If You Generally Solicit, Can You Go Back?

Come September 23, 2013, companies are going to be able to generally solicit and generally advertise their private company securities offerings under Rule 506(c) of Regulation D.

This is a big deal. 80 years of prohibition, over.

This must be too good to be true, right? What are the gotchas?

Well, in general, there are three:

  1. If you generally solicit, you will 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, etc. In a generally solicited offering, you cannot rely on a simple check-the-box certification from an investor. Investors may not like this. They may refuse to give a startup their personal financial information.
  2. In a generally solicited offering, you can only take money from accredited investors. “Accredited investor” means someone with income of at least $200,000 a year for the last two years, with the expectation of the same in the year of investment, or $300,000 with spouse; or $1 million net worth excluding the investor’s primary residence.
  3. If you generally solicit your offering, you have to check the box on your Form D that you generally solicited.

What could go wrong?

One additional thing to think about before you generally solicit on September 23rd. If you generally solicit, you can’t go back. You can’t revert your offering to a non-generally solicited offering to avoid the three drawbacks listed above.

The SEC made this clear in its final rules, when it said the following:

“We remind issuers that once a general solicitation has been made to the purchasers in the offering, an issuer is precluded from making a claim of reliance on Rule 506(b), which remains subject to the prohibition against general solicitation, for that same offering.”

Something to think about before you generally solicit.