Is the JOBS Act Working, One Year Since Key Changes to Rule 506 of Regulation D Went into Effect?

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I’ve talked a lot about the JOBs Act on our blog, because it’s game-changing legislation that is having a profound impact on how money is raised privately, spurring new economic activity and job creation. The JOBS Act is permitting issuers of private securities to talk publically about their offer, and allows them to advertise that they are raising capital.

SEC LogoIt has been one year since the SEC issued key changes to Rule 506 of Regulation D, which created two paths for an issuer to raise capital for private securities. The old rule that most issuers already used is now Rule 506(b) and the new, emerging standard is Rule 506(c).

  • Under Rule 506(c), issuers can freely engage in general solicitation and advertising so long as they, or a FINRA registered broker-dealer, verify that all investors are accredited at the time they invest.
  • Under Rule 506(b), issuers must rigorously monitor their activities, and the activities of those acting on their behalf, to ensure they are not violating the prohibition on general solicitation and advertising.

The new rule is having a material impact on the private securities market. According to the SEC, through June 30, 2014, there were 1,310 offerings raising $14.1 billion under Rule 506(c).

However, some private placement issuers are hesitant to change their method of operation. They are used to complying with the old rules and don’t want to be among the first to change. I believe they are missing out on significant benefits from general solicitation. The new Rule 506(c) has enabled a new type of broker-dealer to emerge that can help issuers remain compliant and make investing in private placements easier for both the investor and the issuer.

If you are an investor of a certain age, you may remember when buying a mutual fund was hard. You needed to fill out a form and mail it to the mutual fund company along with your check. Switching to another fund at another fund family involved writing letters, waiting for checks, and sending in forms – it sometimes took weeks.

Today, you can invest in mutual funds on your computer. Changing to another fund takes a few clicks and it’s done in a day. Prospectuses are online, along with a wealth of data to let you search and filter to find the right fund. All of this has made mutual funds more accessible to everyone, and resulted in an explosion in the volume of money under management by the fund industry. Firms such as Schwab and Fidelity lead the way to make these mutual fund marketplaces possible.

Rule changes under the JOBs Act have made the same kind of change possible for private placements in alternative investments. New brokerage firms, like Venovate Marketplace, are creating online services that make investing in private placements as easy as buying a mutual fund. They enable issuers to more easily comply with the new rules, whether they choose 506(b) or 506(c) for their offer. Here’s how that works.

Issuers may freely engage in general solicitation, publicly promoting that they’re raising capital under Rule 506(c), but they are responsible for the new, stricter requirements to ensure the accredited status of investors. Wherever an issuer advertises their opportunity, if they refer potential investors to a marketplace for more information, the broker verifies each investor’s accreditation, 3C1, 3C7, or 144A qualification, and provides proof of verification to the issuer.

Alternatively, issuers may elect to make an old-school 506(b) offer. This requires them to manage their activities, and the activities of those acting on their behalf, to ensure that no general solicitation occurs. The broker-dealer acts on the issuer’s behalf and follows well-established guidelines for knowing their customer and ensuring that 506(b) deals are only presented to accredited investors, qualified purchasers, or institutions. Issuers must still monitor their activities off the platform, but 506(b) transactions on the platform are worry-free.

Whichever rule the issuer chooses, the broker provides:

  • Transparency – a secure, permission-based deal room to make documents available for due-diligence. Information can be searched and filtered so investors can find the deals that are right form them.
  • Compliance – investor accreditation is verified and all regulations for presenting opportunities are satisfied.
  • Efficiency – paperless, electronic documentation and signature gathering speed the process.
  • Security – electronic fund transfers and online escrow services close the deal securely.

See the table for a quick summary.

Regulatory Restrictions Rule 506(b)
Rule 506(c)
Compliance Solution
General solicitation to the general public allowed? No Yes Password protection eliminates general public from the platform.
Solicitation to accredited investors allowed? Yes Yes Broker-dealer verifies investor accreditation.
Prior relationship with investor required? Yes No Broker-dealer has a significant relationship with investors who see 506(b) offers.At Venovate, we follow the “know your customer” rule and enforce a 30-day waiting period to invest.

The post-JOBs Act era will make it possible for issuers to market to a broader audience of investors and advisors. A new kind of brokerage firm will support this by streamlining compliance with both rules 506(b) and 506(c). This helps issuers raise more money, faster, and at lower cost. Soon, this will make investing in private placements as easy as buying a mutual fund.

Venovate Marketplace has worked closely with a top securities law firm to design systems and procedures that support compliance with both new SEC rules. Our proprietary technology takes into account the law changes, the new rules established by the SEC and FINRA, SEC no action letters, and case law. On our platform, the issuer decides which rule to rely on for an exemption from registration, and we enforce the appropriate set of restrictions and entitlements to ensure compliance with all laws, regulations and guidelines. This gives investors access to a full range of offers and lets issuers conduct business as they wish.

Join Venovate Marketplace and see for yourself how our platform is the smarter alternative to raise capital, or invest in private investment opportunities.

  • Micha Block1

    my husband was wanting a form this month and was informed of an online platform with lots of form templates . If people want it also , here’s a