Before you start talking about specific deals, you need to decide which securities exemption you plan to follow.
Rule 506(b)
Those choosing Rule 506(b) can include an unlimited number of accredited investors and up to 35 non-accredited investors, but general advertising or solicitation is prohibited. With Rule 506(b) your investors can self-certify (attest to) their financial qualifications.
The way to prove you didn’t advertise so that you can claim the Rule 506(b) exemption is to demonstrate that the “issuer” (i.e., a member of the company selling the securities) had a “pre-existing” and “substantive” relationship with every prospective investor.
- “Pre-existing” means the relationship existed before you made the offer. Talking about a current or contemplated deal constitutes the first step in making an offer – so you can’t do that until the “substantive” relationship has been established.
- “Substantive” means you have had a “suitability conversation” with every investor by asking them questions regarding their financial situation, such as:
- Are they accredited?
- If not, are they sophisticated?
- This means asking about their past investing, education, or financial background. What makes them capable of understanding the risks and merits of the offering and determining whether your investment is appropriate for their investment portfolio?
- Does your planned investment period match their investment timelines?
- Do your projected returns meet their investment objectives?
- Can they afford to lose the money?
Rule 506(c)
Alternatively, if you wish to limit your offering to accredited investors, you can choose the Rule 506(c) exemption that allows you to freely advertise and discuss current deals with anyone, but all investors will need to prove they are accredited by going through a verification process before you can accept their investment. The upside is that an investor only has to be verified for investments with you once every five years. For future deals with you, they can re-affirm that nothing has changed and that they are still accredited.
Bottom line
If you plan to include any non-accredited investors, you must use Rule 506(b), which means you can’t talk about specific deals in front of people you haven’t pre-vetted. If you do, you must preclude anyone in the audience that wasn’t pre-vetted prior to your presentation from investing in the offering you presented. If you have the vetting call after the presentation you can offer them investment opportunities in future deals that weren’t mentioned in your presentation. A better choice for those who want to do Rule 506(b) exempt offerings is to provide educational content with theoretical deals to groups that include people you haven’t vetted yet. Be careful not to recap past deals (i.e., tombstone ads) – as regulators also consider talking about past deals to be the first step in making an offer.
