The Securities and Exchange Commission has, under the mandate of the JOBS Act, lifted the ban on general solicitation by amending Rule 506 of Regulation D and Rule 144A of the Securities Act. In effect, this change allows a company to engage in general solicitation, meaning solicitations to the general public, provided all purchasers of securities are accredited investors and the company undertakes reasonable steps to ensure that all purchasers are accredited investors. An accredited investor is defined as:
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- a charitable organization, corporation, or partnership with assets exceeding $5 million;
- a director, executive officer, or general partner of the company selling the securities;
- a business in which all the equity owners are accredited investors;
- a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
- a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
- a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
Consequently, the general solicitation door is only open to those with high net worth, as the SEC sees these individuals as less likely to be deceived by scams and frauds. This change does not, however, open the door to crowdfunding. Crowdfunding advocates are still waiting for the SEC to promulgate crowdfunding rules pursuant to the mandates of the JOBS Act.
If you are a crowdfunding platform or are a company looking to solicit to accredited investors, contact the crowdfunding lawyers at Revision Legal today.