Can You Advertise Your Private Offering?
The Truth About General Solicitation

If you are conducting a Rule 506(c) offering, the answer is generally yes. Subject to the FAA on that last one, of course.

That surprises many issuers. We regularly have issuer and sponsor clients ask whether they can advertise a private placement offering because, understandably, finding investors is not easy. The word “private” suggests that the offering itself must remain private.

But that is not necessarily the case.

Under Regulation D, the answer depends significantly on whether you are conducting your offering under Rule 506(b) or Rule 506(c). The two exemptions may look similar on a term sheet, but they create very different fundraising environments.

Rule 506(b): You Cannot Advertise

With a Rule 506(b) offering, general solicitation is prohibited.

That means no newspaper or magazine advertising, no television or radio commercials, no public website promotion and no public seminars designed to solicit investors.

You also cannot simply develop a new list of prospective investors and begin contacting them about the offering.

Under 506(b), your solicitation universe is limited to investors with whom you, or someone acting on your behalf, had a substantive, pre-existing relationship before the offering. If you have spent years developing a large investor base, that may not present much of a problem.

If you have not, it can be extremely restrictive.

And this is not an academic distinction. FINRA has brought enforcement actions against broker-dealers that participated in Rule 506(b) offerings and solicited investors with whom the firms had not established the requisite pre-existing, substantive relationships.

So if you are using 506(b), keep it private.

Rule 506(c): Advertise Away

Rule 506(c) is a very different animal.

A 506(c) offering permits general solicitation. You can advertise publicly through traditional media, digital media, social media and even direct outreach. You can make cold calls. You can send cold emails. You can advertise at an event. You can put an ad on television.

We have a client who cold calls every single doctor in their town. They pull out the figurative yellow pages and start dialing. Physicians are a population likely to include accredited investors, so it is a sensible target audience. And this approach has yielded success for our client.

But here is an important point: the people who receive or see a 506(c) advertisement do not themselves have to be accredited investors.

That is what general solicitation means. The advertisement can be public.

The people who ultimately purchase the securities, however, must all be accredited investors and the issuer must take reasonable steps to verify their accredited investor status.

So yes, theoretically, you could tow an advertisement for your offering behind an airplane over the Meadowlands.

You just cannot sell the securities to every football fan who calls the number on the banner.

The Tradeoff: Verification

The tradeoff for all of that marketing freedom is accredited investor verification.

With a 506(b) offering, an issuer must reasonably believe that an investor is accredited. With a 506(c) offering, the issuer must take reasonable steps to actually verify accredited investor status.

That additional requirement irritates some sponsors.

I recently had a lengthy discussion with an established client who wanted to switch from 506(c) to 506(b) because he thought accreditation verification was simply too much of a hassle.

I understood his frustration. Verification does require additional work, both from the investor and from the issuer.

But before surrendering the ability to broadly solicit investors, it is worth understanding how the verification rules actually work.

Once an investor has been properly verified for a Rule 506(c) offering, that verification can generally be relied upon for five years. At the time of a subsequent investment, the investor only needs to provide a written representation that he or she continues to qualify as accredited and the issuer cannot have information indicating otherwise.

That can make an enormous practical difference for a sponsor that raises capital repeatedly.

If you properly verified an investor in 2023, for example, you generally do not have to put that investor through the entire verification process again for each new offering over the next several years.

And, of course, TOBIN is always happy to prepare accredited investor verification letters for your investors. This is one example of the operationally generous, high-touch approach we take to supervising and managing a private placement securities offering.

So the question is not simply whether verification requires some administrative effort. It does.

The more important consideration is what an issuer gives up by moving to 506(b) to avoid it.

Think About the Way You Raise Capital

For an established sponsor with a large and productive existing investor base, Rule 506(b) may work extremely well. If you can raise all of the capital you need from investors with whom you already have substantive, pre-existing relationships, you may have little need to advertise or to solicit on a wide basis.

But if you need to expand your investor base, reach new prospective investors or conduct a broader marketing campaign, Rule 506(c) offers considerably more flexibility.

The choice between 506(b) and 506(c), therefore, is not merely a securities-law designation in the PPM.

It affects the way you can actually raise the money.

Rule 506(c) gives sponsors remarkable latitude in where and how they can look for investors.

Rule 506(b) does not.

Understanding that distinction before you begin raising capital can save an issuer from choosing an exemption that does not fit the way it actually intends to find its investors.

If you are preparing your first or next Reg D offering and would like to discuss the practical differences between Rule 506(b) and Rule 506(c), reach out to us at TOBIN. We are always happy to help.