Rule 506(b) of Regulation D provides a widely used exemption from registration by businesses when they are raising capital through private securities offerings. This Rule allows companies to receive a limitless amount of investment from an unconstrained number of accredited investors as long as these businesses refrain from the practice of general solicitation.
Companies engaging in this form of fundraising can benefit from a number of tips to help them, their agents, and their officers avoid participating in general solicitation – something which could put at risk the entire fundraising effort.
Pre-existing Substantive Relationship
Businesses that depend on Rule 506(b) of Regulation D should extend investment offers and solicitations only to individuals and entities with whom they already have pre-existing substantive relationship. A substantive relationship as defined by the Securities and Exchange Commission (SEC) is a relationship in which the company or its representative has enough information to evaluate (and does evaluate) the financial sophistication circumstances of a potential offeree while evaluating offerees status as a sophisticated or accredited investor.
Completion of a Questionnaire
While it is not adequate for an investor to use self-certification exclusively, a business may develop a substantive relationship with a potential investor if the investor, or a broker-dealer operating on the business’s behalf, completes a questionnaire that enables the business or broker-dealer to review the financial circumstances and sophistication of the prospective investor.
Referring back to the necessity of a pre-existing relationship, this relationship must be created prior to the sale of an offering. When a broker-dealer is used in the process, the broker-dealer must have had a relationship with the potential investor before his or her involvement in the offering.
Refraining From Public Advertising of the Offering
In addition, in order to comply with Rule 506(b) of Regulation D, the company issuing an offering, including its agents, must avoid the disclosure of the terms and existence of the offering as well as the offering materials to the press and the general public. Under such circumstances, it is not legal to use mass communication methods such as cold calling and mass mailings in order to advertise the offering. Additional approaches which should not be used include making offering public through advertising on websites with unrestricted access, radio, TV, or magazines.
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