New SEC Rules Change the Landscape for Raising Capital

Pursuing an unregistered capital raise using advertising and general solicitation may require additional steps in order to comply with SEC regulations, but it may provide a company access to investors that were previously unavailable.
By Joseph F. Leo | February 16, 2014

Recently, the U.S. Securities and Exchange Commission adopted new regulations intended to expand access to sources of investment capital for businesses. The new regulations also intend to harmonize capital formation rules with modern communication methods, including electronic communications via websites and social media. The new regulations took effect Sept. 23 and now allow companies conducting capital raises not registered with the SEC to advertise their capital offerings and solicit investments from the general public. The ability to use advertising and general solicitation was previously reserved only for capital raises that were registered with the SEC, which most companies could not take advantage of due to the high cost of conducting an SEC-registered offering. 

The longstanding prohibition against advertising and general solicitation in unregistered capital offerings created difficulties in modern times when so much communication takes place through the Internet and social media. In order to allow greater access to the capital markets, Congress sought to use these new communication tools to enhance the ability of companies to attract investors. Congress determined that the competing interests of investor protection versus increased business access to capital through modern forms of communication could be appropriately balanced by the SEC. 

The new regulations allow companies to use advertising and general solicitation only in capital raises where the investors meet the SEC’s definition of an “accredited investor.” Accredited investors are primarily higher income and net worth investors. Categories of accredited investors include: 1) Individuals with annual income in excess of $200,000 (or $300,000 in joint annual income with a spouse) for the two most recent years and who expect the same level of income in the current year; 2) Individuals who have net worth in excess of $1 million without including equity in the investor’s primary residence; 3) Directors and executive officers of the companies raising capital; and 4) Certain business and other entities with assets in excess of $5 million. While this is not an exhaustive list of investors that qualify as accredited under SEC regulations, these are the most common types.

Under these new regulations, companies engaging in advertising and general solicitation must take reasonable steps to determine whether the investors participating in their capital raises are actually accredited. This reasonable verification is a greater duty than companies currently have when they pursue unregistered capital raises, which is the trade-off that must be considered by companies who wish to use advertising and general solicitation in their capital raises. Under these new regulations, the SEC has developed a list of methods that companies can use to determine whether the investors participating in the unregistered offering meet the accredited standard. The SEC went out of its way, however, to state that it wants to provide flexibility to companies in order to meet this requirement in a way that makes sense for their businesses.  

Further, the SEC proposed additional rules that would require companies raising capital through advertising and general solicitation to file additional information with the SEC. While this could add burdens for companies pursuing unregistered offerings using advertising and general solicitation, it is certainly less burdensome than registering with the SEC. No firm timetable has been established for when these additional filing rules may become effective. 

The bottom line is, while pursuing an unregistered capital raise using advertising and general solicitation may require additional steps in order to comply with these SEC regulations, it may provide a company access to investors that were previously unavailable, expanding the potential pool of available capital.  

It is important to note that the changes made by the SEC only enhance the ways in which companies can raise capital through unregistered offerings. The traditional methods of conducting unregistered capital offerings are intact. 

Author: Joseph F. Leo, Attorney
BrownWinick Law Firm