506(b) General Solicitation and How This Exemption May Be Used

by | Oct 11, 2018 | Money And Finance

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According to Rule 506(b), an issuer is permitted to raise capital and an unlimited amount by selling securities of any type to an unlimited number of accredited investors. Accredited investors can include individuals meeting certain income and asset criteria, large institutional investors, and certain corporate insiders. Now regarding the issue of 506(b) general solicitation:

General Solicitation Aspects of 506 (b)
Rule 506(b) includes a prohibition on general solicitation. According to the rule, general solicitation involves, but is not restricted to, an article, advertisement, notice, or other public communication in a magazine, newspaper, or any related broadcast or media over radio or television. It can also refer to any meeting or seminar in which the attendees were invited by general advertising or general solicitation.

This prohibition is in force regardless of whether any non-accredited individuals were exposed to the advertisement. In addition, if an issuer possesses a substantial and pre-existing relationship with someone to whom the securities are offered, no general solicitation will have occurred, according to the SEC.

The distinction between the comprehensive prohibition on 506(b) general solicitation offerings and the broader definition of “offer,” has been to prevent issuers from locating possible investors outside of existing networks. Issuers routinely use brokers as intermediaries. However, smaller issuers can be blocked out of the process due to the fact that brokers may not find the profitability they desire in these offerings. The private placement exemption, while smaller companies power to utilize individual investment and produce the cash flow and growth they need.

What About Expanding the Investor Pool?
In light of the 506(b) general solicitation issue mentioned above, if any changes are made to the regulations that increase the number of investors, the investors themselves are bound to benefit in addition to issuers who depend on private offerings. Investors who are willing and able to invest in small companies have considerable power over these companies in the consumers of the services and products these companies offer. This is due to the fact there is a limit on the pool of potential investors available.

By expanding the pool of investors, the greater diversity potential investors may occur resulting in a distribution of funding to these businesses that more directly reflect the interest of consumers.