On April 5, 2012, the Jumpstart Our Business Act (the “JOBS act”) was enacted by President Obama with the intention to facilitate the raising of capital by small businesses. Specifically, Section 201(a)(1) of the JOBS Act has directed the SEC to amend Rule 506 of Regulation D under the Securities Act to permit general solicitation or general advertising in offerings made by private issuers. O'Connor Davies - New York CPA Firm

1. O'Connor Davies: Investors and
Funds Insights
SEC Proposes Rule Amendment to Permit
General Solicitations in Private Placement
Offerings - “Rule 506(c)”
In current practice, private issuers of securities are prohibited from making any
general solicitations of investors in connection with an offering of their securities;
unless, the securities being offered are registered with the Securities and Exchange
Commission (the “SEC”) pursuant to the Securities Act of 1933 (the “Securities
Act”).
However, on April 5, 2012, the Jumpstart Our Business Act (the “JOBS act”) was
enacted by President Obama with the intention to facilitate the raising of capital by
small businesses. Specifically, Section 201(a)(1) of the JOBS Act has directed the
SEC to amend Rule 506 of Regulation D under the Securities Act to permit general
solicitation or general advertising in offerings made by private issuers. Although
private issuers will now be allowed to conduct general solicitation of investors for
purposes of raising capital, additional obligations from the issuer will be required.
The new Rule 506(c), proposed by the SEC on August 29, 2012, will allow issuers of
securities to freely communicate with potential investors for the purpose of raising
capital, provided that the purchasers of these securities are accredited investors.
In addition to this, it will no longer be sufficient for issuers to simply obtain a
purchaser’s representation in writing that the purchaser is accredited. Issuers will
now be required to perform additional due diligence procedures to support their
reasonable belief, that an investor is accredited.
While the SEC did not specify what steps to take during the due diligence process,
it indicated that the determination of procedures taken to verify that purchasers of
securities are accredited were “reasonable,” and would be objective based on the
facts and circumstances of each transaction. However, the SEC did set forth a non-
exclusive list of factors that should be taken into consideration during the due
diligence process that includes:
• The nature of the purchaser and the type of accredited investor the
purchaser claims to be;
• The amount and type of information that the issuer has regarding the
purchaser; and

2. • The nature of the offering, such as the manner in which the purchaser was
solicited to participate in the offering, and the terms of the offering, such as a
minimum investment amount.
The SEC stated that the above factors are interconnected, and information gained
through analysis, would assist in the determination by an issuer on whether a
potential investor is accredited. The SEC believes that by not having a uniform set
of rules, the issuer will have the flexibility to use different approaches to ascertain
the accreditation of an investor depending on the offerings circumstances.
But what types of investors are considered accredited? The SEC currently defines
the different types of accredited investors in Rule 501 of Regulation D under the
Securities Act. Under this Rule, the term accredited investor is defined as:
1. A bank, insurance company, registered investment company, business
development company, or small business investment company;
2. An employee benefit plan, within the meaning of the Employee Retirement
Income Security Act;
3. A charitable organization, corporation, or partnership with assets exceeding
$5 million;
4. A director, executive officer, or general partner of the company selling the
securities;
5. A business in which all the equity owners are accredited investors;
6. A natural person who has individual (or joint) net worth that exceeds $1
million at the time of the purchase, excluding the value of the primary
residence of such person;
7. A natural person with income exceeding $200,000 in each of the two most
recent years or joint income with a spouse exceeding $300,000 for those
years and a reasonable expectation of the same income level in the current
year; or
8. A trust with assets in excess of $5 million.
It is also important to note, that the proposed Amendment also includes a change
to Form D, the filing required of all issuers selling securities on Regulation D. This
change would revise the form to add a check box to allow issuers to indicate their
reliance on Rule 506(c).
While the SEC did not provide a list of permissible forms of general solicitation,
Rule 502(c) of the Securities Act provides the following examples: advertisements
published in newspapers and magazines, communications broadcast over
television and radio, websites and seminars whose attendees were invited by
means of general solicitation. These forms of general solicitation will likely provide
additional capital to private issuers. However, the accredited investor verification
and due diligence requirements will materially affect the way in which all issuers,
especially hedge funds and alternative investment funds, raise capital. Before
general solicitation is used to raise capital, we urge all issuers to consult with their
general counsel regarding the potential effects.

3. To find out more about how the proposed Amendment impacts you, visit
www.odpkf.com or call Michael Provini, Ray Sutterlin or Jay Monaghan at 212-286-
2600.
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