506(c) "Twilight Zone?" Or general solicitation as Congress intended it?

Thanks to Broc Romanek for reporting this and thanks to Ellie K for tweeting Broc's post: Rule 506(c) will go into effect 23 September, whether or not there is final action on proposed rules to overhaul Form D filing rules and impose information filing requirements on 506(c) offerings.

So one would fairly conclude from this paragraph in an August 8 letter from SEC Chair Mary Jo White to Rep. Patrick McHenry:

"You . . . expressed concern that the issuance of the July 10th rule proposal may have created uncertainty among some issuers and market participants as to whether the new Rule 506(c) exemption, which permits general solicitation, can be used once it becomes effective. The Commission approved the adoption of Rule 506(c) on July 10, 2013, and the rule will be effective on September 23, 2013. Once effective, issuers will be able to rely on the Rule 506(c) exemption for securities offerings as long as they comply with the conditions of that exemption. Issuers are not required to comply with any aspect of the Commission's July 10th rule proposal until such time as the Commission may approve a final rule and such rule becomes effective. Should the Commission ultimately decide to adopt final rules, I expect these rules would consider the need for transitional guidance for ongoing offerings that commenced before the effective date of any final rules, as it did when it adopted the Rule 506(c) exemption."

This means come 23 September you should be able to "generally solicit" (tweet, blog, advertise, etc.) your private startup offering, although you will have to verify the accredited status of your investors under new standards and otherwise follow the requirements of Rule 506(c) and Reg D.

6517313787_4f5d920c55_zWhat are lawyers likely to say to clients about all of this?

Use caution.

As your elementary school teacher used to say when you and your friends were running around the classroom with sharpened pencils, "it's only fun until someone loses an eye."

Talk to your lawyer about all that could go wrong, but here is at least one illustration of what could go wrong: you start tweeting like mad about your offering, thinking 506(c) has you covered; but you blow one of the conditions of the exemption (for example, perhaps you do not take reasonable steps to verify the accredited status of one of your purchasers). Unlike doing an offering under old Rule 506 (now known as 506(b)), you don't have a 4(2) private offering backstop because you have generally solicited.

The right answer for many startups, come 23 September, it might be, stick with 506(b).

On the other hand, it's possible that the 10 July proposed rules will never be finalized. In which case we may have general solicitation as Congress intended it!

Photo: little_ram / Flickr. "A sharpened pencil is a dangerous object. Use with care."

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