On August 6, the Staff of the Division of Corporation Finance of the Securities and Exchange Commission (Staff) released new Compliance and Disclosure Interpretations (C&DIs) relating to “general solicitation” under Rule 502(c) of the Securities Act of 1933, including guidance as to the Staff’s position that a pre-existing, substantive relationship by an issuer or its agent with an investor is evidence that the offer and sale of securities to such investor did not involve a general solicitation. The new C&DIs also provide guidance relating to Form D (the form filed in connection with a Regulation D offering).
In the new C&DIs, the Staff provides the following guidance:
- Pre-Existing, Substantive Relationships.
- The existence of a pre-existing, substantive relationship is one way (but not the only way) of demonstrating the absence of a general solicitation in a Regulation D offering.
- A relationship is “substantive” for purposes of demonstrating absence of general solicitation when an issuer (or a person acting on its behalf) has sufficient information to, and does in fact, evaluate a prospective offeree’s financial circumstances and sophistication in order to determine if the offeree is an accredited or sophisticated investor. Self-certification alone is not sufficient.
- In addition to a broker-dealer, the Staff believes that an investment adviser registered with the SEC may be able to form a pre-existing relationship with a prospective offeree that is a client of the adviser, based on its fiduciary duty to provide suitable investment advice to its client.
- Third parties other than registered broker-dealers and investment advisers may be able to form pre-existing, substantive relationships with a prospective offeree, depending on the particular facts and circumstances. In the absence of a prior business relationship or a legal duty to offerees, it may be difficult for an issuer itself to establish a pre-existing, substantive relationship with a prospective offeree. The Staff suggests that, in this instance, an issuer may consider conducting an offering in accordance with Rule 506(c) (under which general solicitation is permitted so long as other requirements are satisfied) in order to provide greater certainty that an exemption would be available for the offering.
- A “pre-existing relationship” for purposes of demonstrating the absence of a general solicitation under Rule 502(c) is one that is formed with an offeree prior to the commencement of the securities offering or, alternatively, that was established through either a registered broker-dealer or an investment adviser prior to the broker-dealer’s or investment adviser’s participation in the offering.
- There is no minimum waiting period required for an issuer, or a person acting on its behalf, to establish a pre-existing, substantive relationship with a prospective offeree in order to demonstrate that there is no general solicitation. The issuer must have established, however, such a relationship prior to the commencement of the offering or, if the relationship was through a broker-dealer or investment adviser, prior to the broker-dealer’s or investment adviser’s participation in the offering.
- However, in the case of private fund offerings made on a semi-continuous basis, the Staff has allowed a limited accommodation for offerings by private funds that rely on specified exclusions from the definition of “investment company” set forth in the Investment Company Act. This limited accommodation permits 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.
- There are circumstances under which an issuer, or a person acting on its behalf, may communicate information about an offering to persons with whom it does not have a pre-existing, substantive relationship without involving a general solicitation. For example, the Staff acknowledges the use of networks of investors experienced in investing in private offerings, where such investors share offering information with the other members of the network and the issuer may have a relationship with one of such investors. An issuer may contact other members of such a group and be able to establish a reasonable belief that these other members of the network have the necessary financial experience and sophistication, such that it may not constitute a general solicitation.
- Issuer Information.
- Information that does not involve an offer of securities, including “factual business information” that does not condition the public for an offering, may be disseminated widely without violating Rule 502(c).
- What constitutes “factual business information” is a facts and circumstances analysis, but is typically limited to information about the issuer, its business, financial condition, products, services, or advertisement of such products or services. The information must be presented, however, in such a manner as not to constitute an offer of the issuer’s securities. Factual business information generally does not include predictions, projections, forecasts or opinions with respect to valuation of a security, nor for a continuously offered fund would it include information about past performance of the fund.
- Use of Publicly Available Websites. The use of an unrestricted, publicly available website to offer or sell securities constitutes a general solicitation.
- Demo Days and Venture Fairs. A demo day or a venture fair does not necessarily constitute a general solicitation for purposes of Rule 502(c); the determination is dependent on the facts and circumstances at issue, including as to whether a presentation involves the offer of a security.
- Form D – Sales Compensation. If the information requested on Item 12 of Form D is not applicable to its Regulation D offering because the issuer has not paid or does not expect to pay any commission or similar compensation in connection with the sale of its securities, the issuer should not enter any information in any fields under Item 12.