Maximizing Capital Formation in the Current Market
At Tobin & Company, we understand the importance of navigating the ever-evolving regulatory landscape within the private placement offering space. When it comes to raising capital, Regulation D’s 506 exemptions offer issuers flexibility. However, with DST and other private placement offerings experiencing extended timelines for full subscription, a strategic switch from a 506(b) to a 506(c) exemption can be a valuable tool to expand your investor pool.
Understanding the 506 Exemption Landscape:
The Established Choice: 506(b) Offerings
Traditionally, 506(b) offerings have been favored for their ability to raise capital from a blend of accredited and, under specific conditions, up to 35 non-accredited investors. However, this exemption comes with a limitation – general solicitation or advertising is prohibited.
The Evolving Landscape: 506(c) Offerings
Introduced in 2013, 506(c) offerings ushered in a new era by allowing issuers to leverage general solicitation to attract investors. This broader reach comes with a caveat – the issuer must take reasonable steps to verify investor accreditation.
The Power of a Mid-Raise Transition
A lesser-known yet highly valuable provision within 506(c) allows sponsors to amend a 506(b) offering into a 506(c) offering mid-raise. This strategic shift unlocks the potential to reach a wider audience of accredited investors, potentially accelerating full subscription.
Executing a Seamless Transition
Our team at TOBIN is well-versed in navigating the 506 exemption transition process.
Our Roadmap for a Successful Switch:
Offering Document Revamp TOBIN will reissue or supplement your existing offering documents, clearly outlining the rationale behind the transition to a 506(c) exemption.
Subscription Agreement Revamp A new subscription agreement adhering to the 506(c) requirements will be created by TOBIN.
SEC Filings An amended Form D will be filed with the SEC.
State Filings Depending on the specific states involved, new blue-sky filings might be necessary.
No Sales Pause While TOBIN ensures a smooth transition, the issuer can continue to sell securities under the 506(b) exemption until the re-papering process is complete. Once complete, the new PPM and subscription agreement will be substituted within the sales materials, mothballing the previous sales materials.
Considerations for Sponsors
While the potential for a larger investor pool with a 506(c) offering is undeniable, it’s vital to acknowledge the increased compliance burden. This includes implementing robust investor accreditation verification procedures, managing advertising within SEC regulations, and potentially heightened broker-dealer supervision. However, the elimination of the pre-existing “substantive relationship” requirement between a broker-dealer and the investor can offer some offsetting advantages. TOBIN will help you manage these increased burdens seamlessly. TOBIN is able to assist your team in implementing the new accreditation verification procedures by overseeing your team in completing them, completing them ourselves or referring you to a third-party verification vendor.
Conclusion
At TOBIN, we stay at the forefront of regulatory changes within the private placement space. The strategic switch from a 506(b) to a 506(c) exemption can be a powerful tool to maximize capital formation for your private placement and DST offerings in the current market. Our team is here to guide you through every step of the process, ensuring a smooth transition and optimal results.
Continuing Education and Networking
This year I have decided to add to my autumn conference agenda, and would love to meet with as many of you this fall as possible. Next up in August I will be at the Buttonwood Due Diligence Conference in Colorado Springs, CO. It looks like a perfect place to connect with folks in alternative investments and would love to meet up with you there. Please let me know if you will be there as well so we can put some time on our calendars to connect in Colorado Springs with you and with our good friends at Buttonwood.