I’m not going to repeat what’s posted all over the internet about the new rule and how it works. But just in case you want to read more about it, go to the SEC site here. And you really should read the entire release, here.
You do know that if you sell to just one non-accredited investor in a 506(c) placement after the effective date of the Rule you have a BIG PROBLEM: You lose the exemption and violate the law. Not good.
So what happens in this situation:
- You are conducting a Rule 506b placement in full compliance with the law prior to the effective date of Rule 506c [September 233, 2013]
- You sell to one or more non-accredited investors in the fully-compliant 506b placement prior to the effective date of Rule 506c
- On September 23, 2013, the effective date of Rule 506c, you turn your fully-compliant 506b in which you have sold to one or more non-accredited investors into a 506c
- You continue your 506c selling to only accredited investors and in full compliance with Rule 506c
- You close your 506c placement sometime after the effective date.
You may think the SEC has told you the answer in the Release. Here’s the relevant part of the Release:
Finally, with respect to transition matters, for an ongoing offering under Rule 506 that commenced before the effective date of Rule 506(c), the issuer may choose to continue the offering after the effective date in accordance with the requirements of either Rule 506(b) or Rule 506(c). If an issuer chooses to continue the offering in accordance with the requirements of Rule 506(c), any general solicitation that occurs after the effective date will not affect the exempt status of offers and sales of securities that occurred prior to the effective date in reliance on Rule 506(b).
But what about any sales to non-accredited investors in the fully compliant 506b prior to the effective date?
The Release is silent. Thus, you must draw your own conclusion. Talking to a securities law professional would be a good idea.
In our next post we’ll talk about integration in Regulation D offerings. Theoretically, the doctrine of integration, if applied in the above fact situation, could mean you have violated the law.
But with the language in the Release, does integration apply? Will you lose your 506c exemption?
Excellent Questions. No direct answer from SEC.
If you are interested in more information about this fact situation or potential Reg. D integration issues, please contact us for more information.