Don’t Blow Your Rule 506(b) Exemption Before You Raise a Dime

Don't Blow Your Exemption Syndication Attorneys st Augustin fl coeur d alene id
Recently, I received an email inviting Accredited and Non-Accredited Investors to attend a free webinar regarding a property that was being syndicated. Presumably, this was for a Rule 506(b) exempt offering that allows unlimited accredited investors and up to 35 Sophisticated Investors.

But no general solicitation to the public is allowed. The syndicator must demonstrate a pre-existing relationship before making offers to invest.

I emailed the sender of this email (whom I knew) and suggested the sender’s company shouldn’t be doing this. Why? Because it violated the no-advertising rules for a Rule 506(b) offering.

The sender said there had been three touches with those investors, so what was the problem? Here was my response:

It’s not just three touches that establish a pre-existing relationship. It’s also knowing a potential investor’s financial qualifications before you make offers to invest.

An email blast is certainly the first step in making an offer. And in this case, it certainly sounded like they would be making offers to invest at their advertised event.

Better Safe Than Sorry

I suggested that it would be better to be safe than sorry here. “Sorry” can quickly cost you six figures in legal fees and irreparable damage to your reputation.

It also possibly could elicit a rescission order down the line if things go south and someone complains to a regulator or files a lawsuit. (With such a rescission order, a securities regulator gives you 30 days to return everyone’s money or face prosecution.)

Further, I know someone who actually did get in trouble for this. The SEC nailed that company for making an email blast to 200 people. The company claimed it had pre-existing relationships with all of the recipients. The SEC said, “We don’t care; it’s 200 people; and that’s a General Solicitation!”

The Bottom Line

If you want to advertise in this manner, you need to do a Rule 506(c) offering to verified Accredited Investors only. Or do a Regulation A+ offering (public, pre-approved) so you can advertise to anyone.

If you are going to do a Rule 506(b) offering (which this was), your emails have to be one-by-one to only those whom you have already financially pre-qualified and with whom you have further established a relationship over time. All of that must have been documented in a record-keeping system. (Ever hear of a CRM? Time to get one!)

Your offers should be by word of mouth only—from yours directly to theirs, not to the crowd. According to the SEC, it’s not the quantity of touches or length of time you have known someone, it’s the quality of the relationship that counts.

If you find yourself in a situation where you want to send email blasts to your group to raise funds for your securities offering, here’s my suggestion:

Consider doing Rule 506(c) offerings so that you can freely advertise this way—and ensure that only verified Accredited Investors invest in the offering. Perhaps you will meet some Sophisticated Investors along the way whom you can financially pre-qualify and get to know before your next Rule 506(b) offering.

For more on this subject, read the Syndication Attorneys PLLC article “506(b) v. 506(c)—That Is The Question.”

NOTE: This information is of a general, educational nature and may not be construed as legal advice pertaining to your specific offering, exemption or situation. Any such advice must be sought from your own attorney pursuant to an attorney-client relationship, after consideration of your specific facts or questions. At Syndication Attorneys, PLLC, we will be happy to discuss your investing goals with you. You can schedule a free, 30-minute consultation by clicking this link.


Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!

Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!

About Syndication Attorneys

We are NOT your stereotypical law firm. We don’t believe in simply taking your money, handing you a stack of technical, often-incomprehensible legal documents and then bidding you good luck and good-bye. At Syndication Attorneys PLLC, we are committed to your success – not just with the project at hand, but your continuing success in business and investing. We are your long-term legal team.

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