One of the biggest changes across the private equity (PE) marketplace in recent months has been the relaxation of rules relating to general solicitation in the industry. General solicitation is what most would simply know as advertising, and that is what it essentially refers to.
Previously, companies or PE investment funds weren’t able to advertise “investment opportunities” as it was feared that inexperienced investors would be able to commit funds without understanding the risks and get into a situation beyond their means.
The U.S. Securities & Exchange Commission’s Regulation D Rule 506(c) is responsible for the relaxation of rules surrounding general solicitation and allowing it to happen. Companies and investment funds will have to file for a Rule 506(c) offering before “going public,” and all investors need to be accredited. What are the biggest benefits associated with this change to long-standing regulations?
Finding Investment Opportunities
In this respect the Rule and general solicitation is likely to be a huge benefit, especially to new companies who traditionally find it had to “get their foot in the door” of PE networks and often have to settle for investments from those around them.
While challenges will still have to be met in terms of providing a business plan and mapping out how an investment will be successful, the ability to market an investment fully means that individual opportunities are far more accessible, particularly online.
It is also much more efficient to approach accredited investors who will know the industry the business operates within, therefore terminology and industry specific trends are less likely to need explaining “in layman’s terms.”
Gaining the Investment Needed
One consequence of finding investors in your immediate network is that they tend to only be able to offer smaller sums of capital. However, by using general solicitation to put a business out there, it is possible that one investor could be found who either has experience in a particular industry or happens to think an idea is potentially a goldmine, could spot a proposal and present a high proportion or all of the investment needed.
Gateway to the Future
Looking at the longer term, if a business was to find a high net worth investor thanks to general solicitation, this could make it easier to gain further investment in the future. Say an initial investor is an angel investor or has connections to a network of wealthy investors or high value asset managers; the next time a business requires investment for growth to move to the next level, there’s already going to be an experienced voice who can vouch for the business model and prove that it is a reliable investment.
Accredited Investors = Less Stress
The big advantage of dealing only with accredited investors from a business owner’s perspective is that the level of experience they bring means they understand the ups and downs of running a business. A non-accredited investor, for example, might look at underperformance after six months and wonder what is happening and, depending on the basis of an investor agreement, want to start making changes to the management of a company.
Accredited investors are likely to be less intrusive and allow the business to get on with evolving, although they’ll still obviously want to see success over time. Although general solicitation offers these potential benefits, it is still up to the business owner to ensure their proposal is attractive and has a clear pathway to success, otherwise the opportunity they have will amount to very little.