On September 23, 2013, startups are going to be able to generally solicit their securities offerings under Rule 506(c) of Regulation D.
There are a couple of catches.
If you generally solicit:
- You cannot accept funds from any investor that is not an accredited investor.
(Generally, an accredited investor is an individual who either has (i) a greater than $1M net worth excluding the value of their primary residence (but taking into account debts on the primary residence in excess of its fair market value), or (ii) $200,000 in income for the last two years with the expectation of the same in the year of investment, or $300,000 with spouse.)
- You have to take reasonable steps to verify the accredited investor status of your investors, and keep records that you did so. This means reviewing Forms W-2, or other information from your investors. This might cause them to turn away.
- You are going to have to check a box on your Form D indicating that you generally solicited.
There are a lot of questions about the rules. Many of these questions arise because on the same day the SEC issued the final rules allowing general solicitation that will become effective September 23rd, the SEC also issued draconian proposed rules. But the proposed rules are just that, proposed. SEC Chair Mary Jo White has confirmed in writing that companies will not have to comply with the proposed rules on September 23rd.
SOME COMMON QUESTIONS ABOUT WHAT IS TRANSPIRING ON SEPT. 23RD
I have put *asterisks* next to the answers that might change if the SEC’s proposed rules are adopted as proposed.
- Can I generally solicit now?
No. You can’t generally solicit until September 23, 2013.
- Do I have to file a Form D before generally soliciting on September 23, 2013? *
- Do I have to file my general solicitation materials with the SEC before generally soliciting? *
- Do I have to include the special legends set forth in the proposed rules on my written general solicitation materials?*
- If I generally solicit, can I rely on a 1 page certification that an investor signs certifying that the investor is accredited?
No. If you generally solicit you have to take reasonable steps to verify the accredited investor status of your investor. You can’t rely on a check-the-box self-certification.
- Can I accept up to 35 non-accredited investors if I generally solicit?
No. You cannot accept any non-accredited investors if you generally solicit.
- If I am in the middle of a Rule 506 offering on September 23rd, can I continue that offering but generally solicit?
- If I generally solicit, do I have to file a longer, more detailed Form D?*
No. But you do have to check a box on your Form D indicating that you generally solicited.
- If I generally solicit, do I have to comply with the SEC’s proposed Regulation D and Form D rules?
No. You do not have to comply with the proposed Regulation D and Form D rules until and unless they become a final regulation and final rules.
- What are the additional obligations imposed on me if I generally solicit?
You must (i) take reasonable steps to verify the accredited investor status of your investors, (ii) not accept funds from any non-accredited investors, and (iii) check a box on your Form D indicating that you generally solicited your offering.