Keith Higgins, recently an SEC lawyer here in Boston, and now Director of the Corporate Finance Division of the SEC (“Corp Fin”), addressed the Angel Capital Association in Washington last week, touching upon several matters affecting angel investors. Interestingly, he spent most of his time attempting to dispel misimpressions of the use of new SEC Rule 506(c), which Rule in some instances permits the use of general solicitation in the unregistered sale of company securities.
In spite of predictions that angels and other start-up investors would flock to the new exemption as a way to get broader participation in admittedly risky enterprises, the new Rule has been sparsely used. Offerings under 506(c) since last September have numbered less than 900, raising $10B; the “old” 506(b) exemption, prohibiting solicitation, had 9,200 offerings raising over $233B. Why?
Issuing companies must “verify” that investors are accredited, and self-declaration of accredited status is not enough. BUT Higgins points out that companies can rely on alternate methods of verification without digging deep into investor finances, including: general information on hand; pre-secreening recommendation from a known reliable third party; investing a large amount (presumably, available only to wealthy and thus accredited investors).
Some companies were unclear on what constituted “general solicitation,” a concern that Higgins found inexplicable given the plethora of historical interpretations of that phrase (in the context of the SEC declaring that companies could NOT undertake such actions under “old” Rule 506(b)).
Other companies feared that, since the rules for 506(c) offerings were experimental and that the SEC quite likely would amend them in the future, they might find themselves having violated a new SEC refinement. Higgins assured that the SEC would not apply new regulatory requirements retroactively.
Seems like the SEC expected quite a flood of publicly solicited securities placements, particularly given the pressure for the new 506(c) format and the publicity surrounding its adoption, and is confused by experience to date. To my mind, the state of the market simply reflects the caution applied to pushing new SEC initiatives which look and feel theoretically inconsistent with SEC history — put another way, a fear you cannot teach that old SEC dog any new tricks.