General solicitation ban lifted on biobased investment offerings

Renaissance in biobased capital raising expected.

In Washington, SEC Commissioners have voted 4-1 to lift the ban on general solicitation, and to create a new 506( c) class of offering, which will allow advertising of the offer — while ensuring that non-accredited investors will not be able to participate.

At the same time, the Commissioners voted to expand the information which companies include in their Form D offerings, require the filing of a Form D 15 days before the commencement of a general solicitation, and require a Form D filing after the completion of the offering.

The measure comes more than a year after the Congress passed the Jumpstart Our Business Startups Act (JOBS Act), requiring that the Securities and Exchange Commission lift the ban on general solicitation and advertising in Rule 506 private placements. The SEC has been developing the new rules since then.

Up until now

Until now, in order to get access to an offering for an early-stage company, investors has to be personally acquainted with and known to the offering’s promoters. This has the effect of limiting the distribution – creating barrier for new companies and technologies as accredited investors were forced to invest in other projects.

Example of the existing Form D – offerings that have historically been unavailable to the broad investor pool. Here pictured, a recent successful Coskata capital raise.

Details to follow

To reduce compliance costs, the Investment Advisory Committee of the SEC recommended that Form D form should be available for on-line completion. The form should request simple information regarding the identity of the entity seeking to rely on the exemption, the control persons of that entity (together with their addresses, telephone and contact information), counsel representing the entity (if any), the entity’s accountants or auditors (if any), the amount sought to be raised, a brief description of the entity’s general solicitation plans, and a brief description of the entity’s proposed business and use of proceeds.

The impact

In 2011, Rule 506 offerings accounted for $895 billion, as compared to $984 billion raised in registered offerings. The impact of the new rules will almost ensure that the amount of capital raised through Form D offerings will substantially increase.

Example of existing Form D offerings that would in future be available to the broad investor pool.

This means, more capital for enterprises, access to a broader investment base — for accredited investors, opportunity to get earlier, at lower price points, into the capitalization and shareholding with hot technologies.

The Bottom Line

We expect to see numerous 506(c) offerings mounted within the industry – though the deal flow may be slow at first.  The SEC’s action does not change the investor base — but it does make it vastly more simple for companies to access the addressable market of potential investors with more efficiency than ever before.