Investor Relations and Rule 506 (c) Offerings

Securities Lawyer 101 - Investor Relations Rule 506

Securities Lawyer 101 Blog

As of Sept 23, 2013, issuers can advertise their securities offerings under Rule 506(c) of Regulation D. Rule 506(c) removes the 80-year prohibition against the general solicitation and advertising of private placements. Since the rule change, issuers have been bombarded with investor relations providers offering to assist with may advertise their Rule 506(c) offerings using a variety of venues including the internet, television, seminars, email campaigns and hard mailers. Issuers should conduct thorough due diligence before hiring any third party that purports to provide services in connection

with their Rule 506(c) offerings to avoid disqualification of the exemption.

Proper due diligence can also help the issuer avoid other potential securities violations.

While 506(c) provides an exemption from registration that allows an issuer to advertise its offering, it has stringent requirements. Moreover, additional securities laws are applicable when the services of third parties are used to advertise an issuer’s Rule 506(c) offering. These laws include but are not limited to Section 17(b) of the Securities Act as well as the anti-fraud provisions. In addition, as of July of this year, issuers conducting Rule 506 offerings are prohibited from using the services of certain persons and entities who are subject to the SEC’s bad actor rules.

Rule 506(c) provides tremendous benefits for companies that might otherwise have trouble bringing themselves to the attention of potential investors, but there are numerous pitfalls for the issuers who do not comply with its requirements.  Most importantly, they must bear in mind that while advertisements will of necessity be broadly directed, only accredited investors may participate in the offering.  Issuers must take “reasonable steps” to verify that all investors to whom they sell securities are accredited, which was not required of them in the past.  Overzealous promotion of a Rule 506(c) offering could increase the work an issuer must perform in order to be “reasonably” certain all of its investors qualify.

Individuals and organizations handling advertising for companies conducting Rule 506(c) offerings are bound by Section 17(b) of the Securities Act of 1933.  These advertisers will be considered publishers under Section 17(b), and as such they must publicly disclose the source and amount of consideration received for their work with specificity. 

In addition, in order to comply with the SEC’s antifraud provisions, advertisers must be careful not to make material misrepresentations about the issuer and its securities or omit facts necessary to make the statements made not misleading.  Exaggerated claims about the company by investor relations firms or other third parties could result in SEC investigations and/or enforcement actions.

The issuer should exercise caution when selecting advertisers in connection with a Rule 506(c) offering, making sure the firm it hires is reputable and clearly understands the provisions of the Rule.  It should avoid any promoter who might fall under the SEC’s new “bad actor” disqualification.  Disqualifying events include criminal convictions, court injunctions and restraining orders, SEC disciplinary orders, SEC cease-and-desist orders and more.

Any company planning to seek help with general solicitation in connection with a 506(c) offering should thoroughly investigate its chosen advertiser before engaging their services.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com.   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com