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NEW SEC RULES ALLOW FOR GENERAL SOLICITATION – WHAT YOU NEED TO KNOW BEFORE YOU RAISE CAPITAL Joe Leo BrownWinick 666 Grand Avenue, Suite 2000 Des Moines,

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Presentation on theme: "NEW SEC RULES ALLOW FOR GENERAL SOLICITATION – WHAT YOU NEED TO KNOW BEFORE YOU RAISE CAPITAL Joe Leo BrownWinick 666 Grand Avenue, Suite 2000 Des Moines,"— Presentation transcript:

1 NEW SEC RULES ALLOW FOR GENERAL SOLICITATION – WHAT YOU NEED TO KNOW BEFORE YOU RAISE CAPITAL Joe Leo BrownWinick 666 Grand Avenue, Suite 2000 Des Moines, IA Telephone: Facsimile:

2 Overview SEC Adopts Two New Regulations –Advertising in certain private offerings –Disqualification of “bad actors” –Still no regulations for Crowd Funding Private Offerings Today –504, 505, 506(b) –State Exempt Offerings

3 Requirements Current 506 Offering General solicitation and general advertising prohibited. Allows sales to unlimited number of accredited investors and up to 35 non-accredited investors. –Most common types of accredited investors: $200,000 individual income/$300,000 joint income $1,000,000 or more in assets (excluding equity in primary residence) Directors and officers Investors essentially self-certify as accredited.

4 New Rule 506(c) What it does: –Allows for general solicitation and advertising if only selling to accredited investors. –Requires the issuer to take reasonable steps to verify accredited status of investors. –Provides non-exclusive list of methods for issuers to verify accredited investors.

5 Reasonable Steps to Determine Accredited Status Under the old rules, issuers had to reasonably believe that the investors participating were accredited. –Investors Questionnaire –Pre-existing relationship Under Rule 506(c), these old methods MAY not be enough in all circumstances.

6 Non-Exclusive List of Verification Procedures Not the only way to accomplish the verification. –High minimum investment –Grandfather provision –Other factors –Cannot luck into the correct determination Various categories of accredited investors not covered. Likely will be services to provide verification for a fee.

7 Non-Exclusive List of Verification Methods Verification of Income –Requires issuer to review tax returns and certification Verification of Net Worth –Requires listing of assets and liabilities –Requires a commercial credit check Verification by Third Party –Broker-dealer, investment advisor, attorney or CPA. Grandfather provision

8 Impact of 506(c) Fundamentally changes one of the long- standing rules of private securities offerings. Limits the ability of the issuer to sell to non- accredited investors. Additional compliance due to the accredited investor verification. Change strategy for exempt offerings. What it does not do – effect the Rule 504 and 505 exemptions and other than the bad actor rules does not affect traditional 506 exemptions.

9 Strategy 506(c) Offerings May not want to start with a 506(c) exemption. –Inability to stack other exemptions. –Inability to sell to non-accredited investors. –Additional compliance burdens. Provides additional cover for 506(b) offerings only to accredited investors. Precludes using certain state exemptions. –Additional filing fees.

10 Bad Actor Disqualification Prevents certain “bad actors” from relying on the Rule 506 exemption. Bad actors are those who have committed certain types of indiscretions which for the most part relate to offering securities or other related businesses. The restriction is applicable to the company issuing securities itself as well as other insiders.

11 Disqualification Effective Date Infractions that occur after effective date lead to disqualification. Infractions that occur before effective date have to be disclosed. There is an appeal process where the SEC can waive the disqualification in certain circumstances.

12 What Issuers Need to Do Insiders and others involved in offering need to complete disqualification questionnaires. Issuer needs to use “reasonable care” to determine whether a disqualification exists. No strict liability for issuer.

13 Website: Toll Free Phone Number: OFFICE LOCATIONS: 666 Grand Avenue, Suite 2000 Des Moines, Iowa Telephone: (515) Facsimile: (515) Franklin Place Pella, Iowa Telephone: (641) Facsimile: (641) DISCLAIMER: No oral or written statement made by BrownWinick attorneys should be interpreted by the recipient as suggesting a need to obtain legal counsel from BrownWinick or any other firm, nor as suggesting a need to take legal action. Do not attempt to solve individual problems upon the basis of general information provided by any BrownWinick attorney, as slight changes in fact situations may cause a material change in legal result.


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