Rule Change Targets Startup Investment

By Kittly McConnell
From the November 2013 issue of Columbus CEO

The U.S. Securities and Exchange Commission has approved changes to its general solicitation rule for private-placement companies. The shift is expected to help startups raise capital without forcing them to go public.

Rule 506 of Regulation D of the Securities Act was amended in keeping with the federal Jumpstart Our Business Startups (JOBS) Act. Effective in September, companies with SEC-exempt filing status may now advertise opportunities to registered investors with whom they’ve had no prior dealings.

The rule change allows 506-exempt companies that want to raise capital without an initial public offering, says attorney Aaron Seamon, a Squire Sanders partner whose practice is focused on capital formation and corporate finance.

“One of the requirements of the JOBS Act was for the SEC to eliminate general solicitation and otherwise make certain modifications to the private placement structure to make it easier for companies to raise capital,” says Seamon. He expects startups, growth-oriented companies and their intermediaries to benefit most from the rule change.

Venture-capital-funded companies often seek private-placement exemptions to avoid what can be a complicated and expensive registration process, says Shannon Himes, senior enforcement attorney and outreach director for the Ohio Department of Commerce Division of Securities.

“Probably a very common exemption people use when trying to do startup funding is a federal exemption, a Rule 506 exemption,” says Himes. Ohio companies that qualify for a federal exemption must also file with the state’s Division of Securities.