HAVE I GOT A DEAL FOR YOU!

For years, small companies have been constrained in the ways that they may reach out to potential investors. Most are not in a position to undertake the expenses and effort required for a public offering of their securities and the rules of the Securities and Exchange Commission ("SEC") often limited the ability of these small companies to reach out to potential private investors. Commencing September 23, 2013, new SEC rules may soon be bringing investment solicitations to your email boxes and your favorite social networks.

Rule 506 of SEC Regulation D establishes a safe harbor for private securities offerings. The Rule provides that, so long as a company complies with the Rule's exemption requirements, it is permitted to raise an unlimited amount of money. Up to now, the primary requirements of Rule 506 have been as follows:

• The company cannot use general solicitations or advertising to market its securities.
• The company can sell its securities to an unlimited number of "accredited investors" and up to 35 other non-accredited purchasers; however, each non-accredited purchaser, either alone or with a purchaser representative, must have sufficient knowledge and experience to be capable of evaluating the merits and risks of the investment.
• Companies can decide the scope of information to be provided to accredited investors (subject to the antifraud prohibitions in the federal securities laws), but must give non-accredited investors disclosure documents similar to those required in registered offerings.

In order to expand the market of investors for small companies, the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") directed the SEC to modify Rule 506 to eliminate the prohibition on general solicitations and advertising for certain private offerings. Accordingly, the SEC's new rules going into effect on September 23, 2013, eliminate that prohibition for offerings in which the purchasers are all accredited investors (or reasonably believed by the issuer to be accredited investors) and the issuer takes "reasonable steps" to verify that the purchasers are all accredited investors.

Under existing Rule 501, a person qualifies as an accredited investor if he or she has either: (a) an individual net worth or joint net worth with a spouse that exceeds $1 million (excluding primary residence); or (b) an individual annual income that exceeds $200,000 in each of the two most recent years or a joint annual income with spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level for the current year. Revised Rule 506 provides a non-exclusive list of methods on which an issuer may rely in verifying that the above standards are met. The possible methods include: (i) for income qualification, reviewing any IRS forms that report the income of the purchaser for those years and obtaining a written representation of the purchaser of his expectation of reaching the necessary income level for the current year, (ii) for net worth qualification, reviewing (with respect to assets) bank and brokerage statements, certificates of deposit, tax assessments and independent appraisal reports, and (with respect to liabilities) a consumer report from at least one of the national consumer reporting agencies, or (iii) obtaining a written confirmation from a registered broker-dealer, registered investment advisor, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser's accredited status.

Currently, purchasers are generally able to self-certify that they are accredited investors. As a result, the success of the revised Rule in meeting its goal of increasing investment in small companies may well depend upon the willingness of private investors to respond to general solicitation offerings that will require them to make specific disclosures on their personal finances. In the meantime, expect to begin seeing new investment solicitations in all media venues.