The Securities and Exchange Commission (SEC) recently announced new rules allowing “general solicitation” of investors in private offerings. The intent is to provide businesses, including health care companies, a potential middle road between a public offering and a private offering.
Companies raising capital in a private placement have often relied on Rule 506(b) to Regulation D under the Securities Act of 1933 to avoid the expense of a public offering. Among other restrictions, Rule 506(b) prohibits any general solicitation of investors, thereby limiting its utility to many companies.
Another concern is the new rule’s requirements for verification of purchasers’ accredited investor status. Under Rule 506(c), issuers in general solicitation private offerings must obtain further information from their purchasers, such as financial statements, tax returns, or certifications from the purchasers’ professional advisers. Individual angel investors may not be willing to disclose such sensitive personal information, which limit the new rule’s viability alternative for small capital raises.
Issuers looking to make large private offerings, on the other hand, would appear to benefit the most from new Rule 506(c). Advertising through magazines, websites, newspapers, etc., could attract more investors who are willing to comply with the new verification requirements, and could provide a way to raise more money than could reasonably be raised without general solicitation in a traditional 506(b) offering. This could provide an alternative to venture capital or private equity financing, and quite possibly at a lower cost for the capital.