Friday, August 30, 2013

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 or Or you can check out my eLearning course at or or you can purchase my books at

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
  • 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.


Telling Compelling Stories is the Key to Sales

To sell anything, you have to tell a story that people will care about:
  • What good is advertising, if no one pays attention to it?
  • What good is advertising, if people tune out after seven seconds?
  • What good is advertising, if people say "So what!" after they listen to it?
People will only pay attention to your advertising, if you tell a compelling story.
That's because you have lots of competition for people's attention.
Humans have thousands of years of experience telling stories and listening to the stories other people tell.  Hundreds of different stories compete for our attention each day.  To survive, we have become experts at screening out stories that don't interest us. 
Most people operate on the seven seconds or out rule.  Either you catch their interest in the first seven seconds or they move on to something else.
If that sounds unfair, too bad!
People are attracted to shiny objects.  That's just the way the world works.  Don't waste time trying to change human nature to make people appreciate the inner beauty of your business.
Use your seven seconds wisely.  If you don't, you won't win another seven seconds.  If you use your seven seconds well, maybe you might even earn a whole minute of someone's attention.  That's an achievement.  But you can be satisfied with that.  Then, you have to use that minute to build excitement.
That's true whether the media is print, audio or video, paper, analogue or digital.  The first words or images or the first seven seconds are your doorway to:
·         Raising the capital you need to grow your business.
·         The trash bin of history. 
If you fail in that mission, you are wasting your advertising money and efforts.  More importantly, you are wasting opportunities.  Every accredited investor who sees your advertisement and then tunes out is a lost opportunity.  Lost opportunities destroy businesses.
So, who should you trust with your opportunities?
When you advertise to sell securities, you'll be trusting that precious seven seconds of opportunity to:
  • Salesmen
  • Lawyers
Uh Oh!
Have you ever met a lawyer who can say anything in just seven seconds?
You can't let your lawyer kill your sales opportunity, but you still need to comply with securities laws.
Building Your Securities Sales and Disclosure Team
Have you ever read securities disclosure documents?
Most documents businesses use to sell securities to the public are designed to meet complex disclosure requirements that are specified in SEC forms.  That's why most securities documents look and sound like forms.  Forms don't tell a story that hooks the audience.  People read forms only if they have to. 
The other reason is because lawyers write them.  Lawyers want to make sure they don't omit anything important.  Most lawyers accomplish that by repeating the same information many times.  Doing that might help protect you from liability risks.  But repetition drowns the life out of your story.
If you decide to advertise your private placement offering as Rule 506 (c) permits, your challenge will be to combine two missions:
·         Tell a compelling story.
·         Not violate the fraud provisions of securities laws.
Doing one without the other gets you nowhere.
But how do you do that?
  • Your lawyer writes like a robot.
  • Your advertising/sales people like to just make up stuff.
How do you combine the two to achieve your goals?
You do it the same way you do anything in business that requires mixing skill sets – you create a team with:
  • A media expert who respects the truth.
  • A lawyer who doesn't write like a lawyer.
Fewer than 10% of lawyers know how to combine telling a compelling story while incorporating all the material facts needed to comply with securities laws.
That's not to say that lawyers are boring.  Many lawyers are fascinating people who tell great stories in their private lives.  But that side of their personality fades when they write something for a client.  It's like the old saying that someone can't walk and chew gum at the same time.
Even if your lawyer can tell a story, length matters.  Twitter certainly wasn't made for lawyers.
Combining sales messages with effective disclosure requires a level of sophistication that many businesses don't have.  Search out experts to build teams that combine media skills with securities disclosure expertise.  The best teams will have people who are strong on one part or the other, but who also understand the goals and the methods of other team members and are able to work out solutions that combine inputs from the whole team.
They say you have to sell the sizzle, but if investors get all sizzle and no bacon, you gave securities problems.
To avoid your team killing one another while they decide how to create a compelling story about your business and the opportunity it presents to investors.
  • Don't hire media people who don't care about truth. 
  • Don't hire lawyers who have never written anything other than legal documents.

If you do, the gap between team members will be too big to jump across and the resulting product will be too oriented toward side or the other.  Neither side will get you where you need to go.  You'll need a good blend.
Budget:  Money Solves Problems
Of course, if you have an unlimited budget, you can advertise with full page ads in The Wall Street Journal.  That would probably solve your space problem.  But if you could afford to pay for expensive advertising, then you might not need to raise capital.
The Internet and social media will become the battleground that most businesses use to win the hearts and minds of investors.  Businesses will try to sell securities by using every tool other people use to sell travel, music and porn on the Internet and through social media.  How experienced is your lawyer in that new media environment?  How often has your lawyer:
  • Written a blog?
  • Tweeted?
  • Done a video?
  • Been paid to write for a general audience?
I've been writing a column for a business newspaper for over 15 years while also writing securities disclosure documents.  The two types of writing are vastly different.  It takes a lot of practice to transition from one to the other.
Lawyer often err on the side of making statements.  They think they can shape the world by asserting a position.  That's appropriate in some situations.
·         But isn't it more effective to ask questions than to make assertions?
·         Don't people like to reach their own conclusions?
·         Don't people distrust someone who is trying to convince them of something?
·         Aren't people particularly mistrustful when money is involved?
·         And doesn't the power of social media come from its ability to cause people to contribute what they think to the conversation?
·         Doesn't that contribution cause people to buy into the conversation's importance?
·         Doesn't your sales team know how to do that?
But you can't just turn your securities advertising over to your sales team.  The SEC has already proposed new rules that will require businesses to file advertising materials with the SEC before you use them.  Even if that new rule doesn't become effective, the SEC and state securities regulators will be reviewing your advertisements after you use them.
They'll be looking for your mistakes.
Securities Advertising Issues
You might be tempted to just turn your advertising over to your sales team with the thought that your securities lawyer can fix any problems later by creating a long boring disclosure document for you to give investors just before you close your deal.
That would be a big mistake.  Advertising and securities disclosure issues are so intertwined that it may often become difficult to correct problems after they occur.  You might need to cancel or delay your offering if you don't do the right advertising the first time.
So, what types of issues will your securities lawyer be dealing with in your advertising throughout the offering process?
  • How much information can you include in your Tweets?  Your social media advertising will omit material information.  If you can't fit everything into your advertisements, what do you have to include and what is safe to omit now and include later in other documents?
  • Creating an integrated disclosure campaign that follows up short advertisements with full disclosures to the people your advertisements solicit will be a critical part of your compliance strategy.  Knowing how the pieces fit together will require legal analysis.
  • Videos and other social media tools generally appeal to emotion.  In theory, you can compensate for that by later delivering a more rational document.  But in a law suit, plaintiffs' lawyers will use your videos and other sales tools against you to convince juries you used trickery to commit fraud.  So, each of your sales materials needs to pass a smell test.  When considered by itself, an advertisement shouldn't smell like fraud and trickery.  You securities lawyer should advise you about how to pass the smell test.
  • Expect a Wild West environment as people test new approaches.  Temptations to push the envelope on your advertising will be everywhere.  You will undoubtedly begin to see really "cool" stuff that other business will use to sell securities through social media.  But remember that just because people are doing something it doesn't mean it's legal.  The lawsuits that decide the differences between "cool" and fraud probably won't happen for at least several years.  It will probably take that long for most businesses that raise capital to burn through the money they raise and then several more years for judges and juries to decide which side of the line between creativity and fraud each sales effort was on.  Your securities lawyer can advise you about creativity risks.
  • Your sales and marketing team may routinely make aggressive performance claims to sell your products and services.  Exaggerating how well your products perform or saying that no competitor's product can do what your product does can constitute securities fraud.  You will need to carefully separate the commercial advertising and promotions you use to sell products to customers from your advertising to sell securities.  Your securities lawyer can provide you with guidelines how to do that.
  • Did you know that you can be liable for fraud even you didn't say something?  You can be liable for fraud when other people say something about you.  When business use social media to sell products or services, they often use statements made by third parties as a major part of the sales effort.  They may plant phony customer reviews on websites or they sometimes reward bloggers for giving positive reviews.  Your securities lawyer can advise you about the risks these commercial practices present if you are selling securities.
  • You can have securities liability for statements made in materials to which your advertising materials refer or link.  In a highly linked world, think about what you are linking to in all your communications.  Your securities lawyer can advise you about liability risks for what you link to and how you minimize these risks.
  • Securities regulators have lists of advertising practices they consider warning signs to possible fraud.  If you trip these trip wires, you set off alarm bells in the securities regulator world.  These practices include: misleading comparison charts or graphs, using unequal lay-out, format, size, kind and color of type to describe favorable and unfavorable information, disguising opinions as facts, making generalizations not supported by facts, overstating potential gains, excessive optimism and bonus incentives. 
Basically, almost anything your sales team might do on a regular basis to advertise and sell products can constitute securities fraud.  But you don't have to make your advertising devoid of all salesmanship.  Often, subtle distinctions separate how you tell a compelling sales story from securities fraud. 
So, the art of selling securities is to be able to combine the right mix of story-telling with the material facts by having the right securities lawyer work with our sales team to produce a winning sales everyone else is breaking the rules?  How do you deal with the interim period when people are figuring out at the new rules let you do and don't let you do?
    Articles in Private Placement Series
    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 securities offerings are affected by these changes.
    The SEC's recent changes are a mixed blessing for businesses selling securities.  These changes include:
    • Prohibiting using Rule 506 if someone affiliated with your business or with your capital raising efforts has violated securities or other financial industry laws. 
    • Adding new Rule 506 (c), which allows you to advertise when you raise capital in a private placement.
    • Rule 506 (c) also requires you to take reasonable steps to independently verify that all people who buy securities are "accredited investors," if you advertise your offering.
    Our articles in this series about SEC Rule 506 private placements help you decide how you can use these new rules to raise the capital your business needs by balancing three competing factors:
    • Advertising effectiveness
    • Budget
    • Securities law compliance 
    You have to get all three right to successfully raise capital.
    Here's a list of our articles that discuss the primary issues you will face when you try to balance these three objectives in your capital raising efforts:
    • Advertising Messages   Tweeting Your Way to Securities Fraud in 140 Characters: What Do you Say in SEC Rule 506 (c) Advertising in Private Placements?  How do you decide what you say in your advertising?  How do you say it?  What current SEC and state advertising rules can you use to guide your advertising decisions?  Can you combine effective sales messages with complying with securities laws?  Or is it an either or choice?  What's the point of advertising if securities laws prevent you from selling effectively?
    • Choosing the Right Media for your Advertising. Don't Tweet when You Should Have LinkedIn: Choosing Your Advertising Media in SEC Rule 506 (c) Private Placements  How do you advertise within your budget?  How do you identify your "sweet spot" target investors and the right media to reach them?  What social media tools can you use?  How do you attract accredited investors who meet SEC criteria for making investments?
    • Building your Sales and Legal Team.  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?  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.
    • Accredited Investor Verification.  Will SEC Rule 506 (c)'s Permission to Advertise Cure Your Capital Woes or is Its Accredited Investor Verification Requirement a Poison Pill?  If you want to advertise your securities offering, you must take reasonable steps to verify that everyone you sell to is an "accredited investor."  You can't just rely on the investor checking a box that tells you it is accredited.  How much checking is "reasonable"?  How do you qualify for the "safe harbor" the SEC included in Rule 506 (c)?  What happens if you don't obtain the right type of proof that the people you sell securities to are "accredited investors?"  Why will some investors refuse to comply with your verification requests?  What can you do to reassure investors about privacy issues and make the verification process more convenient for investors?
    • Beware of SEC Integration Rules:  SEC RULE 506 (c) Integration Pitfalls: Don't Use the SEC's New Advertising and Solicitation Private Placement Rule to Saw Off the Limb You are Sitting On  Why should you look before you leap into advertising?  What integration and related pitfalls does Rule 506 (c) create for businesses that choose to advertise or engage in general solicitations?  How do you sell securities to people who are not accredited investors under another SEC private placement exemption, if your advertising doesn't attract enough accredited investors to finance your business?
    ·         Getting Caught : How Will the SEC Know I'm Advertising in a Rule 506 (c) Private Placement?   How will the SEC know about your advertising?  Why isn't it a defense that everyone else is breaking the rules?  How do you deal with the interim period when people are figuring out what the new rules let you do and don't let you do?
    ·         Bad Actors:  SEC's Bad Actor Rule: When You Lie Down with Dogs Expect to Get Fleas  To use Rule 506 (with or without advertising) you have to verify that a long list of people who are affiliated with your business or with selling your securities offering haven't violated securities or other financial industry laws.  How do you make sure the SEC's Bad Actor Prohibition for Rule 506 private placements from cut off your ability to raise capital?
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 or Or you can check out my eLearning course at or or you can purchase my books at

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