What you need to know:

On July 10, the SEC eliminated a ban contained in Rule 506 of Regulation D on the use of general solicitation in connection with fundraising activities.  As a result, private companies and venture capital, private equity and hedge funds will now be able to openly advertise that they are raising money in private offerings.  The new rules will go into effect in mid-September 2013.

The SEC also proposed new regulations that would require issuers intending to use general solicitation and general advertising in connection with their fund raising activities to notify the SEC 15 days in advance of any general solicitation activity and provide additional information about the issuer and the offering to the SEC.  The proposed regulations are subject to a 60-day public comment period.

What you need to do:

Private companies and fund managers should consider and evaluate effective ways to use general solicitation that may allow them to raise capital more quickly and from a wider range of qualified investors.  If an issuer does intend to take advantage of general solicitation, it must be careful to conduct its private offerings in accordance with applicable SEC rules, including selling securities only to accredited investors and taking reasonable steps to verify a purchaser’s accredited investor status.

Elimination of Ban on General Solicitation

Offerings of securities must either be registered with the SEC or qualify for an exemption from registration.  Rule 506 of Regulation D is the most widely used exemption, and it permits issuers to raise an unlimited amount of capital from an unlimited number of “accredited investors” and up to 35 unaccredited investors.  Until this week, Rule 506 prohibited the use of general solicitation and general advertising in connection with fundraising.  The SEC has now voted to remove the general solicitation and general advertising prohibition for offerings relying on Rule 506 provided that:

  • Sales are limited to accredited investors only (no non-accredited investors); and
  • The issuer takes reasonable steps to verify that all purchasers are indeed accredited investors.

The SEC has not changed the definition of an accredited investor, which includes individuals with either a net worth of $1 million (excluding primary residence) or annual income that exceeds $200,000 per year for the last two years, as well as certain institutions that meet minimum asset tests.

The verification of accredited investor status is a new requirement for issuers seeking to use general solicitation in connection with fundraising activities.  In the past, issuers would typically rely upon the purchaser’s representations as to accredited investor status, but the new rules provide that self-certification is an insufficient basis to make this assessment.  The SEC has provided a non-exclusive list of methods that issuers can use to verify accredited investor status, including:

  • Reviewing copies of IRS forms that report income; or
  • Receiving a written confirmation from a broker-dealer, investment advisor, attorney or accountant that such entity has taken reasonable steps to verify the purchaser’s accredited investor status.

Under its final rules, the SEC made it clear that issuers could still conduct Rule 506 offerings and sell to up to 35 unaccredited investors and avoid the new verification requirements if the offering is conducted without the use of general solicitation or general advertising.

New Disqualification Rules for Felons and “Bad Actors”

As part of an effort to address concerns about the potential for abuse associated with the eased solicitation rules, the SEC also adopted rules barring felons and other “bad actors” from raising money through all Rule 506 offerings, regardless of whether the issuer uses general solicitation or not.

Under the disqualification rule, an issuer will not be able to rely on a Rule 506 exemption if the issuer or any other person covered by the rule had a “disqualifying event.”  Covered persons include:

  • Directors, executive officers, officers involved in the offering, general partners and managing members of the issuer, including investment managers and principals of private equity, venture capital and hedge funds;
  • 20% beneficial owners of the issuer; and
  • Promoters and compensated solicitors.

Disqualifying events include criminal convictions, injunctions and restraining orders in connection with the sale of a security, SEC disciplinary actions against broker-dealers and investment managers, and cease and desist orders associated with securities fraud.

The final rule provides an exception from disqualification when the issuer can show that it did not know, and in the exercise of reasonable care could not have known, that a covered person with a disqualifying event participated in the offering.  Issuers conducting Rule 506 offerings should consider utilizing questionnaires and searching public databases in order to determine if any covered persons have been involved in a disqualifying event.

Disqualification applies only for events that occur after the rules take effect in 60 days.  Disqualifying events that exist prior to effectiveness of the rules will have to be disclosed to investors.

New Proposed Regulations Intended to Monitor Developments in the Private Marketplace

In addition to adopting the rules discussed above, the SEC also proposed regulations that are designed to enhance its ability to monitor private fundraising activity now that the ban on general solicitation has been eliminated.  Under its proposed rules, the SEC would require issuers intending to use general solicitation to file a notice with the SEC on Form D:

  • At least 15 days prior to engaging in general solicitation for the offering; and
  • Update that information within 30 days of completing the offering.

The proposal requires issuers to provide additional information to the SEC, including:

  • Identification of the issuer’s website;
  • Expanded information about the issuer;
  • A description of the offered securities;
  • The types of investors in the offering;
  • The use of proceeds from the offering;
  • Information on the types of general solicitations used in the offering; and
  • The methods used to verify the accredited investor status of investors.

The proposed rules would also:

  • Disqualify an issuer from relying on Rule 506 for one year if the issuer fails to comply with the Form D filing requirements;
  • Require legends and disclosures in written general solicitation materials intended to inform of risks associated with the offering and that the offering is limited to accredited investors only;
  • Require private funds that include past performance information in offering materials to provide additional information and disclosure designed to highlight the limitations on the usefulness of such information; and
  • Require issuers to confidentially submit written general solicitation materials to the SEC.

The proposed regulations are subject to a 60-day public comment period.


These new rules provide issuers and investment funds with expanded opportunities for raising private capital, including the ability to use the internet and social media as fundraising tools.  However, private companies and fund managers interested in raising capital through general solicitation will need to take greater care in planning and documenting their compliance—particularly with respect to soliciting personal financial information from individuals to verify their accredited investor status.