equity, sports and entertainment, corporate governance, and general corporate law.

Before joining Mintz Levin, Daniel...

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Samuel Effron, Corporate Attorney, Mintz Levin Law firm
Associate

Sam’s practice focuses on general corporate representation, securities law matters, and transactional work, including public and private offerings, mergers and acquisitions, venture capital financings, debt and venture capital fund formation, federal securities law compliance and reporting, and corporate governance matters.

He has provided counsel to a diverse range of public and private companies, both domestic and foreign, in a variety of industries, including video gaming, consumer electronics, media, e-commerce, software and high technology, education, marketing, financial...

212-692-6810
Evan M. Bienstock, Corporate Attorney, Mintz Levin law Firm
Associate

Evan’s practice involves all aspects of corporate and securities law for emerging growth, early stage and start-up companies in the digital media, energy and clean technology, sustainability and life sciences industries. He routinely advises clients on their growth and development and participates in a diverse array of transactions, from private placements of securities to mergers and acquisitions. He also counsels his clients on their daily corporate needs and has extensive experience assisting companies with compliance to federal and state securities laws.

Evan’s...

212-692-6869