The JOBS Acts set the stage for small businesses and entrepreneurs to raise capital through the means of private offerings and through publicly raised investment funding. Because of this Act, investors – both accredited and non-accredited – are able to invest in certain types of private offerings. The Title II JOBS Act provisions (and also Title III) modified the rules which forbad general solicitation and the manner by which businesses could issue securities and raise funds, opening the door for crowdfunding in the private equity marketplace.
What is General Solicitation?
The term “general solicitation” as the SEC refers to it, includes advertisements made on websites, over TV and radio, in magazines and newspapers, and in seminars in which those attending have been invited through an act of general solicitation or advertising. Also, general solicitation covers the use of a publicly available, unrestricted website.
Through general solicitation, businesses have an opportunity to reach out to a large number of prospective investors in a compressed period of time. However, under this arrangement, the SEC restricts these investors to those who are accredited investors.
JOBS Act Title II and Private Equity
Under the Title II JOBS Act, private equity transactions must be in compliance with an exemption. Generally, those utilizing an exemption have chosen Rule 506(b) of Regulation D which allows issuers to raise an unlimited amount of funds, avoid state filings, and use a maximum of 35 non-accredited investors in a capital raise.
Rule 506(b) Bans General Solicitation
Rule 506(b) prohibits issuers from participating in general solicitation in which companies reach out to prospective investors through the Internet or traditional press, etc. without having a previous substantive relationship with the investors.
Rule 506(c) Permits General Solicitation
Because of the restriction on general solicitation under Rule 506(b), many small businesses and entrepreneurs are relying on Rule 506(c) which does allow general solicitation and advertising for private equity offerings.
If you are an entrepreneur or small business attempting to raise capital for the first time, you may not have a pool of eager investors at the ready who you can depend on to participate in your offering. This is why using general solicitation through the Internet made possible by Title II JOBS Act provisions is a potentially powerful tool to access willing Investors.
