Violation of SEC rule for Private Investor

[Hollis G.]

Does asking a question in an ad ie: "Is your money earning you 8%, 10% or even 12% Returns?", and then supplying someone information on Trust Deed/Private Note investing, in violation of SEC Reg 506 D ruling in regards to general soliction to the public? I understand the exempt status for accredited investors...but I guess I'm wondering how does a certain company(first name starts with "Equity" last name begins with "Build") that I have seen advertise in a similar manner does so, and not be in violation. Or am I just off in left field?

[Don Konipol]

I think many people interested in raising capital are misinformed about Reg D Rule 506. They do not realize that utilization of this "exemption" from registration requires the filing of Form D with the Securities and Exchange Commission. In other words, you just don't follow the rule, you also must file this form with the SEC to be exempt from securities regulation and in compliance. Under the proposed SEC rules for the use of general solicitation and advertising, Form D must be file prior to any offering. Here are the proposed rules as they able to the exemption use with general solicitation and advertising

1. Form D would have to be pre-filed in any Rule 506(c) offerings. The pre-filing would have to be made 15 days before the issuer engages in a general solicitation. Currently, issuers are required to file an initial Form D within 15 days after the first sale of a security. Issuers relying on Rule 506(c) would also have to file an amended Form D within 15 days after the first sale of a security. Issuers relying on Rule 506(b) would not be impacted by the new filing requirements and deadlines.
2. Issuers would also have to file a closing amendment to Form D after the termination of any Rule 506 offering. This would apply to all Rule 506 issuers and not just those relying on Rule 506(c).
3. General solicitation materials used in a Rule 506(c) offering would be required to contain certain legends and other disclosures. Private funds making a Rule 506(c) offering would also be required to include a legend disclosing that the securities being offered are not subject the protections of the Investment Company Act. Private funds making a Rule 506(c) offering would also have to make additional disclosures in any written general solicitation materials containing performance information.
4. Issuers would be required to temporarily submit written general solicitation materials used in a Rule 506(c) offering to the SEC. This temporary requirement would apply to all issuers relying on Rule 506(c) and not just to private funds. The Proposed Rules require these submissions for 2 years. Failure to make the required submission of advertising materials would disqualify an issuer from relying on Rule 506 in the future.
5. Issuers would be disqualified from relying on Rule 506 for one year for future offerings if the issuer, or any predecessor or affiliate of the issuer, failed to comply with the Form D filing requirements of a Rule 506 offering within the past five years. This would apply to all Rule 506 issuers and not just those relying on Rule 506(c).
6. Form D would be amended to require issuers to include additional information about Rule 506 offerings. All 506 offerings would need to make additional disclosures regarding: a) the issuer's website (if any); b) additional information regarding the percentage of purchasers of the offering that are accredited investors and natural persons; c) the percentage of the offering used to repurchase securities, pay offering expenses, acquire assets, finance acquisition of other businesses, provide working capital and discharge debts and d) the names and SEC file numbers of any SEC registered investment advisers providing advice to the issuer if the issuer is a pooled investment vehicle. Additionally, those issuers relying on Rule 506(c) would be required to disclose: a) information regarding the issuer's control persons; b) the types of general solicitation used and c) the methods of verifying that all investors are accredited.
7. Finally, Rule 156 would be amended to extend its antifraud guidance to the sales literature of private funds. Rule 156 provides guidance on the types of information in sales literature that could be misleading for purposes of the federal securities laws, including Section 17(a) of the Securities Act and Section 10(b) for the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Currently, Rule 156 applies only to the sales literature of registered investment companies. The Proposed Rules also update Rule 156 to add additional manner and content restrictions that would apply only to the written general solicitations of private funds. Please realize that 506 is a safe harbor for private offering - you can have a private offering exempt from securities registration without using 506. If your offering is in one state only, then Federal Securities laws may not apply, but state laws might. The biggest danger in handling other peoples money is not that the governmental regulators will find out and shut you down, it's that an investor in a deal that lost money will sue you for securities law violations.