Kristen A. Young, counsel to the Corporate Department of our Boston office, represents clients in a broad range of general corporate matters, including corporate formation, venture capital financing, mergers and acquisitions, securities law compliance, public and private offerings, and other commercial and financial transactions.
Ms. Young has represented clients in diverse industries, including in the high-technology, semiconductor, telecommunications, retail, manufacturing and restaurant industries, as well as hedge funds and investors in a variety of matters. In this Wall Street View, our host spoke with Kristen Young, Attorney (MA Bar) at ZAG-S&W at the Aegis Capital Corp. Healthcare & Technology Conference 2014 in Las Vegas, NV.
Kristen begins with some thoughts on 506c, “What we’re starting to see slowly but surely, companies are actually starting to take advantage of rule 506c and so many of you might know that the SEC has lifted the ban on solicitation and general advertising in regulation D offerings provided some criteria are met. So specifically, you’re only permitted to sell to accredited investors and you have to take heightened steps to verify that those investors are in fact accredited. Initially there was a lot of reluctance on the part of companies as well as platforms to move from 506b space into 506c space, but more and more we’re seeing companies and platforms get comfortable with the concept and make the move.”
She goes on to explain the difference between 506b and 506c, “Rule 506b allows you to sell an unlimited amount of your securities and an unlimited amount of money to an unlimited amount of accredited investors, so those are, you know high net-worth individuals or individuals with high income or certain institutions or 35 unaccredited investors provided that you don’t generally solicit your securities. 506c allows for general solicitation and advertising of your securities, but you’re only allowed to sell to those accredited investors and you have to take heightened steps to make sure that your investors are in fact accredited.”
Kristen explains how 506c is basically “crowdfunding”, but that it doesn’t allow for the whole “crowd” to participate, “I do think of 506c as permitting crowdfunding, but I would say not of the crowd, right? So, you can generally solicit your securities and if you think of crowdfunding as basically raising dollars online from a large number of people, essentially you are crowdfunding except for your not allowed to take all your dollars in from everybody, so the crowd doesn’t get to participate, just a select group of the crowd does.”
She clarifies that the grey area in 506c begins when the company does, “not know what they’re doing. If you are generally soliciting your securities and you’re planning on using rule 506c, that’s fine it’s a permitted exemption. If you’re planning on using 506b, there are different steps you’re going to take – so for example one of the places that we see that our clients might get into trouble is going to a demo day or some sort of pitch competition where they’re actually pitching to a group investors, but it was a group of investors that were generally solicited to be in the room.”
She concludes with a warning: “Be cautious. There are a lot of platforms out there that permit investors to invest in companies that seem exciting and innovative, but you have to remember that it's not shopping on Amazon, and that you need to do you homework and do your [due] diligence just as if you were doing a traditional private placement. And also, be sensitive to the requirements of the law. Not all of the platforms out there are compliant with the laws right now." For more information about Kristen Young and ZAG-S&W LLP, check out their website: http://www.zag-sw.com/
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