As I wrote last year, a lot of ink has been spilled over the Jumpstart Our Business Startups (JOBS) Act, and particularly the provisions that will allow for “Crowdfunding”. I stated that one change I thought would benefit small companies greatly (more than Crowdfunding) is in Section 201(a)(1) of the JOBS Act, which would allow for certain private offerings to be generally advertised, so long as the buyers are accredited investors. I stand by that statement, and now the regulations allowing it to happen have been finalized.

Earlier this year, the SEC published new rules implementing the JOBS Act requirement to lift the ban on general solicitation or general advertising for Rule 506 offerings. See the SEC press release with links to relevant fact sheets here. Or if you want the details, see the actual amendments here and here. Basically, this means that companies will be able to solicit for investors on their own unsecured websites, through press releases, on social media sites, and through other generally available media. Companies will just have to do a little more homework on potential investors (and themselves) to take advantage of these new rules.

What the new amendments do is leave the old Rule 506 in place (under what is now 506(b)), and created a new Rule 506 (under what is now 506(c)). Here are the key differences in new Rule 506(c):

• General solicitations are now allowed, so long as all investors are accredited. Previously, you could have up to 35 non-accredited investors.
• Accredited investor status must be verified, which for most investors means reviewing certain financial/tax documents of a potential investor (or relying on certifications from the investor’s lawyer, CPA, broker or financial advisor that the licensed professional has done the review) and receiving written representations. You can expect that these certification letters are going to become fairly standardized. Previously, common practice was to rely exclusively on investor questionnaires.
• Bad actors are now prohibited from being involved with companies engaging in 506 offerings (including as officers, directors, 20% owners, brokers, etc.), which means companies are going to need to bulk up their D&O and investor questionnaires, which will again likely become fairly standardized. This is a new requirement.

In addition, changes are coming to Form D, which is the notice filing companies are required to make when relying on Rule 506. The most important proposed change would be to require filing the Form D 15 days BEFORE using a general solicitation. Previously, filings were required 15 days AFTER the first sale of securities. Additional proposed changes include disqualification from using Rule 506 for one year if issuers fail to comply with Form D requirements, expanded disclosure requirements, and a closing statement within 30 days after the end of an offering. See the full proposed changes to Form D here.

This doesn’t mean that companies should start soliciting the public for investments without careful review and consideration. Nothing in these rules change the anti-fraud provisions of state and federal securities laws, and companies who do not put the same care and consideration into their public offerings as they would a private offering memorandum are sure to be targets of plaintiffs lawyers as well as state and federal regulators. All public solicitations should be carefully reviewed by legal, financial and accounting experts familiar with the rules and regulations impacting the sale of securities.