You are on page 1of 18
Dealf low.com White Paper

Dealf low.com

White Paper

DEAL MARKETING ON THE INTERNET THE OUTLOOK FOR 2014

Raising Capital Using Rule 506(c) and General Solicitation

Table of Contents

Introduction Regulatory Background Evolution of the Online Deal Environment Pros and Cons of General Solicitation Rule 506(c) Data and Statistics General Solicitation: The Good, the Bad, and the Regulatory Case Studies Steps you should take to Prepare for a 506(c) Offering Conclusion and Takeaways

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

Introduction

After decades of banning general solicitation and advertising of private placement

financing transactions, the SEC finally adopted a more conciliatory position near the end of 2013. The new Regulation D Rule 506(c) offering opened the door to general solicitation, and some companies immediately began using it to reach investors. But many of those companies that filed for almost 300 such offerings in the three month period after September 23 (when the new rule went into effect) have not started advertising or marketing publicly.

In this whitepaper, published numbers are limited to operating companies and some investment funds, not including pooled investment funds and entities raising an unspecified amount of capital. Operating companies include businesses in all stages of development, from early-stage startups to established companies generating revenue.

Given that the Rule 506(c) offering became available with barely three months left in 2013, it is not surprising that many companies who opted for it through a Form D filing did not have time to execute by the end of the fourth quarter. Taking such a step is inadvisable without considerable planning.

The year 2014 will be the first complete year in which using general solicitation to raise capital is a reality, and the year is bound to witness new developments in how general solicitation is advanced in the media. Companies are already using funding portals, their own websites, press releases and social media to put their financing deals on the map. Television and radio advertising could be next, and social media continues to evolve and produce new ways to connect -- and invest.

In this whitepaper, Dealflow.com takes a practical look at Rule 506(c)’s outlook in 2014 and what companies can do to take advantage of the new rules and their potential for deal marketing and investor sourcing.

Regulatory Background

After the Securities and Exchange Act of 1934 established the Securities and Exchange Commission, one of the commission’s first major responsibilities was enforcing the Securities Act of 1933. While it is not necessary to rehearse the numerous inadequacies of federal securities regulation in the Roaring Twenties, one issue worth mentioning here is an understandable concern with unregulated advertising of securities, which prior to the crash of 1929 took place in venues ranging from word of mouth to newspapers to open outcry at “curb exchanges.” A lasting artifact of that concern was a prohibition against advertising and general

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

solicitation which lasted for eighty years. When it came to private offerings, many companies have been frustrated to learn that even after preparing detailed business plans, financial projections and offering documents they could only “advertise” their company to parties with whom they maintained a “substantial pre-existing relationship.”

While the SEC has never completely defined advertising, over the years it has taken actions against those who have sought to use the mail, radio and television to reach a broad swath of investors. This led to a regulatory disparity between those selling securities and those selling other products. While the Federal Trade Commission has long allowed promoters to use every form of media to sell financial and non-financial products directly to the public -- often with disastrous results -- even the most scrupulous players in securities markets have accepted a ban on broad advertising, even if they intend to sell only to

accredited investors.

On September 23 of this year, the SEC eliminated, or at least partially withdrew, its ban

on general solicitation.

Evolution of the Online Deal Environment

The advent of the Internet and the evolution of social media over the last fifteen years or so have given securities regulators and capital markets participants much to think about. In the simplest terms, regulators saw more avenues of solicitation to worry about. As communications realities like email, websites and web-based trading platforms emerged, capital seekers found many more reasons to be frustrated by the commission’s ban on using any and all of these ways to connect with investors.

Given the sum of developments in ecommerce and social networking, the year of 2014 offers deal marketers an unprecedented array of communication techniques that literally did not exist two decades ago.

In the many industries where advertising was allowed from the beginning, the exchange of products and information has changed dramatically over the last decade, making fortunes large and small for entrepreneurs who have played a wide variety of roles. During that time many broker dealers have created powerful online platforms for securities trading, but only now is the same opportunity opening up for businesses that want to make their capital raising story public. Two clear manifestations of these trends are the online funding portal and the company website as places to disseminate investment information.

At the same time, in the wake of the global financial crisis, banks, the SBA and other traditional sources of capital remain unsympathetic to entrepreneurs. Since the fall of Lehman Brothers, the big investment banks have become increasingly profitable and

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

awarded executives record-level bonuses, yet businesses of a smaller scale, ranging from sole proprietors with a brilliant concept to lower-middle market corporations, have more trouble than ever securing capital to grow their operations.

In this environment, the combination of a new regulatory exemption for capital raisers and a host of online capital raising tools seems to set the stage for a Gold Rush mentality stampede toward the use of general solicitation to raise capital for both businesses and investment funds. But the reaction from the venture fund business has, at least to date, been tepid -- only one venture forward took a vocal stand for general solicitation immediately after it became a reality on September 23. More recently, other funds, including some large pooled investment vehicles, have filed Form Ds for Rule 506(c) offerings, but many are not yet taking their marketing efforts to the public.

Online resources have provided ways to connect for years, but it is important to note that they lead to actual investment, not just communication. Recent research from IntraLinks indicates that in the M&A business, where respondents expect increasing use of media such as LinkedIn and Twitter, 54.5% of buy-side and 40% of sell-side interviewees said they had closed a deal sourced online. Almost 55% of respondents said over 25% of their total deal flow was derived from online sourcing.

When it comes to operating companies, several hundred have filed for Rule 506(c) offerings. And while some have taken quick steps to issue press releases about their efforts and make offering materials available on their websites, many others have done little or nothing to develop public marketing campaigns.

Why they have not done so is one of the two key questions this whitepaper addresses. The other question is: How does a company organize a program of general solicitation once it has made the commitment to take that approach?

Pros and Cons of General Solicitation

The use of general solicitation is perhaps the most distinct advantage of relying on the Rule 506(c) exemption. Typically, startups and entrepreneurial companies look to friends and family when they seek their first investor capital. Friends and family rounds often successfully meet the capital needs of a young company, but a disconnect often ensues once these familiar sources of capital are tapped.

At this point, companies and their management work hard to extend their personal networks and attract the attention of angel investors, venture capitalists and other parties with deep pockets. Until September 23 of this year, however, companies were very limited in how they could expand their personal networks to include these new investors.

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

Now companies who file for a Rule 506(c) offering can use every means possible to engage with that ideal audience of investors, so long as the ones who actually invest are accredited investors. Accredited investor status can be arrived at in several different ways, including metrics based on income or assets.

While an accredited investor may not possess the enormous assets of a Warren Buffet or Bill Gates, accredited investors are likely to have the means to invest more than non- accredited investors. In fact, they can invest as much as they care to at their own discretion.

Accordingly, a company looking for capital may be able to reach its goals with a limited number of investors. This can make fundraising in itself simpler for a small company: a single accredited investor may be able to provide the necessary amount of capital. And limiting the number of investors may prove beneficial in later funding rounds.

In some cases, accredited investor commitments may serve as a bridge to later rounds. When venture or large-scale angel investors assess the company, they might be more interested in a situation where equity is held by a few individuals rather than a large number of non-accredited individuals. A large early-stage investor base poses at least a couple of impediments to institutional buyers. In the event that a large number of early stage investors hold control or voting interests, an institutional investor may be reluctant to get involved because numerous unsophisticated players hold an interest in the company -- especially if it is a controlling interest.

Even when investors have no official control, the investors may pose serious challenges by virtue of their feelings of entitlement in the business. They may wish to remain in constant contact with management, and this can create serious demands on management. Remaining in communication with even the most well-meaning unsophisticated shareholder base can reduce the amount of time founders have to manage and develop their businesses.

Pros and Cons of General Solicitation

Rule 506(c) Benefits

Rule 506(c) Drawbacks

General solicitation

No unaccredited investors allowed in offering

Accredited investors bring capital, connections

SEC may require 15-day Form D pre-filing

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation Now companies who file for a

In contrast, accredited investors are less likely to make demands on management, at least on an emotional basis. And these investors are more likely to be in a position to

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

provide mentoring and professional expertise -- an advantage subsequent investors are likely to appreciate.

Moreover, an accredited investor may provide an entree to his or her personal network of investors, a network that social media can readily put within reach of company management. Accredited investors may also be investing on their own while they are members of angel groups or institutional players like venture capital funds -- these individuals may be able to open doors at the institutional level later.

Pitching to accredited investors offers some advantages as well. A demo for a small group of individuals familiar with the company’s type of business is more efficient to approach. They may be more critical than non-accredited investors, but their sophistication makes it easier to “cut to the chase” and dispense with lengthy introductory explanations that unsophisticated investors might require to get up to speed.

Like any other investment component, Rule 506(c)’s accredited investor requirement poses some challenges. The greatest of these involves due diligence with respect to both investors and company management.

Investor verification has drawn serious concern since its prospect arose as part of the JOBS Act’s regulation of Rule 506(c) and Title III crowdfunding. Initially, issuers and investors alike were alarmed by the possibility of an exchange of highly specific information about investors’ financial condition. For decades the financial services industry relied on a self-affirmation dynamic, where investors represented that they met sophisticated investor thresholds but did not have to document their financial condition.

As the JOBS Act moved towards passage, some disturbing possibilities arose for investor verification, as many comment letters to the SEC testify. Many parties on both sides of the investor/investee table recoiled at the thought that investors might have to provide tax return documentation. The mere thought of tax returns is off-putting to investors, and the divulging of such documentation may also conflict with confidentiality provisions of federal tax laws. Likewise, the prospect of providing personal financial statements also mortified investors. In the age of the Internet, when information travels at the speed of light, the idea of handing over one’s personal financial information is even more alarming than it was two decades ago.

With Rule 506(c), issuers can no longer “take it on faith” that investors are accredited.

Instead, they must take “appropriate steps” to verify status even if they have ample reason

to believe investors are accredited.

Fortunately, the SEC has made it very clear that investor verification can be provided by

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

third parties, such as CPAs, attorneys and financial advisors. While this type of verification requires periodic updating, it merely states that the investor has exceeded the SEC’s thresholds. The investor is not required to describe the income or break down the assets that led to accredited investor status. Given the often vitriolic complaints on investor accreditation in comment letters to the SEC, this particular issue has fortunately not lived up the fears it initially caused.

Due diligence is also a major concern for issuers, who need to examine their executives in at least two different lights. Issuers must examine their “covered persons” and determine whether any of them are subject to a “disqualifying event.”

Fortunately for issuers, disqualifying events prior to September 23 are not really disqualifying -- they just need to be disclosed. And issuer management should always

track compliance issues associated with members of their team. Hopefully, it will not be necessary to conduct a background investigation of employees, and some companies are asking executives to fill out compliance questionnaires aligned with the SEC’s disqualifying

event categories.

There may also be some grey area around the definition of who in an issuer’s company is a covered person. Anyone playing a role in deal structuring or marketing could be a covered person, regardless of job title. Issuers can do themselves a favor by including any potential covered person in their due diligence activity.

It’s worth noting that when it comes to investor verification and management due diligence, the commission has provided ways of mitigating situations where good faith efforts failed to uncover disqualifying events or accurately assess investor status.

Issuers should also be mindful that Rule 506(c) offerings completely preclude accepting capital from non-accredited investors. The traditional Rule 506(b) exemption provides for up to 35 non-accredited investors, but Rule 506(c) does not. And again, issuers under Rule 506(c) must make an affirmative determination of investors’ status.

Rule 506(c) Data and Statistics

As of mid-December, some 270 issuers filed Rule 506(c) Form Ds for financing efforts with an aggregate dollar value of $3.7 billion. (These figures exclude closed deals and filings by pooled investment funds. The latter exceeded $20 billion.)

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

Deal Size Breakdown

20 40 30 50 60 80 70 10 0
20
40
30
50
60
80
70
10
0

90

100

  • Under $500,000

  • $500,000 - $1,000,000

  • $1,100,000 - $4,900,000

  • $5,00,000 - $9,900,000

  • $10,000,000 - $19,900,000

  • $20,000,000 - $50,000,000

  • $50,100,000 - $1,000,000,000

In dollar value, offerings range from a low of $32,500 to a high of $1 billion. Some 194 deals involved equity and another 42 debt. Filings reveal an additional three convertible debt offerings, and the remainder had other structures such as options to acquire and partnership or joint venture arrangements.

Deal Flow Breakdown

7% 10% 17% 13% 5% 4% 6% 11%
7%
10%
17%
13%
5% 4%
6%
11%
 

17%

Information Technology

10%

Energy

14%

Financials

7%

Manufacturing

14%

13%

Consumer

6%

Industrials

12%

Health Care

5%

Telecommunications

11%

Real Estate

4%

Other

12%

In transactional volume, information technology took the greatest share, with 45 offerings that made up 17% of the total. Financials was next (39 deals or 14%), followed by consumer products (36 deals or 13%).

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

Deal Value Breakdown

4% 2% 6% 6% 43% 6% 6% 19% 6% 43% 7% Financials Real Estate Health Care
4% 2%
6%
6%
43%
6%
6%
19%
6%
43%
7%
Financials
Real Estate
Health Care
Consumer Discretionary
Industrials
4%
7%
2%
7%
6%
0%
Information Technology
Telecommunications
Energy
Manufacturing
Other
7%
19%

In aggregate dollar volume, financials came out on top thanks to a $1 billion filing by an insurance and financial services company that accounted for 43% of the total. Real estate was next ($702 million or 19%), and health care followed ($275 million or 7%). While information technology was first in deal flow, the aggregate value there was $205 million, a figure representing 6% of the dollar volume.

Deal Type Breakdown

140 160 180 120 100 20 40 60 80 0 Other - 28 Equity - 194
140
160
180
120
100
20
40
60
80
0
Other - 28
Equity - 194
Option To Acquire - 2
Convertible Debt - 3
Debt - 42

200

If the $1 billion filing is taken out of the picture so that it does not skew the numbers, real estate would have come out on top in dollar value, as its dollar value would then represent 26% of the total.

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

Dollar Value Minus $1 Billion Filing

6% 3% 7% 26% 8% 26% Real Estate 8% 21% Financials 7% 10% Health Care Consumer
6% 3%
7%
26%
8%
26%
Real Estate
8%
21% Financials
7%
10%
Health Care
Consumer Discretionary
Industrials
6%
9%
10%
3%
9%
0%
Information Technology
Telecommunications
Energy
Manufacturing
Other
10%
21%
10%

General Solicitation: The Good, the Bad, and the Regulatory

At least 300 companies have decided that the advantages of Rule 506(c) outweigh its disadvantages. Clearly, the most obvious and innovative feature of this offering is general solicitation. Yet a large number of these 300 filers have not taken steps to announce their intentions to the public other than by filing a Form D. (We exclude pooled investment companies and offerings of an unspecified dollar amount.)

This hesitation could have a variety of origins. In some cases, the issuers are very large and sophisticated entities (especially if the data set is expanded to include pooled investment funds that are raising hundreds of millions of dollars in one offering), and these companies have no downside to filing for a Rule 506(c) offering. They never had any motivation to seek capital from non-accredited investors. They have longstanding connections to institutional investors who have no need to demonstrate accredited status.

For other companies, and this analysis includes some substantial going concerns, a variety of impediments -- real or perceived -- are restraining businesses from engaging in the general solicitation that they literally signed up for. What follows is a breakdown of these impediments and suggestions for mitigating their effects.

In many cases, issuers are postponing their capital raising efforts because they have not analyzed basic business needs or retained advisors competent to manage these

needs.

Some (potential) issuers hastened to file for a Rule 506(c) offering without first establishing their business within local regulatory frameworks. Incorporating the business and obtaining relevant business licenses are among the realities that brilliant entrepreneurs have sometimes neglected to investigate at the earliest possible stage. These mundane

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

necessities are of little interest to forward-thinking inventors looking over a distant horizon, but the basic paperwork needs handling in order to avoid costly problems down the road.

Market analysis is also an issue, particularly with startups. Tech icons like Steve Jobs, Steve Wozniak and Bill Gates were under no obligation to pay for market research when they started their businesses, but at the time they were early adopters of technology in areas where there was little or no competition. Today’s markets teem with competition, and no matter how brilliant an idea appears, it is necessary to find out if someone else is already exploiting it. This is an issue that is best handled well in advance of any formal securities offering.

Some companies are prudently postponing their marketing campaign until their capital needs and capital structure have been fully defined. Again, these are matters that should be analyzed prior to initiating a securities offering, but anecdotal evidence suggests that some companies frustrated by delays in implementation of the JOBS Act filed for a Rule 506(c) offering just because it finally became available.

Equity comes in many flavors and may be combined with debt and forward-looking components such as warrants and options. For any company raising capital, the structure of an offering is of crucial importance. Structure is even more important for a company raising capital for the first time, because it will condition every effort that company makes to obtain capital in the future. Today’s hasty choice could become tomorrow’s deal breaker.

Future investors will have to take a very close look at the parameters of earlier financings. Who were the investors and what are their rights with respect to future offerings? Does a previous investor hold an influential stake? How will a new investment dilute the holdings of earlier investors? What will happen if earlier investors exercise options or warrants? What does the character of previous investors say about the company?

Some companies are balking because they are not sure how to broach the subject of accredited investor verification with investors. There is an emotional component to this decision, as well as a timing element -- at what point in negotiations does one bring up the subject, effectively asking the investor whether he or she really has the capital? While there is no exact science for determining when verification becomes part of the conversation, the verification itself need not be problematic.

The SEC’s initial recommendations, which were more fully explained in compliance interpretations, clearly allow for generic verification. In other words, a third party can verify an investor’s status without divulging the assets or income underlying that status.

Due diligence concerns on the other hand, are not as easy to address as investor verification. However, companies should work hard to assess any employee or business

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

partner they get involved with. This can be part of the “homework” behind issuer due diligence for a securities offering. Issuers should take a close look at the SEC’s list of disqualifying events and determine whether they are comfortable assessing employees and business partners.

Issuers also need to think about the regulatory past of third party firms and people who provide marketing and capital raising services, such as placement agents and finders. A contract governing such relationships could require agents to vet themselves for disqualifying events or provide related indemnification.

Case Studies

How do companies engage in general solicitation? At present there doesn’t appear to be any issuer using television or other traditional broadcast media to reach investors. But companies are definitely making use of the Internet in various ways.

While many capital seekers using investment portals are avoiding exposure to non- accredited investors, others are choosing to engage in general solicitation on funding portals. AngelList, for instance, features many companies who have chosen the general solicitation route. Some examples are content provider Moonfrye, driver safety technologist HealthyRoad, Bitcoin platform Payward/Kraken and Live2Support.

Other companies are using their own websites to make offering materials available, sometimes doing so in conjunction with press releases.

Caliber Imaging is using general solicitation to build out its diagnostic imaging business. The company found that a Rule 506(c) offering made a lot of sense compared to the alternatives. Filing an S-1 registration statement is costly and time consuming, but the company is not eligible for an S-3 filing.

Prodigy Network crowdfunded several commercial real estate developments in Bogotá, Colombia, including an airport business hub and BD Bacatá. Over 3,500 investors put $200 million into the BD Bacatá project, a 1.2 million square foot 66 story skyscraper combining business space and a 364 suite hotel. The company is now raising funds for two commercial mixed use projects in New York City. Prodigy uses its website to reach foreign Regulation S investors and U.S. accredited investors.

DIY workshop space provider Tech Shop is raising about $60 million in debt and equity through its own website and road show activity. The company had been trying to raise capital through other means but decided to manage its own general solicitation campaign to fund existing operations and expansion.

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

Algebraix Data, which has previously raised some $43 million in debt and equity, has turned to general solicitation for $15 million. The company, which makes cloud operative semantic parsing technology for big data, plans on using funds from the new round to fund the launch of a SPARQL server.

Patheos, a website that facilitates discussion of religion, raised about $6 million from an existing network of associates and then filed a Form D for a $2.5 million Rule 506(c) offering. Patheos is making deal information available to accredited investors through its website, and the company's CEO said that this seemed like the logical next step to reach new investors.

ScripsAmerica, a public company that manages prescription and over-the-counter fulfillment, also filed a Form D under Rule 506(c). In a subsequent regulatory filing, however, the company described a private investment with a single accredited investor and stated that it had not used general solicitation in sourcing the investment. In this situation, the company traded off its ability to reach unaccredited investors, a trade off that made sense after it found an institutional investor.

Many companies who filed for a Rule 506(c) offering but are not currently engaging in general solicitation declined to comment on their plans for using it. Such companies spanned all sectors Dealflow.com tracks and included Form Ds announcing plans to raise dollar amounts from tens of thousands of dollars to $1 billion.

Traditional venture capital funds were not quick to embrace general solicitation, but ff Venture Capital adopted general solicitation at the earliest opportunity to close a round of capital raising that had been in process for a year. The fund said that in addition to providing access to new investors, general solicitation allowed ff to talk about its investment returns, a subject that the SEC had kept off limits for decades.

Steps you should take to Prepare for a 506(c) Offering

It takes about ten minutes to fill out the SEC's Form D, yet the form's representations could affect a business for years. Rule D filers should have done their homework in a variety of areas, so that completing the form reflects careful consideration. There are numerous areas to investigate in advance of commencing an offering.

First, find the right advisors. Such people could include attorneys, CPAs, finders, deal makers, advertising specialists or portal managers. Per the discussion above, different companies may have vastly differing advisory needs. These services generally cost issuers, either up front or on some deferred basis. While the ever burgeoning culture of

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

the Internet provides many ways to search for advisors, old-fashioned word of mouth will likely play a part. Get referrals from people you know, especially if they are involved in businesses related to yours. Shop around.

Clearly, it's a good idea to obtain quality legal advice well before a company gets to the point of filing a Form D. Advice in this area may extend to capital structure as well as to topics such as protection of intellectual property.

The term “financial advisor” can cover a wide range of roles, from investment banker to finder or placement agent. Issuers need to balance the cost of these services against

the value they get from being able to spend more time on management and less time on

raising capital.

The value of CPA advisory is clear to most companies when it comes to paying taxes. But making a compelling pitch to investors usually involves preparing financial data that can range from existing financial statements to financial projections. Investors appreciate it when these figures (even if they are speculative) have been professionally prepared rather than pulled out of the air.

In the marketing area, both new and established companies such as Dealflow.com are offering advertising services to firms using general solicitation. Some have recently emerged, and many more are likely to do so as the year progresses.

Marketing channel analysis: Especially when it comes to general solicitation, a variety of avenues will be employed, ranging from online portals to personal networking to road shows to social media. The mix will be different for each issuer, and the right mix may require a lot of work to find.

In the course of interviewing hundreds of issuers, Dealflow.com found many issuers who were eager to embrace new online potentialities yet unwilling to abandon traditional means of seeking investors. Clearly, some companies have succeeded in quickly meeting all of their capital needs through an online funding portal.

At the other end of the spectrum, some companies said they actually expected to source little or no capital through their posts on funding portals. Instead, they hoped to at least open the door to a new set of investors and establish an informational presence in a curated space.

Some said that establishing a post on a funding portal is an integral part of establishing legitimacy. Such a post might function as a "billboard" available to anyone, even if funding ultimately derives from road shows and personal networks. For tech companies in particular, establishing an identity on a funding portal may be an important part of creating

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

a sense of authority and authenticity -- even if this round's capital comes from previous

contacts and investors.

Issuers interested in funding portals need to consider the range of available choices. Some issuers like the idea of a portal with lots of deals, while others preferred less

populated portals whose managers have expertise in marketing specific sector investments to potential buyers. Others feel that it is helpful to list on more than one portal. Those considering multiple portals should be on the lookout for potential legal and marketing conflicts that could result. It would be best to disclose such an arrangement to all portals

involved.

Issuers will need to determine their own mix of traditional and online marketing approaches. Given the nascent status of the portal industry and its regulatory framework, issuers will do well to expect changes and be prepared to recalibrate as new services become available and new regulations come into effect.

While it's possible to run a viral marketing campaign with little overhead, legal, accounting, portal, advertising and banking charges are likely to run in the thousands or tens of thousands of dollars. The amount will of course depend on the range of services required, a range that needs to be fixed by careful consideration well in advance of filing a Form D or starting a marketing campaign. Talk to other people who have been through the process -- especially if their business is similar to yours in sector or scale.

Know what you are paying for, and get it in writing. What seems clear and distinct today may not seem so to either party months or years down the line. At the same time, carefully read all the documentation related to a service and its costs. Many business managers

have learned the hard way that it's best to put in the time up front to read all such material,

even if it seems dense and legalistic.

Well before getting to the point of signing a contract, make sure the nature of the service is clear -- as well as what one can expect it to accomplish. When it comes to results, there is a tremendous difference between paying for specific services defined by a contract and paying for access to investors or information. Expectations need to be adjusted accordingly. Obtaining access to information can prove invaluable, but issuers should not expect “guaranteed results” when purchasing access.

No one wants to pay too much, and doing so could actually lead to problems down the line. Make sure that the fees you’re paying to agents are in compliance with the law and not out of line with what you would pay a broker or agent.

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

Conclusion and Takeaways

Regulatory Background: The Rule 506(c) exemption did not exist until late in the third quarter of 2013. Yet capital raisers are already drawing on this option in financing efforts aimed at raising about $4 billion.

Online Deal Environment: Like the Rule 506(c) exemption, the social web didn’t exist in the SEC's early days of operation decades ago, and the commission is clearly wrestling with many ramifications of online commerce. Still, the SEC has opened the door to general solicitation via the Internet and traditional forms of media. Expect 2014 to see the rise of more ancillary businesses dedicated to marketing and compliance issues involving broad deal solicitation efforts. Given the adaptability that continues to characterize online commerce and social media, companies operating on the Internet will undoubtedly provide even more ways to connect companies and capital than they did in 2013.

Benefits and Drawbacks: The Rule 506(c) exemption allows companies to use general solicitation to raise any amount of capital. At the same time, issuers have to work harder to make sure deal players do not run afoul of SEC disqualification rules, and issuers must take "reasonable steps" to verify accredited investor status. In both of these areas, advisory firms will continue to spring up and provide assistance.

Rule 506(c) Deal Numbers: By the end of the year, some 300 companies were looking to raise $3.7 billion -- a number that dwarfs the aggregate value of deals on the funding portals Dealflow.com tracks. While there is undoubtedly some overlap, even the most conservative analysis would indicate that Rule 506(c) filers are seeking significantly more capital than funding portal users are seeking.

Case Studies: While many companies file for Rule 506(c) in order to develop a marketing plan around general solicitation, there are other reasons as well. Some issuers found the choice more amenable than other financing approaches, like S-1 and S-3 Filings. And at least one company canceled an IPO and then filed for a Rule 506(c) offering. Some companies preferred filing one Form D before commencing an offering rather than filing multiple Rule 506(b) forms after the close of investments made in multiple tranches.

Preparing for a 506(c) Filing: Like any other capital raising campaign, a Rule 506(c) offering requires extensive planning. At the onset, issuers need to assess their capital needs and market position with the utmost care. So much is necessary even to begin the discussion about whether a general solicitation fundraising strategy is optimal. From the earliest stages, competent and trustworthy advisors are invaluable. Finding the right advisers may take considerable time, and issuers should use every means possible to assess the capabilities of advisors. Take nothing on faith.

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

Costs and Caveats: Clearly, no one wants to pay too much for advisory services, but the appropriate cost is difficult to assess when the nature of the service is unclear. All parties to a contractual service arrangement should end negotiations with expectations on the same plane. Advisors should not offer miracles, and issuers should not expect them. But reasonable expectations should emerge on both sides of the table, which may require much time and work for all parties involved.

In closing, completing the SEC's Form D only takes a few minutes, regardless of the securities exemption being claimed. But the form itself should represent extensive research and planning on the part of an issuer, starting with the determination of capital needs. Many companies have failed because they raised capital without determining how much capital they truly needed and how it should be allocated.

The advent of general solicitation is a huge step forward for deal marketing, but like any other tool it can be used well or it can be used poorly. Here the value of advice is -- invaluable. Choosing the right advisors and deal marketers requires considerable study. Proceeding with a Rule 506(c) offering and general solicitation is an innovative and effective approach for many companies. But its appropriateness needs to be carefully arrived at, not just assumed.

As 2014 dawns as the first complete year for general solicitation, we expect many more companies to take the Rule 506(c) path, and we encourage them to rely on every resource to make the best of this decision.

Dealf low.com Raising Capital Using Rule 506(c) and General Solicitation

Dealf low.com

Raising Capital Using Rule 506(c) and General Solicitation

Disclaimers

All rights reserved. © 2013 Dealflow.com. Copying, distributing electronically by email, or duplicating this publication in any manner other than one permitted by agreement with Dealflow.com is prohibited. In this whitepaper and in our newsletters, Dealflow.com provides information and data about companies actively raising capital in reliance on the exemptions provided by Rule 506 of Regulation D of the Securities Act of 1933. We provide information to the investment community, entrepreneurs, and service providers. We are not a funding portal, hedge fund, broker-dealer or investment advisor. Dealflow.com has used reasonable effort to ensure that the information in this publication is accurate and up-to-date; however, Dealflow.com makes no representations or warranties, express or implied, relating to this information, and Dealflow.com expressly denies any liability direct or indirect, related to the accuracy or completeness of this information and to any decisions that may be made based on this information. By receiving this whitepaper you agree that Dealflow.com, nor its affiliates has liability whatsoever for any claim, expense, fee, cost or other type of loss related to or arising from use of the information, and has no obligation to correct, refresh, or update any information. This whitepaper is a general circulation publication. The information herein is not intended to be and should not be construed to be recommendations to purchase, retain, or sell securities, or investment advice with regard to the companies mentioned or advertised. Customers of Dealflow.com may be discussed or advertised in this publication. Dealflow.com, its subsidiaries, and its employees or contractors may, from time to time, purchase, own, or sell securities or other investment products of the companies discussed or advertised in this publication. The contents of this whitepaper do not constitute the solicitation or provision of legal advice. This information should not be used as a substitute for obtaining legal advice from an attorney. Securities regulation is an evolving area of the law and the information contained in this publication may be rendered out-of-date by new laws, regulations or interpretations of existing legislation. Deaflow.com™ is a trademark of DealFlow Analytics, Inc. (d/b/a Dealflow.com). Trademarks, trade names, and logos used in this publication are the property of their respective owners.

About Dealflow.com

Dealflow.com is developing software based on the collaborative collection of actively-marketed deal information. We offer insight into investment deals including operating companies, startups, investment fund interests, real estate opportunities, mergers and acquisitions, and other types of deals being marketed on the Internet. Sign up for our newsletters at Dealflow.com or call us at (516) 876-8006 to learn more.