Looking for Mr. 506(c)

"On a relative basis, issuances claiming the new Rule 506(c) exemption have accounted for only 2.1% of the reported capital raised pursuant to Rule 506 since becoming effective in September 2014."

Download (1)So reads a key finding of a report, Capital Raising in the U.S.: An Analysis of the Market for Unregistered Securities Offerings, 2009-2014, by Scott Baugess, Rachita Gullapalli and Vladimir Ivanov, staff at the SEC's Divisio of Economic and Risk Analysis. They are speaking about the way Rule 506 under Reg D was reformed by rulemaking pursuant to the JOBS Act, to permit general solicitation while preserving a Rule 506 exemption that is preemptive of state law, as long as all purchasers are verified to be accredited investors.

Rule 506(c) should be a big deal, and we should be seeing more "public" private offerings, like the one from the brewpub chain McMenamins, which my colleague, Jordan Rood, wrote about here.

But we aren't, not yet.

So far, old Rule 506, now re-styled Rule 506(b), is the Donald Trump to Reg D's Jeb Bush. The authors of the SEC staff report have ideas why:

The novelty of the 506(c) provisions after decades on non-permissibility of general solicitation in Regulation D offerings may be one reason why Rule 506(b) continues to dominate the Regulation D market. In particular, issuers with pre-existing sources of financing and/or intermediation channels may not yet have a need for the new flexibility. Other issuers may become more comfortable with market practices as they develop over time, including among other things, certainty over what constitutes general solicitation. There may also be concerns about the added burden or appropriate levels of verification of the accredited investor status of all purchasers, for which efficient market solutions may develop over time.

And might there be a whiff of the taint of adverse selection that one would readily associate with Title III crowdfunded deals. The authors allow that this might be so:

It is possible that some sophisticated investors may perceive the election of the 506(c) exemption as a signal that issuers anticipate difficulties in raising sufficient capital and consequently consider it a less attractive offering, which could also dissuade issuers from utilizing the new exemption for their financing needs.

I yet think this will change. Just not any time tomorrow.

Image: scene from Looking for Mr. Goodbar.


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