Raising Capital: Put Your Mouth Where The Money Is

On behalf of Kaplin Stewart Meloff Reiter & Stein, P.C. posted in on Nov 2, 2016.

Are you always searching for new ways to raise capital? Maybe your existing “go to” investors are not interested in the deal being presented or maybe they are not providing enough funds to get the project off the ground. Currently, companies seeking to raise capital through the issuance of non-registered securities are prohibited from using any form of general solicitation. But the rules are about to change. On September 23, 2013, Rule 506(c) under Regulation D of the Securities Act will become effective. The new rule will permit general solicitation as a means to attract investors subject to the following conditions:

  1. All terms and conditions of Rule 501 (defining an accredited investor) and Rules 502(a) (relating to integration) and 502(d) (relating to resale limitations) are satisfied;
  2. All purchasers of the securities are accredited investors; and
  3. The issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors.

To satisfy the third condition, the new rule provides four non-exclusive methods for verifying accredited investor status:

  • To verify if an individual satisfies the income test, review certain IRS forms and obtain a written representation from such person (and their spouse).
  • To verify if an individual satisfies the net worth test, review recent bank statements, brokerage statements, certificates of deposit, tax assessments and a credit report, and obtain a written representation from such person (and their spouse).
  • Obtain a written confirmation from certain third parties, including an SEC registered broker-dealer or investment adviser, a licensed attorney, or a CPA, that has itself taken reasonable steps to verify that the purchaser is an accredited investor.
  • Obtain a certification from a prior accredited investor purchaser (and still current holder) in an issuer’s Rule 506(b) offering (prior to the effectiveness of the new Rule 506(c)) that such person qualifies as an accredited investor.

The SEC emphasized that the methods listed above are not the only ways to satisfy the “verification” requirement. Issuers may make an objective determination using its own verification methods by considering all facts and circumstances of each purchaser and transaction including the following relevant factors: (1) the nature of the purchaser and the type of accredited investor that the purchaser claims to be; (2) the amount and type of information that the issuer has about the purchaser; and (3) the nature of the offering, including the minimum cash investment, the terms of the offering, and the manner used to solicit purchasers.

In today’s world of Facebook and Twitter, it is only a matter of time before a savvy entrepreneur lays the ground work for how webinars, social media and other forms of online communication can be used to raise capital and grow their business. However, be sure that you proceed with caution to ensure that you are satisfying the conditions set forth by the SEC, and be on the lookout for new rules that are currently being proposed to further limit how general solicitation can be used. Soon enough, it will be time for you to put your mouth where the money is.