What are the Drawbacks to General Solicitation in Respect of Rule 506(c)?


January 21, 2014

The U.S. Securities & Exchange Commission (SEC) passed Regulation D Rule 506(c) towards the end of 2013. The headline feature of this is that it allows companies seeking investment to undertake general solicitation when seeking investment (i.e. they can advertise the investment opportunity on websites and platforms that accept such adverts.)


While the relaxing of these regulations are generally being seen as a positive for the impact they are potentially going to have in boosting the private equity (PE) marketplace in the United States as well as how investment is attracted to the country from around the world, there are some potential drawbacks associated with general solicitation in respect of Rule 506(c).


No Unaccredited Investors Allowed
Although it is generally beneficial that only accredited investors are allowed to invest in companies that have undertaken general solicitation, it is also a potential drawback. This is because investors could well be experienced and have a track record of success, yet fails to meet the requirements of being an accredited investor as per the guidelines set out by the SEC as well as other regulatory bodies that deal with the PE marketplace.


Due Diligence Processes
Another potential problem is that a PE fund looking to invest could be employing some people who would be accredited investors and others who might not be, meaning they’ll need to be very careful as to whom gets involved with due diligence and the various other processes associated with investing.
Having employees that need to become accredited investors in order to work on a project could add red tape to potential investments and make it harder to move forward. With that in mind it is generally regarded as a sensible move for all PE funds and other companies that might invest to look to get as many of their employees approved as possible.


Form Filing
From the investor perspective, before undertaking general solicitation, they need to gain permission for a Rule 506(c) offering. This could take up to 15 days to be approved, over which time potential investors could well have found another opportunity in which to invest.

Share on FacebookTweet about this on TwitterShare on Google+Share on LinkedIn