September 23, 2013

New SEC Rule 506(c) Effective Today

Craig Trbovich Commercial Real Estate –

Wall St Bull

September 23, 2013 – Today may not be as anticipated as the release of the latest iPhone last Friday, but for sponsors of private placement offerings, September 23, 2013 marks a new era of raising capital for business and commercial real estate ventures.  As part of the 2012 Jumpstart Our Business Startups (JOBS) Act to encourage funding for small businesses, the SEC was required to eliminate the prohibition of using general solicitation and advertising for exempt private placement offerings.  Regulation D, Rule 506(c), issued by the SEC, becomes effective today to comply with that requirement.

Here is a summary of the new regulation:

    • General solicitations are now allowed to attract investors for private placement offerings that comply with Rule 506(c).
    • Certain filings and procedures are required before engaging in a general solicitation.
    • Certain disclosures are required in solicitation materials.
    • Can only accept “accredited investors” NOT “sophisticated investors” (consult your advisor or for definitions).
    • Sponsors must take reasonable steps to verify Accredited Investors.  The SEC has provided four non-exclusive, non-mandatory steps for natural persons to satisfy this requirement.
    • The SEC has restricted certain “Bad Actors” from serving as an officer, principal or manager of a Rule 506 offering.  These bad actors consist of persons convicted of, or subject to certain sanctions due to securities violations.

According to the SEC, “General Solicitation” includes advertisements published in newspapers and magazines, public websites, communications broadcasted over television and radio, and seminars where attendees have been invited by general solicitation or general advertising.  In addition, the use of an unrestricted, and therefore publicly available, website constitutes general solicitation.

Rule 506(c) and its provisions increase sponsors’ ability to attract new investors to real estate investments and other business ventures through exempt private placement offerings.  The Rule should especially benefit smaller offerings (under $10 million) by allowing access to accredited investors that were difficult to reach in the past.

Go to the Small Entity Compliance Guide from the SEC to see a well written overview of the regulation for small business owners.   To see the full regulation, go to Federal Register Release 33-9415.  And as always, consult a specialist before implementing a Rule 506(c) offering.


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