Would You Let Your Lawyer Run Your Sales Department? How Can You Build the Right Team for Advertising in SEC Rule 506 (c) Private Placements?

By Jim Verdonik

I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs. You can reach me at JFV@WardandSmith.com or JimV@eLearnSuccess.com. Or you can check out my eLearning course at http://www.elearnsuccess.com/start.aspx?menuid=3075 or http://www.youtube.com/user/eLearnSuccessor or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW

Which do you think is most important for building a successful business:

• People?
• Ideas?
• Technology?
• Money?

You can skip this article, if you answered ideas, technology or money.  Because in this article we're going to talk about people.

Specifically, we'll be talking about the people who will help you raise the money you need to grow your business:

• Sales people

and

• Lawyers

Scope of this Article

In July 2013 the SEC made the biggest changes to private placement capital raising rules since the SEC issued Regulation D more than three decades ago.

More than 90% of private placements rely on SEC Rule 506.  These changes allow you to raise capital in a private placement by advertising or doing a general solicitation.  But Rule 506 requires you to verify that all the people you sell to are "accredited investors," if you advertise your offering.

In this article we'll talk about:

·         How do you build teams to help you do effective advertising while still complying with SEC and state anti-fraud rules? 

·         What role should your sales team play? 

·         What role should your lawyer play?

·         How do you choose a lawyer who can help you create effective advertising that also complies with securities laws?

See the end of this article for links to other articles about these Rule 506 changes.

 

Don't Tweet when You Should Have LinkedIn: Choosing Your Advertising Media in SEC Rule 506 (c) Private Placements

By Jim Verdonik

I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs. You can reach me at JFV@WardandSmith.com or JimV@eLearnSuccess.com. Or you can check out my eLearning course at http://www.elearnsuccess.com/start.aspx?menuid=3075 or http://www.youtube.com/user/eLearnSuccessor or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW

Thomas Watson, Chairman of IBM, predicted in 1943 that: "I think there is a world market for five computers."

Now that the SEC is allowing business to advertise in Rule 506 (c) private placements, some pundits are following Mr. Watson by predicting that few businesses will advertise their private placements. 

If that is true, the biggest restriction on advertising won't be reluctance to use advertising.  People have been complaining for many years that that the anti-advertising private placement rules unnecessarily limit the ability of people to raise capital to start and grow businesses, unless they already know a lot of wealthy people. 

The biggest reason why people won't advertise private placements is that the SEC has proposed rules that may make advertising impractical.  We discuss these proposed rules in another article.

Of course, the dirty little secret about private placements is that they haven't really been private for a long time.

Since Internet use became ubiquitous, very little remains private.  So, why should private placements be the exception? 

Private placements have been sneaking around the corners of the Internet wearing thin disguises for over a decade.  Even before the Internet, businesses began making presentations to investors in "venture capital" conferences, where advertising is used to solicit investors to attend the conference.  Both venture capital and angel investors attend these public conferences.  If a business rented a hotel conference room and did mass mailings and newspaper advertisements for investors to attend, the SEC would consider that to be illegal adverting and general solicitation, but the SEC has winked at other organizations inviting dozens of businesses to make pitches to investors solicited by advertising.

This happened because the private placement rules have never really made much sense.  How do you sell something you can't tell people about?

So, Rule 506 (c) merely opens doors for businesses to do openly what they previously often disguised.

Of course, when some people think about securities advertising, the might be thinking about advertisements they see in The Wall Street Journal, which  has had a long and very profitable reign as the Mecca of securities offering advertising.  We're all familiar with tomb stone ads for deals and mutual fund advertisements.

Pundits might be correct in predicting that we won't be seeing a flood of similar advertisements in private placements – especially by young businesses.

The two primary reasons are cost and effectiveness.  Traditional advertising costs too much for most businesses to afford and won't achieve the goal of generating sales.

So, most Rule 506 (c) advertising will take a different form and use different media than traditional public offering securities advertisements.

Scope of this Article

In July 2013 the SEC made the biggest changes to private placement capital raising rules since the SEC issued Regulation D more than three decades ago.

See the end of this article for links to other articles about these Rule 506 changes.

In this article, well talk about

• What media will work best? 

·         Which attributes of different media create risks you won't comply with securities laws?

·         How can you use these new rules to raise the capital your business needs by balancing three competing factors: Advertising effectiveness, budget and securities law compliance? 

Tweeting Your Way to Securities Fraud in 140 Characters: What Do you Say in SEC Rule 506 (c) Advertising in Private Placements?

By Jim Verdonik

I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs. You can reach me at JFV@WardandSmith.com or JimV@eLearnSuccess.com. Or you can check out my eLearning course at http://www.elearnsuccess.com/start.aspx?menuid=3075 or http://www.youtube.com/user/eLearnSuccessor or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW

Have you ever wanted to say something in a meeting or on a conference call, but by the time you get other people's attention, you didn't know what to say?

Embarrassing isn't it?

Clients have asked me for decades:

• "Why can't I advertise in my private placement?" 
• "How am I supposed to raise capital, if I don't already know investors?" 

Be careful what you wish for. 

New SEC Rule 506 (c) allows you to advertise for accredited investors in a private placement, if you meet the accredited investor verification requirements of Rule 506 (c).  So, I ask you:

• What do you want to say?
• How will you say it?
• Will you use traditional advertising? 
• Or will you rely primarily on social media?
• How does your choice of advertising media affect what you say and how you say it?

Of course, social media would be dead if people really were at a loss for words.  We never seem to run out of words.  But any sampling of social media will turn up clear examples of people's words getting far out in front of their brains.   

We often warn teenagers to think before they say something in social media, because they are creating a permanent record that people will use to judge them.  Their career might be hurt by something they said when they were 17 years old, or when they are frustrated with their boss or are just exercising their right to pursue happiness (a/k/a partying).

Sometimes social media mistakes are OK.  Your world doesn't always end.  You might be embarrassed for a day, but then you and everyone else moves on to more pressing matters.  Your friends have incentives to forgive and forget, because they know that they might make a similar mistake tomorrow.

But before you begin to raise capital through the media, ask yourself:

• Will the SEC and state securities regulators accept your mistakes like forgiving friends do?

Or

• Will the SEC and state securities regulators scrutinize and penalize your mistakes like a prospective employer would?

Why should you care about what the SEC and state securities regulators think?

You won't be advertising your private placement to please the SEC.  You advertise to raise capital.  But the SEC and state securities regulators carry big sticks.  They can make it impossible for you to raise capital.  They can kill your business.  If they think you are really trying to commit fraud instead of just making an honest mistake, they can even put you in jail. 

So, we'll talk about how you do an effective job of selling while avoiding the biggest securities pitfalls.

Scope of this Article

In July 2013 the SEC made the biggest changes to private placement capital raising rules since the SEC issued Regulation D more than three decades ago.

This article explores:

• How do you decide what do you want to say in your advertisements?
• How do you say it generate sales?
• How do you say it to comply with securities laws?
• Can you combine effective selling with securities law compliance?
• Or do you have to choose one or the other?

See the end of this article for links to other articles about these Rule 506 changes.

Can You Sue Your Mayor for Securities Fraud?

 

By:  Jim Verdonik

I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs. You can reach me at JFV@WardandSmith.com or JimV@eLearnSuccess.com. Or you can check out my eLearning course at http://www.elearnsuccess.com/start.aspx?menuid=3075 or http://www.youtube.com/user/eLearnSuccessor or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW

[This post is based on an article I wrote for Triangle Business Journal published August 2, 2013]

What's the hottest thing in securities fraud?

·         Rich investment bankers selling financially engineered SWAPs to institutional investors?

·         Con men selling guaranteed high returns to widows and orphans?

·         Nigerian princes selling oil deals via email?

No.  Your local City Hall is the hottest thing in securities fraud.

Earlier this year, the Securities and Exchange Commission charged both Harrisburg Pennsylvania and Miami Florida with securities fraud.  With Detroit recently filing a $20 Billion bankruptcy, municipal bond fraud is hitting the big time - expect investor law suits.

How does a city commit securities fraud?

It's always been clear that misstatements or omissions of material facts in the disclosure documents cities give investors when they sell bonds are securities fraud.  But now the SEC is going after cities for misstatements and omissions that officials make outside their formal disclosure documents. 

WOW! 

Can you imagine a world where Government has to be truthful?

Most law suits against big publicly traded corporations are for misstatements or omissions in press releases or ongoing disclosures, not in the registration statements they file with the SEC when they sell securities to the public. 

These ongoing misstatements and omissions mislead investors who are trading securities with other investors.  Likewise, investors trade the bonds governments sell.  So, governments also have ongoing obligations not to mislead investors by misstating or hiding material facts.

And, of course, as Government debt increases, opportunities for really big time securities fraud grow.  A single city can make Bernie Madoff look like an amateur.

What types of omissions and misrepresentations did Harrisburg and Miami make?

Harrisburg stopped providing information about its finances to the public by not disclosing audited financial statements.  Harrisburg also lied on its website to hide its deteriorating financial condition.

Miami played "shell games" with municipal bank accounts by transferring $37.5 million from its capital account to its operating budget to fool people into thinking its operating budget was balanced.  These misrepresentations allowed Miami to obtain a higher credit rating from the rating agencies which reduced the interest Miami had to pay investors.

Governments routinely make more promises than they can keep.  Raising taxes drives away taxpayers.  So, the tax base shrinks and a death spiral occurs until there aren't enough people and businesses to tax. 

All that is perfectly legal.  No one goes to jail for fooling the voters.  But when governments borrow money to try to keep the illusion going as long as they can, they can cross the line into securities fraud when they treat investors like voters.

We're all used to your typical government website or press release accentuating the positive.  But accentuating the positive without disclosing the related negatives is how people usually violate securities laws. 

After a few more prosecutions by the SEC and investor law suits, maybe we'll start seeing government websites and press releases present more balanced pictures of what is happening:

·         The city revitalized downtown while potholes spread all over town.

·         The state increased teacher salaries while test scores stagnated.

·         We lowered the town's unemployment rate by giving city jobs to the mayor's family.

·         We balanced the city's budget by postponing water main repairs that won't leak until our current mayor retires.

·         Crime rates decreased, because we increased waiting times to answer telephones and frustrated people stopped reporting crimes.

Check out your Federal, state and local government websites.  How are they doing at complying with securities laws?

The Constitution's 1st Amendment protects the right of politicians to mislead voters in elections, but securities laws protect investors from government officials lying or hiding material facts.

 So, the next time you ask a government official a question; don't say you are a voter.  Say you are a bondholder.  You might get a more truthful answer.

By the way, challengers remain free to mislead you in election campaigns.  Only incumbent officials are subject to securities laws.

If you would like to learn more about learning how to grow your business or other issues important to your success, you can reach me at JFV@WardandSmith.com or JimV@eLearnSuccess.com. Or you can check out my eLearning course at http://www.elearnsuccess.com/start.aspx?menuid=3075 or http://www.youtube.com/user/eLearnSuccess or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW

"http://player.vimeo.com/video/53287764?title=0&byline=0&portrait=0&badge=0"