Amending Rule 506 — Lifting the Ban on the General Solicitation of Investors and the New Bad Act Disqualification

The Securities and Exchange Commission (“SEC”) recently enacted amendments to Rule 506 (“the Rule”) promulgated under the Securities Act of 1933, as amended, (“the Securities Act”). These amendments were required by the Jumpstart Our Business Startups Act of 2012 (“the JOBS Act”). As a result of the change, entrepreneurs have the ability in some circumstances to publicly advertise that they are fundraising for their businesses, which was previously impermissible under the Rule. However, the SEC also added new disqualification provisions related to prior bad acts by certain individuals. These changes represent a significant evolution in the process by which securities may be sold in private placements.

Historical Background -

Rule 506 is the primary exemption used by companies to raise capital through the private sale of securities. Historically, an issuer could use the Rule to exempt from registration the sale of an unlimited dollar amount of securities to an unlimited number of “accredited investors” and to no more than 35 non-accredited investors. However, general solicitation of investors was prohibited in such an offering. While the Rule did not define general solicitation or general advertising, Rule 502(c) gives several examples, including, “advertisements published in newspapers and magazines, communications broadcast over television and radio, and seminars whose attendees have been invited by general solicitation or general advertising,” as well as “other uses of publicly available media, such as unrestricted websites,” (e.g., social media such as Facebook, Twitter or LinkedIn). In the past, the prohibition on general solicitation typically limited an issuer to approaching only those prospective investors with whom it had a preexisting relationship.

Please see full alert below for more information.

LOADING PDF: If there are any problems, click here to download the file.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Lane Powell PC - Securities / D&O Law Blog | Attorney Advertising

Written by:


Lane Powell PC - Securities / D&O Law Blog on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:

Sign up to create your digest using LinkedIn*

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.

Already signed up? Log in here

*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.