The Regulatory and Financial Burdens of Using General Solicitation to Raise Capital Nov15


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The Regulatory and Financial Burdens of Using General Solicitation to Raise Capital

One of the prominent benefits provided to issuers of securities through the JOBS Act is the relaxation of the requirements concerning the use of general solicitation. However, despite the enthusiasm about these rule changes, there are some costs that should be known about using general solicitation for fundraising a securities offering.

These financial and regulatory burdens are explained below:

More Stringent Verification Requirements

One of the chief hidden expenses of engaging in general solicitation comes from the requirement to verify accredited investor status. Prior to the expansion of general solicitation in Regulation D securities offerings, accredited investor status was usually verified through a self-certification process. This process involved the purchaser of securities filling out an accredited investor questionnaire indicating that he or she was accredited and signing the document.

However, now under the new Rule 506(c), an issuer that performs general solicitation is required to conduct “reasonable steps” to verify the accredited status of all investors in the offering. The process can be invasive to the investor and cumbersome for the issuer. The issuer or a third-party investor verification service may review evidence of the investor’s financial status, including net worth and/or income. This may involve evidence provided by the investor from W-2s, tax returns, credit reports, and bank statements.

However, additional time and transaction costs are required for the investigations that verify the accredited status of investors.

Procedural Flaws

Under Rule 506(c) offerings, unlike other Rule 506 offerings, if a procedural flaw prevents you from gaining the exemption, such as the failure to file Form D on time, there are no remedies. If a company fails to follow all of Rule 506(c) requirements, there is no federal exemption provided to cover the offering. Also, the company would, according to law, have engaged in a public offering of securities that was unregistered. This would represent a violation of securities law and expose the company and its control persons to a full range of liability.

It is important to weigh your options carefully when considering general solicitation as part of your fundraising efforts. Even if you ultimately choose to use general solicitation, it is best to know the costs in advance and have a plan to pay for them.