SEC Staff Issues Guidance Regarding "General Solicitations" Under Regulation D
August 19, 2015
On August 6, 2015, the staff of the Division of Corporation Finance of the Securities and Exchange Commission (“SEC”) issued new Compliance and Disclosure Interpretations (“C&DIs”) relating to the meaning of “general solicitation” under Rule 502(c) of Regulation D under the Securities Act of 1933, as amended (“Securities Act”).
Specifically, the new C&DIs provide guidance regarding whether an offer of securities in a Regulation D offering by an issuer (or an agent acting on its behalf) to an investor with whom the issuer (or agent) has a pre-existing substantive relationship constitutes a “general solicitation” under Rule 502(c) of Regulation D. Rule 502(c) prohibits an issuer (or person acting on its behalf) from offering or selling securities by any form of general solicitation or advertising when conducting certain offerings in reliance upon Regulation D, including Rule 506(b) of Regulation D.
Also, the staff provided guidance on certain related issues under Regulation D, including whether the use of publicly available web sites, demo days and venture fairs constitute a general solicitation.
You will no doubt recall that, under amendments to Regulation D adopted in 2013, “general solicitations” are now permitted in private offerings under Rule 506(c), however, a condition of the new rule is that all purchasers in the offering must be “accredited investors” and the issuer is required, among other things, to take reasonable steps to verify that all purchasers are “accredited investors.”
“Pre-Existing, Substantive Relationship”
The staff provided the following guidance:
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The existence of a pre-existing, substantive relationship is one means, but not the exclusive means, of demonstrating the absence of a general solicitation in an offering pursuant to Regulation D. An offer of an issuer’s securities to the person with whom the issuer (or agent) has such a relationship would not constitute a general solicitation and would not contravene Rule 502(c).
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A “pre-existing” relationship is one that the issuer has formed with an offeree prior to the commencement of the securities offering or that was established through a registered broker-dealer or investment adviser prior to their involvement in the offering.
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There is no minimum waiting period between the date the issuer (or agent) establishes the pre-existing, substantive relationship with a prospective offeree in order to demonstrate a general solicitation is not involved. The issuer must, however, establish the relationship prior to the commencement of the offering or prior to the date the agent began its participation in the offering. Private funds relying upon the exception from the definition of “investment company” in reliance upon Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940, as amended, that conduct continuous offerings are granted a limited accommodation from this requirement. Prospective investors in such private funds who qualify as accredited or sophisticated investors may purchase, after a waiting period, securities in a private fund offering posted to a website platform prior to the investor’s subscription to the platform.
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A “substantive” relationship is one in which the issuer (or agent) has sufficient information to evaluate and does evaluate a prospective offeree’s financial circumstances and sophistication in determining his status as an accredited or sophisticated investor. Self-certification without other knowledge of a person’s financial circumstances or sophistication is not sufficient to form a “substantive” relationship.
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The staff noted that the SEC has previously stated that “staff interpretations of whether a “pre-existing, substantive relationship” exists have been limited to procedures established by broker-dealers in connection with their customers. This is because traditional broker-dealer relationships require that a broker-dealer deal fairly with, and make suitable recommendations to, customers, and, thus, implies that a substantive relationship exists between the broker-dealer and its customers. [The Commission has] long stated, however, that the presence or absence of a general solicitation is always dependent on the facts and circumstances of each particular case. Thus, there may be facts and circumstances in which a third party, other than a registered broker-dealer, could establish a “pre-existing, substantive relationship” sufficient to avoid a “general solicitation.” The C&DIs acknowledge that the staff has recognized instances where issuers have developed pre-existing substantive relationships with prospective offerees but that, in the absence of a prior business relationship or a recognized legal duty to offerees, it is more difficult for an issuer to establish a pre-existing, substantive relationship especially when contemplating an offering over the internet. Issuers would need to consider whether they (i) have sufficient information about particular offerees and (ii) whether they in fact use that information appropriately to evaluate the financial circumstances and sophistication of the prospective offerees prior to commencing the offering and should, therefore, consider whether conducting the offering under Rule 506(c) would provide greater certainty regarding the availability of an exemption.
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An issuer (or agent) can communicate information about an offering to person with whom it does not have a pre-existing, substantive relationship without having the information constitute a general solicitation where the issuer (or its agent) are introduced to prospective investors who are members of an informal, personal network of individuals with experience investing in private offerings. For example, sophisticated investors such as “angel investors” share information about offering through their network and members who have a relationship with a particular issuer may introduce the issuer to other members. Issuers that contact one or more experienced, sophisticated members of the group through this type of referral may be able to rely on those members’ network to establish a reasonable belief that other offerees in the network have the necessary financial experience and sophistication. Whether there has been a general solicitation is a fact-specific determination. The greater the number of persons without financial experience, sophistication or any prior personal or business relationship with the issuer that are contacted by an issuer (or its agent) through impersonal, non-selective means of communication, the more likely the communications are part of a general solicitation.
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Registered investment advisers may be able to form a pre-existing relationship with prospective offerees that are clients of the adviser, since they are fiduciaries and owe their clients a duty to provide only suitable investment advice. Advisers must make a reasonable determination that the investment advice provided is suitable for the client based on the client’s financial situation and investment objective such that a substantive relationship could exist.
Information That May be Disseminated by an Issuer Without Constituting a “General Solicitation”
The staff provided the following guidance:
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Information not involving an offer of securities may be disseminated widely without constituting a “general solicitation.” Factual business information that does not condition the public mind or arouse public interest in an offering is not an offer and may be disseminated widely. Information that involves an offer of securities through any form of general solicitation would contravene the “general solicitation” prohibitions of Rule 502(c).
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What constitutes “factual business information” depends on the facts and circumstances and includes information about the issuer, its business, financial condition, products, services, or advertisement of such products or services, provided the information is not presented in a manner constituting an offer of the issuer’s securities. It does not include predictions, projections, forecasts or opinions with respect to the valuation of a security, nor for continuously offered fund securities would it include information about a fund’s past performance.
Demo Days and Venture Fairs
The staff provided the following guidance:
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Generally, a demo day or venture fair does not constitute a “general solicitation” although the staff would apply a facts and circumstances test. If a presentation does not involve an offer of a security then the Securities Act would not be implicated. Moreover, where the presentation does involve the offer of a security, the demo day or venture fair would not constitute a general solicitation if, for example, the demo day or fair is limited to persons with whom the issuer or organizer has a pre-existing, substantive relationship or have been contacted through an informal personal network. If persons are invited by means of a general solicitation, however, and the presentation involves the offer of a security, the issuer may be able to rely upon Rule 506(c) if reasonable steps have been taken to verify that attendees are accredited investors and purchasers are limited to accredited investors.
Use of Unrestricted Publicly-Available Web Sites
The staff provided the following guidance:
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The use of an unrestricted, publicly-available website by an issuer (or its agent) to offer or sell securities of the issuer constitutes a general solicitation under Rule 502(c). Offering and selling securities through such a web site would be available in connection with a Rule 506(c) offering. The staff noted that Rule 506(c) would permit a general solicitation in connection with the offer and sale of securities provided certain conditions are met, including that the issuer take “reasonable steps” to verify that purchasers are accredited investors.
For more information, please contact:
Neil R.E. Carr
Direct Dial: +1 202 587 2983
neil.carr@somertons.com
Kathleen L. Cerveny
Direct Dial: +1 202 779 9507
kathleen.cerveny@somertons.com
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