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Use of General Solicitation and Advertising in Rule 506 Offerings

Generally, the terms “public offering” and “private offering” have the meanings that the words imply: a public offering of securities is made to hundreds or thousands of investors who may have no connection to the company, and a private offering is made to a select group of investors known to the company or its broker. Historically, private offerings made under widely-used SEC Rule 506 (part of Regulation D) were required to be completed without the use of any “general solicitation or general advertising.” However, a provision of the federal JOBS Act, enacted in 2012, blurred the lines between private and public offerings by permitting general solicitation or advertising in Rule 506 offerings, subject to conditions imposed by the SEC. The SEC has now done its imposing, establishing rules to become effective in September 2013.

Use of “Profits Interests” for LLC Equity Compensation

With limited liability companies (LLCs) having become a widely-used form of business entity for new private companies, I am often asked by LLC clients about compensating employees and other service providers in company equity.

The basic tax planning goal in setting up these equity grants is to avoid triggering an immediate tax to the recipient prior to any distribution of cash to pay this tax.  This is not a practical issue with true startup companies that have no or very limited value, since there is not a significant tax.  However, if the company does have value, and it makes a simple grant of equity to a recipient, there is taxable income to the recipient equal to the fair market value of the equity.

Use of Finders in Securities Offerings

In private securities offerings where the company does not engage an investment banker who is a registered broker-dealer to market the offering to investors, companies will often seek the assistance of so-called “finders,” who are not registered as broker-dealers, to connect the company with potential investors.  These finders are often paid a pre-determined percentage of the amount ultimately raised by the company from the investors introduced by the finder.  Though this practice is extremely common, this area of the law is very much a gray area, and there are significant risks to both the finder and the company that should be considered.

Welcome to My Blog

Welcome to the inaugural entry in my new corporate and securities law and transactions blog. The focus of this blog will NOT be a place to find exhaustive summaries of the latest SEC rule proposal or decision of the Delaware Chancery Court.  That sort of thing is covered effectively by my former brethren (and sistren) at large firms and by other legal blogs.  I will link to such summaries that I think readers will find useful.  Rather, my goal here is to provide attorneys, along with business people and other non-attorneys who work on transactions, some practical tips and thoughts on issues that I frequently come across in my practice.  I will aspire to write in what the SEC calls plain English, though you can rest assured that it will not be a good beach read.