Syndication and crowdfunding attorney, Gene Trowbridge, Esq. CCIM discusses whether deal sponsors may sell securities under 506b and 506c at the same time. The short answer is yes, but the deal sponsor must be very careful to avoid running afoul of the integration doctrine, which determines if the two offerings should be treated as a single offering. Doing so may result in losing your registration exemption, and risk unlawfully selling unregistered securities.
In this video, Gene explains the integration doctrine and the 5-factor test used to determine if it applies, the pertinent differences between 506b and 506c offerings, and the 2020 SEC “harmonizing” rule 152. Importantly, he concludes by describing how one may structure their dual offerings to avoid losing their securities exemptions.
The Integration Doctrine:
The integration doctrine seeks to prevent an issuer from improperly avoiding registration by artificially dividing a single offering into multiple offerings such that the Securities Act exemptions that would apply to the multiple offerings would not be available for the combined offering. Generally, this means:
An offering which starts: (1) “privately” must finish “privately” and (2) under one exemption, must finish under that exemption. There are a couple of exemptions to the general rule.
The Historic Five Factor Test:
– Part of a single financing plan
– Offer the same class of securities
– Sales of securities happen at about the same time
– Same consideration received
– Proceeds used for the same general purpose
Difference between 506b and 506:
506b:
(1) No advertising and solicitation
(2) Max 35 Sophisticated Investors. Investors self certify.
506c:
(1) Advertising and solicitation allowed
(2) No sophisticated investors accredited only. Requires third party verification to be “reasonably assured” investors are all accredited
Trowbridge Nieh LLP structures many deals that begin as a 506(b) and then transitions to a 506(c). Many issuers wonder if they can bring to market a 506(b) and 506(c) offering at the same time. The problem is that if the integration doctrine applies, then the strictest exemption is applied, in this case 506(b). Therefore, the issuer may be improperly conducting general advertising and solicitation, which could result in a loss of exemption. The issuer needs some protection from this costly mistake. This is where the 2020 SEC “harmonizing” rule 152 comes in.
What is the Harmonizing Rule?
In 2020, the SEC passed a Rule 152, which is intended to “harmonize” the integration rule. The rule states: Offers and sales will not be integrated if, based on the facts and circumstances, an exemption from registration is available for each offering. The harmonizing rule contains two key elements: (a) issuers may conduct offerings so long as rules relating to pre-existing, substantive relations for the 506(b) offering prohibiting general solicitation are followed, and (b) any offering made more than 30 days before the start or after the finish of another offer will not be integrated. Prior to Rule 152, concurrent offerings required a 90-day separation to avoid integration. The Rule 152 safe harbor cannot be used to circumvent the prohibition on general solicitation in an exempt offering. Doing so may result in losing your registration exemption, and risk unlawfully selling unregistered securities. As Gene says “that’s not good.”
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