Securities laws have many kinks that can ruin your deal if you don’t know how to navigate them properly. I want to address a few of them in this post. Specifically, I will discuss some things you seldom hear about Rule 506 public/private placements. This all comes with the mandatory grain of salt: this is not legal advice. If you need legal advice, get a lawyer.
1. “General solicitation” is broadly construed.
Once you “alert the public” to the fact that you are raising funds for a deal, then you are “guilty” of general solicitation and your deal becomes a “public” 506(c) deal. All it takes is for you to mention in a public website or online publication that you are raising funds for your deal. There are some websites that support 506(b) private placements (GroundBreaker is one of them), but this requires additional steps and security measures. In general, if you want to keep your deal private, you can only market and give access to it to those with whom you have a pre-existing relationship.
2. Once you go “public,” everything is public.
This is something many people get wrong. Once you generally solicit your deal online, your entire deal, not just the online portion, becomes a 506(c) deal. This means you will have to take reasonable steps to verify the accreditation status of all your investors, not just of those coming from online sources. And, of course, you can no longer sell your deal to unaccredited investors (there is a 35 unaccredited investor limit for 506(b) private deals).
3. You must make some filings.
There is a federal filing requirement for all Rule 506 placements. It is not overly burdensome, but it must be done. The actual pain, however, comes from the states. Although Reg. D (of which Rule 506 is part) preempts state law, states can and do require filings (often with a fee). The best practice is to file with each state where any investor resides. Unfortunately, the filing format for each state differs, so you will need to do some extra research each time you do a deal (we all hope some day uniformity will be finally achieved). And then there’s New York, which requires filing and payment of the fee (one of the heftiest in the country) before investors are solicited. (There are some ways to work through this, but you should know that this is the law in the Empire State.)
4. Disclosures are important
It is beyond the scope of this short post to discuss disclosures in depth, but you should always keep in mind this: even if there are no affirmative disclosure obligations for your Reg. D deal (unless you sell to unaccredited investors), a thorough and accurate PPM will minimize potential litigation risks.