On September 30, 2013 the SEC eliminated an 80 year old rule which prohibited companies from soliciting investments via public advertising. This is a good thing, right? Nothing can stop your small billboard company from placing a banner on its website saying “Investors Wanted” or from putting up an “Investors Wanted” sign on a billboard you own in order to obtain capital to grow faster.
Not so fast.
The new 506(c) rule says you can only accept money only from an “accredited investor”, that is, a person with a single income above $200,000, a married income above $300,000, or a net worth (excluding the value of a home) above $1 million.
The accredited investor rule is nothing new. Any company raising money from private investors had this restriction in the past. Put here’s the kicker. Under the original rule 506, accredited investors self-certified. You asked them if they were accredited they filled out a form saying they were and that was that. You took their word for it and didn’t pry.
Under the new rules you must verify that anyone who gives you money is an accredit investors by getting w2’s or an income tax return or bank and brokerage statements or a letter from that investor’s CPA or attorney. Welcome to the nanny state.
There have been several articles in the press by angel investors who’ve said this will have a chilling effect on capital raising. My company has decided to continue raising money under the old 506 rule and to forego public advertising in order to protect the privacy of my investors. Here’s an article which explains why the new rules will help wall street more than main street.
