SEC issues proposed Regulations that allows direct solitication

On September 4, 2012 by Phil Champagne

By Phil Champagne, Managing partner at Wren Investment Group

On August 29, the SEC issued the proposed regulations which will amend Rule 506 On August 29, the SEC issued the

proposed regulations which will amend Rule 506 and Form D.  The SEC proposed a “new Rule 506(c) which would permit the use of general solicitation to offer and sell securities under Rule 506, provided that certain conditions are satisfied.” The conditions really are limited to the requirement that the issuer must take reasonable steps to verify that the purchasers of the securities are accredited investors, under the current definitions. In short, an accredited investor is a natural person :

  • has a net worth or join net worth with their spouse that exceeds $1 million
  • or earns at least $200,000 per year or the joint couple income is at least $300,000 per year.

In 2011, almost 1 Trillion dollars was raised in private placements using the existing Rule 506 and there is no change to the existing rule. But with addition of the new Rule 506(c) it is expected even more money will be raised for investment purposes. The proposed regulations appears to be much less complicated than expected. There is no statutory definition of what constitutes “general solicitation” and there is no statutory roadmap to tell issuers what “reasonable steps” must be taken to verify that the purchasers of securities are accredited.

Any investment company like ours could not openly solicit to any investors. We wrote an article on the subject that we will post later for reference. Now this changed but only for accredited investors. Unfortunately, this means for other investo

rs, only mutual funds or other public investment are available to them. The exception is if they have a prior relationship.

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