When raising money in a private offering of securities, the most popular exemption from registration that companies use is the one contained in Rule 506 (b) of Regulation D. This rule generally allows for companies to raise unlimited funds from an unlimited number of accredited investors as long as the companies do not participate in general solicitation as part of the offering process.
Below are a few requirements for companies to keep in mind so that they, nor their agents or officers, as well as brokers, do not participate in general solicitation or advertising and cause roadblocks to their capital raising efforts.
To begin with, companies depending on Rule 506 (b) of Regulation D should put forth offers and make solicitations for investments only to individuals with whom they retain a “pre-existing substantive relationship.” According to the Securities and Exchange Commission (SEC), a substantive relationship is one in which the company has enough information to evaluate, and does evaluate the financial circumstances and sophistication of a prospective offered in order to determine his or her qualifications as a sophisticated or accredited investor.
While self-certification is not sufficient by itself, a company may develop a relationship with a possible investor if the individual adheres to a request from the company to answer a questionnaire that helps the company evaluate the potential investor’s financial situation and sophistication.
The relationship is required to be pre-existing, which means the relationship began prior to the offering. A broker-dealer may substitute for the company itself in this process. If the broker-dealer had a pre-existing relationship with the prospective investor, this will satisfy the pre-existing requirement.
No Public Disclosure
Additionally, when putting forth offers in accordance with Rule 506 (b) of Regulation D, the company and its agents must not disclose the materials of the offering or its existence or terms to the press or general public. It is prohibited to advertise the offering through mass communication in any form.
It is important to train and monitor the agents, representatives and employees of your company to ensure they do not engage in activities during an offering that equates to general solicitation.