Editor’s note: Jim Verdonik is an attorney with Ward and Smith P.A. He also writes a column about business and law for American Business Journals, is a contributor to WRALTechWire, has authored multiple books and teaches an eLearning course for entrepreneurs. He is one of the best-known and most active lawyers dealing with high-tech in the Southeast.

RALEIGH, N.C. – There’s been a lot written lately about the SEC’s proposed crowdfunding rules and new Rule 506 (c).

But most of the articles don’t address the bottom line issue: Which exemption is best for most companies that are trying to raise capital?

Here’s the bottom line answer: New Rule 506 (c) provides much greater capital raising flexibility than both the proposed crowdfunding rules and traditional private placement exemptions.

Only Rule 506 (c) offerings have all the following advantages that affect your ability to communicate to a wide audience on a cost efficient basis:

  • Allow you to use social media, advertising and other solicitations with the only limit being that you are not allowed to commit fraud. Social media is a cost efficient tool for attracting investors if you know how to use it.
  • Allow maximum flexibility about what you disclose to investors and how you disclose it, subject only to the requirement that you not commit fraud.
  • Do not require financial statements that have been reviewed or audited by independent accountants no matter how much money you raise.
  • Provide an exemption from state rules that require pre-sale filings and reviews by state securities administrators, which can cause delays and extra offering expenses.
  • Allow you to raise any amount of capital.
  • Have no post-sale filing requirements other than filing Form D with the SEC and some states.

The one downside to Rule 506 (c) offerings is that you must sell only to accredited investors and take reasonable steps to verify that all your investors are accredited. See my blog post on July 18, 2013 that discusses the accredited investor verification process.

Accredited investor verification is a small price to pay for all the advantages Rule 506 (c) offerings provide.

Financial statement requirements in crowdfunding offerings and Rule 506 (b) and 505 offerings that include non-accredited investors can double or triple your capital raising expenses. Crowdfunding’s requirement that you must continue to file reports with the SEC for an indefinite time period after you raise money is also a cost burden. And you can use social media in crowdfunding offerings only if you limit yourself to a notice that is a lot like the traditional “tombstone” ads you see in the Wall Street Journal. BORING doesn’t sell in social media. In return for all these limits, the crowdfunding rules will permit you to raise small amounts of money from many investors without worrying whether the investors are accredited. That’s not a great deal compared to the short-term and long-term costs of complying with the crowdfunding rules.

So, does crowdfunding offer no benefits?

As discussed above, Rule 506 (c) offerings give you great flexibility in what you say, how you say it and what social media and other advertising and solicitation tools you use. Choices and alternatives are generally good things, but they can present problems. Using social media effectively is a skill that not every business has. If you are not effective in how you use social media, your sales effort will fail. The one stop shop approach that provides all the technology and regulatory compliance will be attractive to some people.

Some people like to do the work to renovate their own homes. Others prefer to hire a contractor to do it for them. They either lack the skills to do it themselves or they don’t have the time. For that they pay a higher price. Some people will decide to pay the SEC’s regulatory price required to use the proposed crowdfunding exemptions.

The primary benefits of crowdfunding platforms is that they will offer a clear pathway for investors and businesses to meet. This will be particularly true of crowdfunding platforms that specialize by industry. They will attract investors that are interested in that particular industry.

Think of it like cable TV channels. If you want the news, you know what channels specialize in news. The same goes for movies, history, travel and cooking. Investors seeking certain types of deals will gravitate to crowdfunding platforms that specialize in their type of deal. That’s a valuable service.

Of course, having the best of both crowdfunding platforms channel to investors and Rule 506 (c) flexibility is what most people will probably choose.

There is no reason why you have to accept the restrictions of the SEC’s crowdfunding rules to take advantage of crowdfunding platform services. If you comply with Rule 506 (c)’s accredited investor verification rules, you will be able to do Rule 506 (c) offerings through crowdfunding platforms. Indeed, until the SEC’s proposed crowdfunding rules become effective, these hybrid offerings types of offerings will be the only deals you can do through crowdfunding platforms.

Crowdfunding platforms will be one of many types of technology and marketing services people operate to facilitate 506 (c) offerings. That will allow businesses raising capital to use social media in creative ways to drive people to their crowdfunding platform offering instead of being limited to ineffective tombstone advertisements. Another benefit of combining Rule 506 (c) with crowdfunding platforms will be that you can avoid the SEC’s proposed requirement that you use only one crowdfunding platform. Rule 506 (c) contains no such restriction. So, you can use multiple channels to communicate with investors.

Combining crowdfunding technology with Rule 506(c) offerings will present some regulatory and technical challenges to the intermediaries who operate crowdfunding platforms, but it will offer many benefits to businesses raising capital.

Of course, no single exemption is best in every circumstance for every company trying to raise capital.

Here’s a table that shows the requirements for eight different offering exemptions, including proposed crowdfunding rules and traditional Rule 506 (b) offerings.

Judge for yourself which type of offering exemption gives you the best deal (by viewing the entire chart, which can be viewed online at this site.)

(C) Ward and Smith