Major Change in Securities Laws Applicable to Startup Financings

As the SEC has adopted regulations under part of the JOBS Act, a major change in the securities laws relevant to startup companies is occurring.  Up until now, companies placing securities in reliance on the Rule 506 safe harbor exempting the company from SEC registration were prohibited from “general solicitation,” which would include newspaper, radio, television or Internet advertising of the offering.  The JOBS Act (combined with the SEC implementing regulations) removed the prohibition on general solicitation in Rule 506 offerings, as long as sales of securities are limited to “accredited investors,”  .and the company takes reasonable steps to verify that the purchasers are accredited investors.  Prior to this change, the company could just rely on an investor’s representation that he, she or it was accredited.  When relying on the new rule that permits general solicitation, companies will need to do more to verify that the investor is accredited, and the SEC has given a non-exclusive list of reasonable verification steps.   This change is part of the JOBS Act, which was driven by the changing circumstance of the ubiquity of the Internet, and is one of the more significant changes in the securities laws in the last 25 years.  There will be more changes coming soon when the SEC finalizes its regulations under other parts of the JOBS Act.  For more info on the permission for general solicitation, see