SEC Rule 506 (c): Who Is Allowed Be A Capitalist?

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

Everyone knows you need a license drive a car.

You also need a license from the Government to be a doctor or a lawyer or an accountant or stock broker.

Wow! It seems like the Government likes to restrict access to all the good paying jobs.

Maybe that's why Government makes it difficult to make an investment, unless you are already mega rich.

You don't need a Government license for minimum wage jobs like flipping burgers at MacDonald's or greeting people at Wal-Mart.  The Government lets anyone work in low paying jobs.

Why do you need a special Government permission to make good money, but Government allows anyone to work for the minimum wage?

Maybe the Government licenses doctors, lawyers, accountants and stock brokers because people pay them a lot of money.  Or, maybe people pay them a lot of money, because Government license requirements limit competition.

Does this sound like another version of the question:  Which came first, the chicken and the egg?

People have long debated whether the benefits of Government licenses justify the increase in cost associated with Government licenses.  Few people change their minds.

But let's examine the basic motivation for limiting the ability of people to make investments.  Supposedly, Government licenses exist to protect the public from people who aren't competent to perform services. 

But does the same rationale apply to investors?  What explains why the Government imposes restrictions on who is allowed to make different types of investments?  Does licensing investors make any sense?

Investors give money.  They don't collect money.  And money is fungible.  One person's money is no better or worse than another person's money.  So, limiting who can invest doesn't promote higher quality investing.

Then why is the Government so intent on limiting who can make investments?

Let's talk about the SEC's recent rule change for Rule 506 (c) private placements under Regulation D that requires businesses to verify that an investor is an "accredited investor."

You used to be able to take someone's word for it, if they told you that they are an "accredited investor."

Now, if you want to advertise your offering, you have to check financial documents people must give you to prove they are an "accredited investor."

It's kind of like a store clerk or bar tender who checks your driver's license before they sell you a beer or wine.

But instead of your driver's license, the clerk or bar tender asks to see your bank statements or tax returns.  That's much more intrusive into personal finances and exposes you to identity theft and other risks. 

Why would the Government want to increase these risks for investors?  Identity theft occurs a lot more often than securities fraud.  So, Government seems to be struck in time warp fighting an old enemy while new enemies are creating bigger dangers.

Why is the Federal Government using SEC Rule 506 (c) to decide who is allowed to be a capitalist?  Are the benefits worth the risks and the inconveniences?

Many people the new Rule ostensibly seeks to protect don't want this protection.

The new verification requirement is already annoying many investors.  The Angel Capital Association announced a few days after the new rule was released that the new SEC rule could kill angel investing: http://www.angelcapitalassociation.org/blog/new-sec-rules-could-kill-angel-investing/

We'll discuss the accredited investor verification process SEC Rule 506 (c) imposes at length below and why many investors oppose the new verification requirements.

Does Filing Your Private Placement Tweets with the SEC make Sense? SEC Rule 506 (c)'s Advertising Torture Dungeon

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

Do you like movies about time travel?

You know the basic plot.

A character goes into the future or into the past and doesn't understand how anything works.

The SEC has been trapped in a Grade B time travel movie since the Internet arrived.  It keeps trying to squeeze a big free flowing Internet into the same old securities laws and rules.

People used to communicate with one another by sending a letter or calling one person on a telephone.  The SEC is having a difficult time adjusting to a more complex world of shared communications to multiple audiences the Internet created.

The SEC might not understand how the Internet changed the way we communicate and how to adapt capital raising laws to this new world.  But we have proof the SEC knows the Internet exists:

• The SEC has a website. 
• Public companies file their disclosure documents with the SEC over the Internet.
• The SEC even permits you to deliver proxy statements and annual reports to shareholders over the Internet. 

But the SEC just doesn't understand why the Internet (and social media in particular) have changed how people think about and use communications.

That's why the SEC is proposing rules for selling securities in private placements that are very unfriendly to using the Internet generally, or social media in particular.

Does the SEC believe the Internet and social media are temporary?

Or does the SEC believe the Internet and social media can be locked in a corner by rules?

Here's another question:

Can you imagine a country that spends tens of billions of dollars every year to improve communications, but prohibits businesses from using that investment to raise the capital needed to grow the economy?

Let's explore how this crazy country decided that people can use the Internet to:

• Watch mindless movies.
• Buy porn.
• Make snarky comments about how someone dresses.

But can't use the same tools to raise capital to create JOBS. 

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 by changing to Rule 506.

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

In this article, we'll talk about:

• Why is the SEC finding it difficult to adapt securities laws to the Internet and social media?
• How do you navigate through private placements while the SEC and state securities regulators go through a long process of adjusting to the modern world?
• Why will the  SEC eventually give up?

If you are a parent, this time period might remind you of the "terrible twos."  Your goal is to survive while your child adapts to new realities.  During this process, focus on the fact that the SEC is just one of many organizations that are trying to adjust to media changes.  The adjustment period may be unpleasant, but it remains as inevitable as growing up.

How Will the SEC Know I'm Advertising in a Rule 506 (c) Private Placement?

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

When I counsel a client, I always get worried when I hear the words:  "How will they know?"

Sometimes these words are a signal that the client is willing to do anything to achieve their goals.  But in my long years counseling clients, I've found that people usually don't intend to commit a crime.  They often back into it without really being fully aware of what they are doing.  And it's usually pretty easy to convince them they are making a big mistake.

Often, they are just being naïve about how the world works.  The often rationalize about ways to escape a bad situation.  They are like a deer standing in the road harboring the illusion that your oncoming car won't hit them if they stand still long enough.  That works until your car crashes into the deer.  Sometimes you get hurt, but the deer is usually a bigger loser.

But what matters is that the client is at a dangerous cross road in their life.

It's up to me to convince them that they are better off not taking the risk of ending up like the deer in the road.

Here's a link to a video that tells how I did that with the CEO of a public company who was acting like a deer in the headlights.

http://www.youtube.com/watch?v=OFwdVWQlASA&feature=c4-overview-vl&list=PLEyL-gjb9p8yqMcjg4lsrt8r69XYcSU7Q

Another common client complaint is:  "Everyone else is doing it, why can't I do it?"=

Every parent gets lots of practicing answering this question from their children.  Children are born with the notion that they should be able to do anything they see other people doing.  This probably has evolutionary benefits.  Maybe it’s the instinct that drives us to learn by mimicking others.  But it's also how we get ourselves into trouble.

Let's explore how these two common human traits can get you into trouble when you try to raise capital to grow your business.

Scope of this Article

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

More than 90% of private placements rely on SEC Rule 506.  These changes include prohibiting you from using Rule 506 if someone affiliated with your business or with your capital raising efforts has violated securities or other finance industry laws.  The SEC also added new Rule 506 (c), which allows you to raise capital in private placements by advertising or doing a general solicitation.  But new Rule 506 (c) requires you to verify accredited investor status of all buyers if advertise.

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

This article explores:

• How will the SEC and state securities regulators will find out about your advertising?
• Why is it dangerous to assume that what you see other people doing in their advertisements is legal?
• What happens if you are caught advertising when you didn't comply with the Rule?
• What happens if your advertising is misleading??