There have been many changes within regulations related to the financial industry over the last 12 months, and many moves to change other regulations on top of this over the same time period, which have helped to make it easier for certain groups to operate within the private equity (PE) marketplace.
One of the most significant is Rule 506(c), part of the Securities & Exchange Commission’s (SEC) Regulation Rule D, which exempts certain parties from selling securities without having to register their activities with the SEC themselves.
Although the implementation of Rule 506(c) was welcomed across the finance industry, it was cleared close to the end of 2013, meaning this year is likely to be when we start seeing companies truly taking advantage of it. Rule 506(c) relaxes the rules around “general solicitation,” meaning companies can advertise for investment outside of traditional deal platforms, although it also states that all investors must be accredited investors.
This latter part of the Rule is double edged in many ways, designed to prevent inexperienced investors from getting “out of their depth” while also preventing any companies who might target unsuspecting investors for excessively high risk investments from doing so and risking the capital of someone who doesn’t understand or have experience in the industry.
There are now clear opportunities for both companies that are actively seeking their own external investment sums as well as for private equity houses embarking on fundraisers to undertake advertising campaigns carefully designed and targeted towards those accredited investors who might be interested in what they have to offer.
This will potentially boost online dealmaking by making investments more accessible – many experienced investors are still operating without using online platforms at all – and introducing investors to a new way of working with the PE marketplace.
With controversy in the United States continuing to rage around the Dodd-Frank reform and the Volcker Rule, to name two of the biggest stories of the moment, taking advantage of Rule 506(c) offers a great way for both those seeking investment and accredited investors to avoid dealing with the SEC and can make the investment process quicker and simpler from start to finish.