The SEC has released its final rule for public solicitation under the 506 safe harbor of Reg D. This new rule paves the way for companies to raise unlimited capital from accredited investors without the constraints formerly imposed against public solicitation. The rules against public solicitation could be a trap for the unwary and less than cautious. Now, companies can generally solicit funds from the public. Extra precautions must be taken to verify that investors are all accredited investors.
According to the SEC, verification methods acceptable for meeting the safe harbor requirements include the following: Reviewing copies of any IRS form that reports the income of the purchaser and obtaining a written representation that the purchaser will likely continue to earn the necessary income in the current year. Receiving a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser's accredited status.
This final rule paves the way for general solicitation under the 506 safe harbor of Reg D, making it easier to find investors and providing an important mechanism for raising capital for small businesses and entrepreneurs. Care still needs to be taken to meet all of the other requirements of the safe harbor including restricting stock transfers, timely filing of Form D and the like.
The ability to publicly solicit investors could provide angel investors with more and better opportunities. As always, buyer beware! Insist on financials being prepared by an independent accountant, check the Form D, check with state regulators about the promoters, independently verify the value of intellectual property if it is an important part of the investment and look for a comprehensive private placement memorandum that puts the investors on notice of the risks and other facts relevant to the solicitation. Remember, restrictions on sales of shares and lack of liquidity makes angel investing a long term investment with associated higher risks. Use due diligence to weed out.
If you are an accredited investor wary of making direct investments in startups, consider joining an angel investor group or invest your money in a professionally managed seed fund.