For small businesses and startups, the most common method for raising capital is through the use of private placements. Small businesses don’t often have the financial structure in place for public offers due to the high expenses involved and other registration requirements.
The Securities Act of 1933 requires companies in most cases to register their offering with the Securities and Exchange Commission (SEC) when they sell a security. However, some businesses are permitted to sell securities without registering with the SEC based on certain exemptions provided in the law. Private placement offerings are the securities sold through these exemptions.
Rule 506(c) and Private Placements
Qualifying for an exemption requires company to abide by a number of restrictions, including accredited investor verification, the maximum amount permitted to be raised, the manner in which the offer is made and who is permitted to participate. Public offerings generally use solicitation and advertising to attract investors. Historically, this public offering option wasn’t available to private companies who didn’t register their securities as a public offering. However, with the implementation of Rule 506(c), issuers can take advantage of these tools with private offerings.
How to Find Accredited Investors
Once you have made the decision to make an offering to accredited investors, the next step is to acquire investors. But how to find investors is the question. With the right offering and exemption you will be able to use general advertising and solicitation to find investors. Under Rule 506(b), you won’t be permitted to use general advertising and solicitation. The rule requires you to have a substantive and pre-existing relationship between your company and the prospective investors. As well, an investor may express interest in your offering if that investor was unsolicited.
In the case where general solicitation and advertising are not allowed, an issuer may establish a pre-existing relationship with an investor through an intermediary. These intermediaries can be persons associated with the company such as employees, directors and officers. In addition, third party registered broker-dealers (and in some case, when carefully done, unregistered finders) can help issuers find willing investors.
But if you use Rule 506(c), finding accredited investors might be easier as you can generally solicit and advertise. You’re not held hostage to the limitations of your rolodex or expensive intermediary fees to borrow someone else’s network. You can control your search by publicly hunting for accredited investors and letting them know that you have a deal for them to invest in. It really levels the playing field for those who don’t have the network and resources to tap into the otherwise exclusive accredited investor community.
Some exemptions require investors to be verified as ‘accredited investors’. Rule 506(c) requires this, and failure to properly verify even one investor (even if you’ve known them your entire life) can jeopardize your entire offering. Luckily, this qualification process can be performed through an accredited investor verification service. After you have learned how to find accredited investors how to find, you can use such a service to make sure they are qualified.
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