As Congress grapples with ways to kick start the economy and spur small business growth and hiring, one proposal gaining momentum is to relax or even eliminate the long-standing ban on general advertising or solicitation imposed on private companies seeking to raise capital under the private placement rules of Reg D of Section 4(2) of the 1933 Securities Act.
Perhaps the most commonly used “safe harbor” private offering exemption is found under Rule 506 which, along with Rule 502, provides “that neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:
1. Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and
2. Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.
This prohibition essentially mandates that any issuer utilizing the Rule 506 exemption must have a bona fide, pre-existing relationship with every investor it seeks to raise capital from. The prohibition has come under increasing criticism as unnecessarily restricting on the ability of private companies to raise capital. On January 6, 2012, the SEC’s Advisory Committee on Small and Emerging Companies made the following recommendation:
THEREFORE, the Advisory Committee recommends that the Commission take immediate action to relax or modify the restrictions on general solicitation and general advertising to permit general solicitation and general advertising in private offerings of securities under Rule 506 where securities are sold only to accredited investors.
If enacted, the number and visibility of private placement under rule 506 should increase substantially making it easier for small companies to find the accredited investor they need to fund their growth.
The full Committee letter can be found here: SEC-Advisory-Committee-Letter-to-SEC-Re-Relaxing-General-Solicitation
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