Corporate Alert: Corp Fin Issues CDIs Concerning “General Solicitation” Under Regulation D
Regulation D under the Securities Act of 1933 conditions the exemption from registration that it provides on the absence of “general solicitation or general advertising”—terms that it does not define—except in the case of certain small (i.e., under $1 million) offerings under Rule 504 and offerings solely to accredited investors whose status as such is verified by the issuer under Rule 506(c). On August 6, 2015, the SEC’s Division of Corporation Finance issued 11 new CDIs (256.23–256.33) with respect to the interpretation of “general solicitation” under Rule 502(c) of Regulation D, summarized below:
- The Division confirmed its long-standing view (first articulated in Securities Act Release No. 7233 (Oct. 6, 1995)) that use of an unrestricted, publicly available website to offer securities constitutes a general solicitation.
- An issuer may widely disseminate information not involving an offer of securities, including factual business information that does not condition the public mind or arouse public interest in a securities offering, without engaging in a general solicitation. Factual business information typically is limited (but will depend upon the facts and circumstances) to information about the issuer, its business, financial condition, products, services, or advertisements thereof, provided it is not presented in such a manner as to constitute an offer of the issuer’s securities (predictions, projections, forecasts or opinions with respect to valuation of a security, or information about past performance of a fund for a continuously offered fund would generally not constitute factual business information). Other than to clarify that certain types of information would generally not constitute “factual business information,” the new CDIs do not provide further guidance on what information or manner of presentation would constitute an “offer of securities,” stating only that “Information that involves an offer of securities through any form of general solicitation would contravene Rule 502(c).”
- The Division confirmed its view that an offer of the issuer’s securities to a person with whom the issuer (or a person acting on its behalf) has a “pre-existing, substantive relationship” does not constitute a general solicitation.
- For a relationship to be “substantive” for purposes of demonstrating the absence of a general solicitation, the issuer (or a person acting on its behalf) must have sufficient information to evaluate (and must, in fact, evaluate) a prospective offeree’s financial circumstances and sophistication in determining his or her status as an accredited or sophisticated investor. Self-certification alone (by checking a box on a questionnaire) is not sufficient.
- The Division noted that its prior guidance concerning the establishment of “pre-existing, substantive relationships” has generally been limited to relationships between registered broker-dealers and their customers. However, it is now recognizing that registered investment advisers may also be able to form such relationships with their clients as a means of demonstrating the absence of a general solicitation. The Division views the legal and fiduciary duties that broker-dealers and investment advisers owe to their customers and clients as significant in establishing the existence of a substantive relationship.
- Although the Division acknowledged that there may be facts and circumstances in which an issuer, acting through a third party other than a registered broker-dealer or investment adviser, could establish a pre-existing, substantive relationship sufficient to avoid a general solicitation, it expressed skepticism, stating that it is likely more difficult to do so in the absence of a prior business relationship or a recognized legal duty to offerees, especially with respect to an offering over the Internet. The Division cautions issuers that they may wish to consider whether conducting the offering under Rule 506(c)—which does not require the absence of general solicitation—would provide greater certainty.
- There is no minimum waiting period required for an issuer, or a person acting on its behalf, to establish that a “pre-existing, substantive relationship” with a prospective offeree exists. However, the issuer must establish such a relationship prior to the commencement of the offering, or, if the relationship was established through either a registered broker-dealer or investment adviser, prior to the time the registered broker-dealer or investment adviser began participating in the offering. A limited accommodation has been allowed for offerings by private funds that rely on the exclusions from the definition of “investment company” set forth in Sections 3(c)(1) and 3(c)(7) of the Investment Company Act, permitting an individual who qualifies as an accredited or sophisticated investor to purchase, after the end of a waiting period, securities in private fund offerings that were posted on a website platform prior to the investor’s subscription to the platform, as private fund offerings are made on a semi-continuous basis.
- Under certain circumstances, an issuer (or a person acting on the issuer’s behalf), can communicate information about an offering to persons with whom it does not have a “pre-existing, substantive relationship” without engaging in a general solicitation. The Division has acknowledged the practice where issuers and persons acting on their behalf are introduced to prospective investors who are members of an informal, personal network of individuals with experience investing in private offerings (“angel investor” groups, for example) by members who have a relationship with such issuer. 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. The CDI notes, however, that in general, the greater the number of persons without financial experience, sophistication or any prior personal or business relationship with the issuer that are contacted through impersonal, nonselective means of communication, the more likely the communications are part of a general solicitation.
- Whether participation in a demo day or venture fair constitutes a general solicitation is a facts and circumstances determination. A presentation at such an event involving an offer of a security may not constitute a general solicitation if attendance is limited to persons with whom the issuer or the organizer of the event has a “pre-existing, substantive relationship” or have been contacted through an informal, personal network as described above.
In addition, the Division issued a no-action letter to Citizen VC, Inc. on August 6, 2015, in response to Citizen’s request that the Division staff concur in its conclusion that the detailed policies and procedures established by Citizen will create a “substantive, pre-existing relationship” between Citizen and prospective investors, such that the offering and sale of interests in SPVs on its Internet site will not constitute general solicitation under Rule 502(c). In issuing the letter, the staff confirmed that the quality of the relationship between an issuer (or its agent) and an investor is the most important factor in determining whether a “substantive” relationship exists. In expressing their views, the staff noted that the relationship with new members would pre-exist any offering (consistent with its previous guidance), that a prospective member is not presented with any investment opportunity when being qualified to join the platform, and that Citizen’s policies and procedures are designed to evaluate the prospective investor’s sophistication, financial circumstances and ability to understand the nature and risks of the securities to be offered. However, despite statements that the staff concurred with the analysis contained in the request letter, the staff did not state a conclusion (e.g., that it would not recommend enforcement action if offerings were conducted as described in the request letter).
 The CDI also notes that if potential investors are invited to the presentation by the issuer or a person acting on its behalf by means of a general solicitation, and the presentation involves the offer of a security, Rule 506(c)—which does not require the absence of general solicitation—may be available if the issuer takes reasonable steps to verify that any purchaser is an accredited investor and the purchasers in the offering are limited to accredited investors.