By Lance Jon Kimmel
As we approach the first anniversary of the ability to use general solicitation and advertising for private offerings to accredited investors, we have learned that the advent of what is now called Rule 506(c) has been neither overly intrusive into the private affairs of investors nor the revolution in private capital formation that some anticipated. Instead, Rule 506(c) has been an evolution - taking its place as one more strategy in private offerings - and a logical extension of the long-held SEC view that accredited investors are largely able to fend for themselves.
The concept behind Rule 506(c) is simply stated – an issuer or its placement agent can now find investors who were previously not individually known to them by means of any modality of general solicitation and advertising. All the Rule does is liberalize how to locate investors. It does not change the fundamentals of private capital formation. It does not change the need to provide full and fair disclosure – PPM, business plan wrap or the equivalent.
The Rule does change the way to determine the accredited investor status of an investor. The introduction of this need to “verify” accredited investor status produced weeks of hand-wringing and webinars in Fall 2013 with endless speculation that this requirement would result in a stillborn Rule. No such thing happened. Verification has gone along its merry way, with accredited investors producing the income and/or asset documentation that they have long produced to their mortgage brokers, commercial banks and other financial institutions.
Investment bankers have approached the new Rule tentatively. In most cases, placement agents already have connections with a large pool of investors and many firms do not need to run an offering with general solicitation and advertising. Still, there are benefits in introducing new potential investors to a firm’s products and services and, once first contact is made, those investors will have a pre-existing relationship with the firm in subsequent dealings. Investment banking firms have neither run toward nor run away from Rule 506(c). They use it when it makes sense to do so.
As a result, several investment banking firms – and others – have been exploring the development of on-line and other platforms to promote their own – and others’ – Rule 506(c) offerings. The platforms can be as vast as the methods of general solicitation and advertising itself – anything from traditional print and broadcast media to the latest instruments of social media. As more issuers, and placement agents, engage in direct offerings under Rule 506(c), these platforms can be expected to multiply as a way to drive investor traffic to deals about which they might not be aware and match issuers doing direct offerings to investors they do not know how to reach on their own.
All of this has led to a mischaracterization in many quarters that Rule 506(c) is a form of crowdfunding. It is not, and the SEC never once used the word “crowdfunding” in referring to Rule 506(c). For one thing, accredited investors are likely not going to be “crowded” into any investment – they are almost universally thoughtful and deliberate in reviewing investment opportunities. While many investors are young and tech savvy, many more are older and may not know how to respond to a tweet about a hot new investment; and if they knew how to respond, the issuer might not want to hear what the investor had to say about such a message. As noted, all Rule 506(c) does is create a new way to find accredited investors. But that is quite enough as capital formation continues to evolve under the JOBS Act.
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