Until recently, new companies wishing to raise money – that had exhausted their sources from friends and family and had no access to angel or venture capitalists – needed to rely on the SEC’s Regulation A or D, regulations promulgated under the federal Securities Act of 1933. Nothing wrong with that, except that offerings under Regs A and D need to satisfy a whole slew of conditions, some of which are expensive and some of which are just plain annoying.
Congress recognized the limitation in offering possibilities and passed the JOBS Act two years ago as a means of expanding the universe of options. The rules and regulations needed to effectuate the Act are (ever so) slowly being adopted.
While we’re waiting for the SEC to issue final regulations for equity crowdfunding, Title III under the JOBS Act, and for Reg A+, a liberalization of Reg A, there are other possibilities. Companies may want to consider raising funds under Title II of the JOBS Act. Compared to traditional Reg D and Reg A offerings, Title II or Rule 506(c) offers a streamlined and cheaper method of raising money.
What’s good about Rule 506(c)?
- There is no limit on the amount that can be raised
- General solicitation and advertising is permitted
- No pre-sale disclosure, including financial information, is required
- No pre-sale approval is required by any governmental agency
- Usually, no ongoing reporting is required
- State security laws are pre-empted (for the most part)
But what’s not so good about the Rule?
- Sales may only be made to accredited investors
- The issuer must take reasonable steps to verify that each investor is an accredited investor
- Certain “bad actors” may not participate in the sales
If you need (or want) money and you’re able to limit your sales to accredited investors, a Rule 506(c) offering — equity crowdfunding light? — should be seriously considered.
Please feel free to contact me, if you have any questions.
Alan N. Walter