After the initial seed raise, many issuers find it difficult to locate sufficient accredited investors to participate in the offering and turn to intermediaries. When using intermediaries, a company must (unless conducting a Rule 506(c) offering ensure that the intermediaries follow the rules requiring substantive pre-existing relationships with any prospective investors and avoid general advertising and solicitation. Intermediary violations of securities rules and regulations can subject the issuer to the same liabilities as if the issuer had committed the violations.
In September 2103, the SEC adopted rules allowing private issuers of securities, including hedge funds, to engage in advertising and general solicitation under Regulation D. Until the recent CFTC announcement, hedge funds that include commodities or futures within their portfolios could not engage in general solicitation, since such instruments are regulated by the Commodities Futures Trading Commission (CFTC).
The SEC’s adoption of Rule 506(c) to allow general advertising and solicitation for private placement offerings has left us with some questions of practicality. We know from Rule 506(c) that issuers must take “reasonable steps” to verify the accreditation status of investors. We also know that the most non-invasive means of verifying that an investor is accredited is through obtaining written certification from a licensed professional, (attorney, CPA or broker/dealer) stating that the professional has reviewed documentation demonstrating that the investor meets the accreditation standard, as was set forth by the SEC. See the Capital Fund Law Group post on the adoption of Rule 506(c) here. But where can we find professionals willing to verify accreditation?
On July 10, the SEC adopted the long-awaited final rules to implement sections of the JOBS Act to lift the ban on general advertising and solicitation for certain Regulation D private placement offerings (as well as 144 offerings). At the same time, the SEC proposed new rules that, if adopted, will require additional regulatory burdens. The rules will take effect 60 days from the date of publication in the Federal Register.