Know The Law: Raising Capital Under SEC Rule 506

John Bentas
Counsel, Corporate Department
Published: Union Leader
September 9, 2013

Q: I am a small business owner and I would like to raise some additional capital. I have already taken investments from friends and family so I need to appeal to a broader audience. Are there any options for me to sell my stock by way of an advertisement?

A: Until recently, there was a broad prohibition on the sale of securities, including stock, of a private company by way of advertisements or general solicitations. The only publicly available stocks were those listed on national exchanges or securities appropriately registered with the Securities and Exchange Commission (SEC). As a result, investment options for most people were limited to those securities.

In July, the SEC adopted rules that have eliminated the prohibition against general advertisement and general solicitation in connection with a certain type of securities offering. The new rules go into effect on September 23, 2013, but they have many limitations (and some complications) to them.

The lifting of the ban on general advertisement and solicitation only applies to an offering that is otherwise exempt from registration with the SEC under Rule 506. Without going into too much detail about that type of offering, in essence a Rule 506 offering is one in which only “accredited investors” (or sophisticated investors) are allowed to purchase securities. Generally, accredited investors are persons with income in excess of $200,000 individually (or $300,000 with their spouse) or who have at least $1,000,000 in net assets (excluding the value of their primary residence). As you can tell by these requirements, even though you may be able to reach a broader audience with general advertising and solicitations, you will be very limited in the type of investor to whom you can actually sell stock.

Although the SEC has lifted the ban on general advertising and solicitations, the anti-fraud rules still apply. Therefore, you must be truthful, accurate and not misleading when it comes to the form and substance of your advertisements and solicitations.

Lastly, since the rules are so new, there are many aspects about them that are unclear at this early stage (including how they will interact with state securities laws). In conjunction with the new rules, the SEC has proposed numerous additional rules (not yet adopted) that (1) may impact how you can advertise (including certain required disclaimers), (2) may require additional filings with the SEC, and (3) may institute stringent documentation requirements to insure that you verify that all purchasers are actually accredited investors. Given the status of the rules, it would be prudent to begin complying with these proposed rules now, to the extent you can.

In summary, there is an option for small companies to generally advertise and solicit the sale of their securities, provided that you plan carefully and seek the advice of professionals familiar with your situation, the new and existing SEC rules, and securities offerings generally.