For many years, the private placement exemption has made it easier for fund sponsors of all types to raise capital without the burden or costs of registering the securities they offer. The exemption comes with a variety of benefits and requirements. Meeting those requirements is imperative.

A prohibition against general advertising for your offering is one of the requirements for most private placements.

How can sponsors use the latest digital marketing strategies and techniques to raise capital and still remain compliant?

How can an expert digital agency help?

The Classic Private Placement: 506(b)

The classic private placement exemption is Rule 506(b) under SEC Regulation D. “Reg D” offers a variety of safe harbor provisions that allow for the offering of unregistered securities, as long as they’re not sold directly to unsophisticated investors. 

Rule 506(b) allows issuers to sell an unlimited amount of securities to an unlimited number of accredited investors, provided these are investors with whom the issuer has a pre-existing relationship. Sponsors can also admit up to 35 non-accredited investors subject to other requirements.

However, issuers cannot engage in any form of general solicitation or general advertising under 506(b).

A New Type of Private Placement: 506(c)

Over the years, policymakers grew concerned that private placement restrictions impaired capital formation. As a result, Congress passed the Jumpstart Our Business Startups Act or “JOBS Act” in 2012 with the goal of revitalizing small business after the financial crisis. The JOBS Act led to the creation of 506(c) private placement offerings, which permit general advertising and solicitation as long as:

1. Only accredited investors are permitted to invest, and
2. The fund sponsor takes reasonable efforts to make sure that each investor is accredited.

These “reasonable efforts” actually entail significant work, since sponsors must collect financial documents such as brokerage statements from investors that verify their status. Because of this requirement, a 506(c) offering can be more costly and labor-intensive than a classic 506(b).

As a result, many sponsors still prefer the lower-cost 506(b) structure. However, sponsors of these classic private placements are wondering how to enhance their outreach, including going online, while complying with the prohibition against general advertising.

General Advertising: No.

General Education: Only if Done Right.

The SEC has provided guidance over the years as to what constitutes general advertising, an important compliance issue for sponsors of 506(b) offerings.

The Harvard Law School Forum on Corporate Governance published a helpful summary on the topic:

“The SEC has established a number of safe harbors that expressly permit issuers to communicate certain information that does not pertain to a specific security or offering and pursuant to which such communications would not be viewed as “offers.” For example, an offeror may communicate regularly released “factual information” pertaining to an issuer’s business…”

General Solicitation and General Advertising

Bradley Berman, Gonzalo Go, and Nicole Cors,

Mayer Brown LLP

The key is not communicating specifically about the offering. Rather, a fund sponsor may be able to communicate information about their business and provide education instead.

Reaching a Broad Audience

The benefit of avoiding registration is often a mixed blessing for asset managers, as the restrictions on general solicitation and advertising can make the process of raising capital challenging.

That is why many sponsors partner with a firm like GK3 Capital to help reach a broad audience of prospective investors, but without discussing a specific offering.

Education and the Buyer’s Journey

A digital agency like GK3 Capital specializes in helping asset managers reach targeted audiences with valuable content that educates potential investors.

For example, in private real estate, GK3 Capital can create a series of blog posts, videos, and webinars that help inform advisors and their clients interested in real estate investment opportunities. Topics could be varied and range across areas of potential interest, including:

There are numerous topics a firm like GK3 Capital can address that help prospective investors better understand their options and make wiser investment decisions. While this content doesn’t specifically discuss the asset manager’s offering (to comply with 506(b)), it may relate to broad investment topics.

As an example of a successful educational program for a private placement sponsor, see our Case Study: How a Leading Fund Sponsor Cracked the RIA Market and Raised $350M (To Start).

Speaking Two Languages

One reason GK3 Capital has been able to help asset managers communicate within the restrictions of 506(b) regulations is that the team has decades of experience working in the industry, with both fund sponsors and financial advisors. The firm also has the digital skills to reach the right prospects with the right message at the right time.

This ability to speak two languages—digital and financial services—is critical in today’s competitive environment, where so many asset managers are vying for advisors’ attention. 

Involve Your Compliance and Legal Team

As a private placement sponsor, you must first seek guidance from your compliance team and legal advisers. (GK3 Capital does not provide compliance or legal advice.) Your marketing approach will be driven by the facts and circumstances of your offering and business, and the right compliance approach for you is what matters.

Keeping compliant is key because the consequences of non-compliance can be costly.

Is Your Private Placement Ready for Digital?

Forward-thinking asset managers use a digital agency like GK3 Capital to reach potential customers, establish trust, and nurture relationships.

When digital campaigns are executed effectively, the educational insights we help our clients deliver lay the groundwork for meaningful advisor and investor conversations.

For a closer look at how asset managers increasingly use digital strategies to raise assets, check out our video series, "Grow your AUM with Digital Distribution."