The Impact of Title II of the Job’s Act Regulation D Rule 506(c) on US and Canadian Issuers

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Regulation D Rule 506 (Rule 506) is a popular private placement exemption in the United States (US) for US resident issuers and foreign issuers as it pre-empts state securities regulations.  When using other US Federal offering exemptions like Regulation D Rule 504 or Rule 505 you must find a state equivalent private placement exemption you can rely on when making your offering.

Under Rule 506 issuers can raise an unlimited amount, with an unlimited number of accredited investors and include up to 35 non-accredited investors in the offering. Issuers get to decide what information they need to provide accredited investors (antifraud prohibitions apply). Non-accredited investors must receive information and financial statements equivalent to that found in a Canadian offering memorandum or form Regulation “A”. One thing you can’t do when relying on Rule 506 is advertise; at least that was the situation up to September 23, 2013.

Title II of the Job’s Act resulted in creating Regulation D Rule 506(c) which allows issuers to advertise when conducting a Rule 506 offering.  Advertising your offering is great as it opens up who you can connect with that may be interested in your offering.  In giving issuers this new right to advertise the Securities and Exchange Commission (SEC) removed the ability of any non-accredited investors from participating in the offering.  They also put the onus on the issuer to verify each investor is indeed an accredited investor. Accredited investors could self-identify under the old Rule 506.  The SEC also introduced what the call “bad actor” rules which limits who can rely on the exemption.  The old Rule 506 still exists and in legal circles is now called Rule 506(b) and the advertising allowed version of Rule 506 is known as Rule 506(c).

When an issuer sells securities under a private placement exemption in the US they must file a Form D Notice of Exempt Offering of Securities.  Tracking Form D filings can inform us as to impact and market adoption of Rule 506(c) (although not all issuers file a Form D like they are supposed to).

In the first 30 days from its enactment on September 23, 2013, 306 issuers relied on Rule 506(c) raising $2.2 billion dollars.  Although impressive, these numbers are much smaller than the number of issuers who relied on Rule 506(b) and the amount raised under Rule 506(b) during this same period.  The SEC recently released this chart showing comparatives of Rule 506(b) and 506(c) offerings from September 23, 2013 to February 7, 2014.  Rule 506(c) offerings represent well under 10% of all Rule 506 offerings.

Rule 506 Offering Characteristics
-by offering exemption claimed-
[1][2]

 

Sept. 23, 2013 to Feb. 7, 2014

 

Rule 506(b)

Rule 506(c)

Initial Offerings

 

 

Number

7,091

679

Total Amount Sold (Billions)

$179.8

$12.3

Average size of offering (Billions)

$25.4

$18.1

Median size of offering (Millions)

$1.6

$1.0

Total # investors

108,341

7,894

Average investors/offer

15.3

11.5

Fraction that used an intermediary

20%

27%

Amendments to Offerings Initiated in Prior Years

 

 

Number

3,055

N/A

Total amount sold (Billions)

$160.6

N/A

506(b) offerings initiated in 2013 that switched to 506(c)

 

 

Number

N/A

210

Total amount sold (Billions)

N/A

$7.2


Notes:

  1. All dollar amounts are in U.S. dollars.
  2. Securities and Exchange Commission 2014.

During the period of September 23, 2013 to February 20, 2014, 14 Canadian issuers claimed they were relying on Rule 506(c) in their Form D filings with the SEC .  During this same period 264 Form Ds were filed by Canadian claiming reliance on Rule 506(b).  (A couple of these Canadian issuers appear to have used Rule 506(c) when there was a better exemption available to them.)

Canadian Issuers Using Rule 506(c)
-09/23/13 to 02/20/14-
Jurisdiction Date Issuer Name Funds Raised
US$
Other Details
QU 09/13 Montrusco Bolton Canadian Capitalization Equity Fund 113,841,291  
BC 10/10 Response Biomedical Corp. 4,000,000 $3,119,136 sold on filing date.
BC 10/13 Netco Silver Inc. 62,966  
BC 11/13 White Bear Resources Inc. 25,894  
BC 11/13 Meadow Bay Gold Corp. 28,476  
AB 11/13 Alterrus Systems Inc. 40,800 Shares for debt to a director.
BC 11/13 Naked Brand Group Inc. 500,000  
BC 11/13 Convalo Health International Corp. 71,828 $23,943 sold on filing date.
ON 11/13 Open Text Corp. 100,000,000  $0 sold on filing date.
BC 11/13 Convalo Health International Corp. 1,637  
NS 12/13 Unique Solutions Design Ltd. 900,000 $866,769 sold on filing date.
BC 12/13 Golden Reign Resources Ltd. 246,000 $0 sold on filing date.
BC 12/13 First Growth Holdings Ltd. 19,180  
BC 01/14 Bold Stroke   Ventures Inc. 950,000 Relied on in Capital Pool Company Qualifying Transaction acquiring Upfile Services Inc.
Total: $220,688,072  

It is still early days for Rule 506(c).  This exemption will likely get far more use in the future as Canadian and other  issuers understand how they can use this exemption to their benefit.

Alixe Cormick is the founder of Venture Law Corporation in Vancouver, British Columbia and a member of Commercialization Advisory Board of the Life Science Institute at the University of British Columbia, the Advisory Board of the National Crowdfunding Association and two private tech companies. She is also a member of the Pacific Northwest Keiretsu Forum, an association of accredited private equity angel investors, venture capitalists and corporate/institutional investors, and Vantech Angel Technology Network, a Vancouver angel group. You can reach Alixe by phone at 604-659-9188, by email at acormick@venturelawcorp.com, on twitter at @AlixeCormick or on Google+ at +AlixeCormick.
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The Impact of Title II of the Job’s Act Regulation D Rule 506(c) on US and Canadian Issuers
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Discussion about Impact of Title II of the Job’s Act Regulation D Rule 506(c) will have on U.S. and Canadian Issuers raising capital in the U.S.
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