What is a General Solicitation When Selling and Marketing Securities?

What is a General Solicitation?

A General Solicitation is the act of marketing a capital raise publicly. Rule 506(b) of Regulation D prohibits the use of general solicitation to market securities. (https://www.sec.gov/fast-answers/answers-rule506htm.html)

Additionally, Rule 502(c) prohibits:

(1) Any advertisement, article, notice, or other communication published in any newspaper, magazine, or similar media or broadcast over television and radio; and

(2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

See: Equity Net

The Securities and Exchange Commission (SEC) takes a case-by-case approach when determining whether a company is engaging in general solicitation.

Prohibited communications tend to be broad-based; they are not targeted to a specific audience. A typical example of general solicitation is telling potential investors in a newspaper the terms of an offering and inviting them to purchase securities.

A pre-existing relationship between the issuer and a potential investor is strong evidence that general solicitation has not taken place. A relationship is pre-existing if it was formed before a securities offering commences, or if it was established through a registered broker-dealer or investment adviser before the registered broker-dealer or investment adviser participated in the offering.

A pre-existing relationship may arise in business, social settings, or any other context.  The general rule is that the pre-existing relationship must be of some duration and substance.  The SEC defines a substantive relationship as “[a relationship] in which the issuer (or person acting on its behalf) has sufficient information to evaluate, and does, in fact, evaluate, a prospective offeree’s financial circumstances and sophistication, in determining his or her status as an accredited or sophisticated investor.”

The relationship must be established from the actual effort to get to know the person, rather than “just checking some box” or waiting a set amount of time.

See: https://www.wealthforge.com/insights/what-constitutes-a-pre-existing-substantive-relationship-in-a-506b-offering

The SEC has stated in past no-action letters that a third-party broker-dealer may establish a pre-existing relationship with a potential investor by sending the potential investor a generic form that provides enough information for an issuer’s evaluation of the potential investor’s financial circumstances.  The generic form may not reference the offering the issuer is undertaking.

See: http://www.wnj.com/files/Publication/a941cb2d-f6db-40da-9cb0-85b44f514c70/Presentation/PublicationAttachment/ba8ac6ec-6388-4a90-b2fa cb6b5b30328d/FAQ_Regarding_the_Private_Placement_of_Securities_under_Regulation_D_Rule_506.pdf

If you are unsure of whether your company is following Regulation D or engaging in general solicitation, call Corporate Securities Legal LLP today to speak with an experienced securities lawyer.  Click this link to contact us now: https://bradshawlawgroup.com/location/contact/