Lots and lots of questions about the new and final general solicitation rule, as well as proposed rules that would add additional conditions – beyond the accredited investor verification required by Congress – for exempt offerings that make use of general solicitation.
As we sort through the questions and ambiguities, however, one point couldn't be clearer: the old rule used for most startup and emerging company financings, old Rule 506 (hereinafter to be known as 506)b)), was expressly preserved.
True, if the proposed Reg D rules are finalized as proposed, new Form D filing requirements will impact Rule 506(b), as well as the new, final, general solicitation-friendly rule 506(c).
But 506(b) has no heightened verification requirement, and no pre-filing or information requirements have been proposed for 506(b) deals. It may well be that Form D filing obligations will soon have more teeth, regardless of whether you choose 506(b) or 506(c), but it's fair to say that the new Reg D rule set goes out of its way to preserve the old way of doing things, as long as you do not generally solicit or generally advertise, and as long as you otherwise comply with the conditions that have always been in place for Rule 506.
It didn't have to be thus and the SEC deserves credit and praise for thinking this through.
As drafted, Title II of the JOBS Act did not actually require that the old 506 be preserved. The notion had been in the air. A version of the JOBS Act that had been introduced in the Senate in March 2012, not the version that made it into law, expressly contemplated that the SEC might bifurcate 506 in the way that the agency ended up doing. And I and others advocated for such an approach in the run up to the SEC's August 2012 proposed rules to implement the lifting of the ban on general solicitation. But there was no Congressional imperative that the agency do so.
.@naval: I agree the extra red tape is silly, but it would only be a problem if a startup generally solicits. Which most won't.
— danprimack (@danprimack) August 19, 2013
And because the Reg D rule set expressly preserves "the old way" of startup and emerging company financing – no general solicitiaton or general advertising – there is actually pretty darn good intuitive appeal to the apparently commonsense reaction, "just stay away from general solicitation."
I'll bet many companies will decide to stay inside the cozy, clubby confines of 506(b). But here's the problem with taking too much comfort from such a reassurance: industry practice today has been bending the old rule – prohibiting general solicitaiton and general advertising – to the point of breaking.
Joe Wallin puts it this way on his blog:
"What about startup weekends? What about business plan competitions? What about incubator demo or graduation days? Will the teams that compete in these events be deemed to have generally solicited an offering? Some of these events, if conducted as they’ve been run in the past, will clearly constitute general solicitation."
If you're going to content yourself (limit yourself? liberate yourself?) with the old way, if you're going to stay within the confines of 506(b), here's the longstanding verbiage from the Reg D rule set you need to get comfortable with:
". . . . 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 . . . ."
Ask yourself: come September 23, will some offerings that formerly looked like 506(b) now look like 506(c)?