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.
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