Privately held operating company issuers (as distinguished from private funds) should plan ahead if they intend to use general solicitation for Rule 506(c) offerings after September 23, 2013.  Here are just a few considerations that issuers may want to bear in mind:

  • From the outset, obtain all of the information required to identify whether there are any bad actor disclosures that are required to be made in connection with a Rule 506 offering, and if so, determine how and when those disclosures will be made to investors.
  • Determine whether you will structure your offering as a Rule 506(c) offering (using general solicitation, and no non-accredited investors) or a Rule 506(b) offering.  This decision should be made taking into account the company’s overall funding strategy.  If the offering will be structured as a Rule 506(c) offering, is there a “finite” offering period, or will the issuer be engaged in a continuous effort to raise funds over a period of time?
  • If you are relying on Rule 506(c), consider how you will address the investor verification requirement.  If you will rely on a third-party provider to handle investor verification, ensure that you understand the process undertaken by this provider, the status of the third-party provider (i.e., is it a broker-dealer, an investment adviser, etc.), and the information that you will receive from the third-party provider.  If you are implementing procedures to address investor verification internally, then consider documenting these steps, keeping careful records, and ensuring that you are sensitive to privacy concerns relating to handling personal identifiable data.
  • If a broker-dealer is being retained to assist with the financing, it will be important to agree on appropriate documentation, including an engagement letter and/or placement agreement that contemplates the use of general solicitation, and wherein the parties agree to the types of information that will be used, the medium for contacting potential investors, and the content of any written solicitation.  The applicable documentation should also include representations with regard to bad actor disqualifications from both the company and the broker-dealer.
  • The company also will want to think ahead and consider how it will track the number of holders of its securities for the purpose of determining whether registration of a class of securities may be necessary now or in the future.
  • The company should determine whether it has a communications policy that outlines which employees are permitted to speak on behalf of the company in the context of an offering.  If not, the company may want to consider implementing a communications policy that, at least, identifies the authorized employees, and that provides for a review or approval process so that communications made by or on behalf of the company undergo a review.
  • Consider which methods of communication will be used.  It will be helpful to consider in advance the types of media that will be employed in an offering—will any general solicitation be limited to conferences, investor meetings, business plan competitions, etc., or will social media be used?
  • To the extent that social media will be used, consider whether it is a venue that permits posts by third parties, and how you will handle third party posts.
  • Determine who will be responsible for reviewing/vetting written general solicitation materials.  The company will want to date its presentations (this will be useful in indicating which materials are outdated or current) and will want to keep copies of each version of written general solicitation materials that it uses with potential investors, and ensure that it controls all changes to any written solicitation materials.  The company also will want to ensure it shares the same type and level of material with investors prior to their making a final investment decision.
  • Any general solicitation should be fair and balanced, and should present the company and its business accurately.  The company will be liable for material misstatements in, or material omissions from, its materials.
  • The company will want to be particularly careful about forward-looking statements.  Forward-looking or “predictive” statements should be accompanied by cautionary language.
  • A Form D filing will be required to be filed in relation to the Rule 506 offering, the new Rule 506(c) box should be checked if the company intends to use general solicitation for the offering.