October 21, 2021

Volume XI, Number 294

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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.

©1994-2021 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume II, Number 102
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About this Author

Daniel I. DeWolf, Mintz Levin, Member, Chair, Technology Practice; Co-chair, Venture Capital & Emerging Companies Practice Emerging Companies Lawyer, Venture Capitalism
Member / Chair, Technology Practice; Co-chair, Venture Capital & Emerging Companies Practice

Daniel is a leading authority on growth companies and venture capital law — and has worked on pioneering online capital-raising methods since the Internet’s beginning. He is immersed in the national and international ecosystem of emerging companies and investors focused on start-ups. He has also been a member of NYU Law School’s faculty since 2003, where he teaches venture capital law. Earlier, he co-founded and served as managing director of an early stage venture capital firm based in New York City.

Daniel is Chair of Mintz's Technology Practice Group and Co-chair of the firm’s...

212-692-6223
Samuel Effron, Securities Law Attorney, Mintz Levin, Capital Financing Lawyer,Venture Capital & Emerging Companies Securities & Capital Markets
Member

Sam’s practice focuses on venture capital and other private securities transactions, counseling start-ups and emerging growth companies, funds and crowdfunding platforms. Sam is heavily involved in the start-up community in New York and regularly advises and mentors young companies and entrepreneurs regarding the legal and business issues that they face, and speaks at many of the local accelerators, incubators and co-working spaces.

Sam is a co-editor of MintzEdge, an online resource...

212-692-6810
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