What Constitutes General Solicitation?
Mihir Gandhi
Despite the fact that Title II of the JOBS Act lifted the restriction against general solicitation when it created Rule 506(c) in September 2013, many issuers are still choosing to rely on Rule 506(b) exemptions from SEC registration. The culprit is uncertainty around exactly what the SEC will consider “reasonable steps” for the accredited investor verification that is required under Rule 506(c). This has also raised more questions about what activities constitute general solicitation, which is prohibited under Rule 506(b).
Substantive, Pre-Existing Relationships
In contrast with Rule 506(c) which allows general solicitation to anyone, Rule 506(b) requires substantive, pre-existing relationships with investors. This requirement covers two areas: duration, and familiarity. Pre-existing relationships must have been in place prior to the sharing of information on the securities offering. The relationship can be between potential investor and the registered broker-dealer, the investment advisor, and/or the company offering the securities for sale. This relationship must also be sufficiently substantive as to permit the issuer to appropriately evaluate the potential investor’s sophistication and financial means.
Demo & Pitch Days
Presentations used during demo or pitch days may implicate the securities laws if there is any mention of securities being offered. If your pitch day presentation is going to discuss a specific offering, then your audience must be restricted to individuals with whom the issuer or event organizer has a previously-existing and substantive relationship.
Angel Introductions
Issuers may have existing relationships with angel investors, and these angel investors may provide introductions to new potential investors that are already within their known network, as long as a reasonable presumption exists that the new offerees in the angel investor’s network also have the required financial means and sophistication.
Just the Facts
Sharing information about an issuer’s services, products, business or financial information is not considered general solicitation that is prohibited under Rule 506(b). If, however, the information shared includes forecasts, opinions, projections or predictions about the valuation or performance of a security, this could implicate securities laws and be construed as general solicitation.
506(c) vs. 506(b)
General solicitation is permitted for securities offerings under Rule 506(c), but in exchange, issuers are required to sell only to accredited investors and they must take ‘reasonable steps’ to verify each investor’s accreditation status. Under Rule 506(b), general solicitation is not permissible, but issuers may accept up to 35 sophisticated but non-accredited investors (though generally most securities law experts advise against accepting any non-accredited investors).
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