This document summarizes a presentation on new Rule 506(c) which allows for general solicitation in securities offerings under certain conditions. The presentation covered: - The history leading to Rule 506(c) and the JOBS Act which allowed for general solicitation under Rule 506 offerings. - The requirements of Rule 506(c) including only selling to accredited investors and taking reasonable steps to verify investor accreditation. - Various methods that could be considered as "reasonable steps" to verify accreditation like income/net worth verification, third party verification, and relying on past investors. - Practical considerations for issuers considering a Rule 506(c) offering like integration

1. Business Law & Order:
General Solicitation
November 18, 2013

2. Ann Arbor SPARK
Business Law and Order
General Solicitations and Rule 506(c):
An Overview
Richard Hoeg
Partner
Honigman Miller Schwartz and Cohn LLP
November 18, 2013

3. History – General Prohibition

Securities Act, Section 4(a)(2): “The provisions of section 5
[prohibiting issuance without a registration statement] shall
not apply to transactions by an issuer not involving any
public offering.”

Rule 502(c) of Regulation D: “…neither the issuer nor any
person acting on its behalf shall offer or sell the securities
by any form of general solicitation or general
advertising…”
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4. History – JOBS Act of 2012

JOBS Act Section 201(a)(1): “…the prohibition against
general solicitation or general advertising … shall not
apply to offers and sales of securities made pursuant to
[Rule 506].”

JOBS Act Section 201(b)(2): “…Offers and sales exempt
under [Rule 506] shall not be deemed public offerings
under the Federal securities laws as a result of general
advertising or general solicitation’.”
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5. Rule 506(c)
 New Rule 506(c) sets forth that an issuer may seek
investment by means of general solicitation provided that
such issuer:
 sells only to accredited investors, and
 takes reasonable steps to verify that all purchasers are
accredited investors.
 Effective September 23, 2013
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6. Accredited Investors
 Notable accreditation categories:
 Individual Net Worth ($1,000,000)
 Individual Income ($200,000)
 Organizational Net Worth ($5,000,000)
 Any person or entity that the issuer reasonably
believes comes within any of the other “accredited
investor” categories
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7. Rule 506(c) – Important Notes
 If an issuer did not take “reasonable steps to verify” an
investor’s status to the satisfaction of the SEC, it will not
be able to use Rule 506(c) even if all of the investors
actually turn out to be “accredited”.
 The current Rule 506 possibilities (offering to up to 35
non-accredited investors without general solicitation)
remain open under Rule 506 in the form of Rule 506(b).
 Most importantly, Rule 506(c) itself does not establish
what “reasonable steps to verify” actually are.
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8. “Reasonable Steps” - Generally

Issuers are expected to adopt a “principles-based
approach” in determining the reasonable steps necessary
to verify accreditation status in Rule 506(c) offerings.

July 10th Release: “After consideration of the facts and
circumstances of the purchaser and of the transaction, the
more likely it appears that a purchaser qualifies as an
accredited investor, the fewer steps the issuer would have
to take to verify accredited investor status, and vice
versa.”
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9. “Principles-Based” Examples

What “might” an issuer use to verify?
 Government filings, pay stubs, reliable third party verifications of
status, and “specific information about average compensation”

When will an issuer “likely” be required to utilize heightened
verification standards?


What about lower standards?


If solicitation is made through “widely disseminated” means such
as e-mail and social media
Offerings with a high minimum investment amount “could” require
lesser verification
A mere “box in a questionnaire” (i.e., self-verification) will almost
never be sufficient.
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10. Inherent Risk
Rule 506(b) is a safe harbor, Rule 506(c) is not
 Failure to qualify under Rule 506(b) leaves the issuer
with the possibility of claiming that the offering is not
“public”.
 A 506(c) offering is public in reality, non-public only
by statute.
 If technical compliance with Rule 506(c) is not
achieved, failure to register the offering will likely be a
violation of the Securities Act.
 The consequences for non-compliance are severe.
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11. “Reasonable Steps” – Safe Harbors




Income Verification
Net Worth Verification
Third Party Verification
Pre-existing 506 Investors
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12. Income Verification
An issuer can verify a proposed investor’s income level by:
 reviewing any Internal Revenue Service form that
reports income for the two most recent years
and
 obtaining a written representation that the investor has
“a reasonable expectation” of receiving sufficient
income during the current year.
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13. Net Worth Verification
An issuer can verify a proposed investor’s net worth by reviewing:

For Assets: bank statements, brokerage statements and
other similar third party statements
and

For Liabilities: both (1) a credit report and (2) a written
representation that all liabilities necessary to determine net
worth have been disclosed.
All documents must be dated within the last three
months
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14. Third Party Verification
An issuer may rely on the determination that an investor is
“accredited” if made by any one of the following:
 a registered broker-dealer,
 an SEC-registered investment adviser,
 a licensed attorney
 a certified public accountant
 Such determination must have been made
within the last three months
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15. Pre-Existing 506 Investors

Issuers don’t need to separately verify the status of
current investors that participated in a previous Rule 506
offering of the issuer

Caveats


Only applies to Rule 506 offerings closed before September 23,
2013
The investor in question will still need to certify that they are
accredited at the time of the Rule 506(c) offering (“check the
box”)
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16. Additional Proposed SEC Rules

Pre-sale Notice Filings (Form D)

Additional Information on Filings (including regarding investors)

Post-Closing Filing Requirements

Additional Disclosures and Legends

Submission of all advertising materials to the SEC (limited)
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17. Practical Impact
 Rule could represent a sea change, but perhaps not right
away.
 Much to consider for potential securities issuers in
deciding whether to use the new Rule or not.
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18. Exceptional service. Dykema delivers.
Ann Arbor SPARK
Business Law and Order
November 18, 2013
Presented by D. Richard McDonald
drmcdonald@dykema.com
248-203-0859
California | Illinois | Michigan | Minnesota | North Carolina | Texas | Washington, D.C.
www.dykema.com

19. ADVERTISED PRIVATE PLACEMENTS
PRACTICAL CONSIDERATIONS
• SEC Integration concepts will require that all private offerings be
carefully planned
– If an issuer conducts a Rule 506(c) private offering using
advertising or general solicitation, the issuer may not be able to
conduct a Rule 506(b) traditional private offering for six months.
• Special care should be given when drafting sales and advertising
materials relating to the offering, as an untrue statement of a
material fact or omission of a material fact necessary in order to
make a statement made, in light of the circumstances, not
misleading, could create Securities Act or Rule 10b-5 liability.
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20. PRACTICAL CONSIDERATIONS (CONT’D)
• The issuer should establish a communications policy
– Identify the officers permitted to speak and the “message”
– The issuer should control when and where advertising/general
solicitation occurs and what is said
– If using a placement agent, discuss early on whether to use
advertising and if it will be used, how and when
• Consider what steps to verify may be necessary before proceeding
with an advertised offering
– Who will be targeted by the ads?
– Who are potential investors?
– Will the company have any information about the investors?
– What is the cost of using a third party service?
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21. PRACTICAL CONSIDERATIONS (CONT’D)
• Continue use of investor questionnaires as part of the process.
• For individual investors, use of registered broker or investment
advisor to collect information and certify accredited status would be
sufficient.
• For entity investors, consider verification methods that are similar to
the individual safe harbor methods, or use public information filed
with regulator, other reasonably reliable third party information or
verification from other reliable third parties.
• Comprehensive record keeping is critical.
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22. PRACTICAL CONSIDERATIONS (CONT’D)
• Securities sold in a compliant advertised private offering are
“covered securities” for purposes of state blue sky preemption
– States generally will require a notice filing and fee.
• Potential broker-dealer registration issues for individuals actively
involved in multiple selling efforts when there is no registered
intermediary participating.
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23. SAMPLE SOLICITATION METHODS
•
•
•
•
•
•
•
•
•
•
Social media
Internet
Mass mailings
Newspaper or magazine ads
Billboards
Bus sides
Shipping containers
Sky writing
T-shirts worn by skyscraper window washers
Others?
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24. SAMPLE SOLICITATION
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25. TRADITIONAL V. ADVERTISED PRIVATE OFFERINGS
TRADITIONAL -- Rule 506(b)
ADVERTISED – Rule 506(c)
•No dollar limit
•No limit on the number of accredited
investors
•Up to 35 non-accredited but sophisticated
investors may purchase
•General solicitation or advertising not
permitted
– Need pre-existing relationship
•Securities are restricted from transfer
•Certain information must be delivered if
any non-accredited investors
•“Traditional” accredited investor
verification procedures
– Self-certification may work
•Record keeping important
•No dollar limit
•No limit on the number of accredited
investors
•No non-accredited investors are permitted
to purchase
•General solicitation and advertising
expressly permitted
– May approach anybody
•Securities are restricted from transfer
•No information delivery requirement
imposed on issuer
•Heightened accredited investor verification
procedures
– Self-certification not sufficient
•Record keeping critically important
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26. TRADITIONAL V. ADVERTISED PRIVATE OFFERINGS
(CONT’D)
PROS OF RULE 506(C) OFFERING
• Assured to reach a larger
audience to solicit interest
• Use social media or Internet
• No limitations on what type of
investor receives information
• Easier for a company to try to
raise money without paying a
broker dealer
• Better access to a larger
universe of smaller investors
CONS OF RULE 506(C) OFFERING
•Issuer responsible that purchaser is
an accredited investor
•Issuers may prefer a targeted
marketing approach driven by
sensitivity about disseminating
information about their company
•Potential to waste time with
investors that are not serious or do
not fit the profile of opportunity
•Don’t know what type of investor
you are bringing into the capital
structure
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27. TRADITIONAL V. ADVERTISED PRIVATE OFFERINGS
(CONT’D)
NO GENERAL SOLICITATION
YES GENERAL SOLICITATION
•Issuer is sensitive about
disseminating private company
information needed to make an
investment decision
•Issuer wants only serious investors
to be considered
– Leverage broker dealer’s
relationships and knowledge
of investor types
•Issuer is raising capital for an asyet undisclosed strategic purpose or
plan
•Issuer wants to run a more
controlled offering process
•Smaller sized capital raises
•Equity growth opportunities with
lots of upside
•Too small for investment banks
•Companies that can’t attract large
institutional capital providers
– Poor financial results
– Out of favor industry sectors
– Early stage
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Exceptional service. Dykema delivers.

28. Rick McDonald is the Leader of Dykema’s Securities-Public Company practice
area. His practice focuses on mergers and acquisitions, SEC matters, securities
offerings and corporate finance transactions, with an emphasis on counseling
public companies on all aspects of corporate governance as well as SEC
reporting, disclosure and compliance.
248.203.0859 / DRMcDonald@dykema.com
This presentation is for informational purposes only, and not for the purpose of providing legal advice. You should not consider any
information in this presentation to be legal advice and should not act upon any such information without seeking professional counsel.
Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation.
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29. Next Business Law & Order Program:
Tax Planning
January 20, 2014