This is something we briefly touched on last fall, but it’s the new year, it’s capital raising season, and there’s new offerings out every day. It’s almost like springtime and seeing new growth popping up everywhere. This is one of the times of the year where people get out and start raising capital.
What happened last fall is that the SEC adopted final rules, whereby they simplified and harmonized all of the different exempt offering types. We had different rules for all kinds of different things, and they have harmonized them to make all these offerings seem similar on various levels. We’re attaching here a pdf that summarizes all the exempt offering types. You’re welcome to download that and study that. It’s also duplicated in the article we mentioned above, from Laura Anthony’s law blog.
Let’s touch on some of the major ones. First off, we’re talking about exempt offerings. You’re being exempt from SEC registration, such as a going public, so there’s all kinds of rules to not have to do all those other rules. This stems from the 1933 and ’34 securities exchange acts and has set the basis for how we raise capital for small businesses here. Although, it’s been under great upheaval and change since the 2012 jobs act under the Obama administration.
Now this is all good news and exciting stuff! If you are doing an offering inside your own state, it’s very likely you can qualify for an in-state exemption, which is fairly straightforward. There are several rules, and you’ll hear attorneys talking about rule 504, rule 506b, rule 506c, and regulation A. The 500 rules are under regulation D. 506b under regulation D is an exempt offering – you cannot do any general solicitation advertising. You have to go to people that you know or that people inside your organization know, but you can raise money from both accredited and non-accredited investors. We can talk about what an “accredited” investor is another time, but think about it as somebody who has enough money that they should know what they’re doing. Rule 506c is similar to 506b, except you can do general solicitation. You can run TV ads, newspaper ads, digital advertising, etc. but you may only accept investments from accredited investors. No matter how small the investor is or how small the investment is – if you’re raising a thousand dollars, but you’re doing general solicitation advertising, they have to be an accredited investor.
Then we move on into the realm of what’s called “pseudo public,” which is under regulation A. They have two tiers, and it basically breaks down as whether the numbers for the company have been audited or not audited. In tier one, were you not audited, you could raise 20 million dollars from anyone accredited and not accredited. Tier two, you could raise up to 75 million dollars from accredited and not. Then once you’re public, once you’ve issued shares, then you have to follow SEC reporting rules because you’re essentially a backdoor public offering. Reg A’s take a lot longer, so what you see a lot of people doing is a 506c and then once the SEC accepts their Reg A filing, then they close down the 506c and move directly into an A.
We know this is all highly technical, so take your time, check out the PDF, read the Laura Anthony article, and if there’s any way we can help you prepare your organization to start raising capital, don’t hesitate to schedule a call.