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General Solicitation of Investors Begins

A JOBS Act rule that ends the ban on general solicitation and allows companies to market private placements to a mass audience goes into effect today.
Marielle SegarraSeptember 23, 2013

The day has finally arrived: companies may now solicit investors using public advertisements.

In July, the Securities and Exchange Commission lifted its ban on general solicitation of private placement deals, allowing companies to market private placements publicly as long as they only sell equity to accredited investors. The rule, originally outlined in the 2012 Jumpstart Our Business Startups (JOBS) Act and debated for more than a year, goes into effect Monday.

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Until now, under Rule 506 of Regulation D companies had to advertise their offerings behind online registration walls or go through broker-dealers to reach accredited investors. Now, they can market private placements anywhere, including social media or some other, more whimsical, platform. “Taken to the extreme, you could advertise a private placement under Rule 506 on the radio, on an infomercial or on the side of a blimp,” David Lynn, a partner at Morrison Foerster, told CFO last year.

The new rule comes with caveats. Companies must file a Form D (which states they have made a public 506(c) offering), within 15 days of receiving their first investment. The SEC is considering amendments that will require firms to file the form even earlier — 15 days before they use general solicitation.

In addition, issuers are responsible for verifying that their investors are accredited. In its final rule, the SEC included a list, rendered below, of some of the ways issuers can comply with this requirement.

The JOBS Act also outlined rules for equity-based crowdfunding, which will allow businesses to raise up to $1 million from non-accredited investors. Because of its dollar limit, this form of financing will likely be less useful for mature firms than general solicitation. Some experts have also expressed concerns that crowdfunding would torpedo a company’s chances of securing venture capital financing later on. But others say it could actually plug funding gaps for venture capital-backed companies. The SEC has not yet written the rules on crowdfunding.

Read additional reporting about the JOBS Act at