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The Value of Relationships

Posted in JOBS Act News, Private Placements, Rule 506 Rulemaking

Maybe, given that we’re living in the age of social media with Facebook “friends” and LinkedIn contacts, it shouldn’t be all that surprising that the value of relationships may appear to have diminished.  In fact, in many discussions with clients about Rule 506(b) and Rule 506(c), conversations seem to assume that the principles of “preexisting relationships” have fallen by the wayside.

The preexisting relationship doctrine has not been eliminated by the JOBS Act or new Rule 506(c) and should remain an important consideration for issuers and their advisers when thinking about private placements and general solicitation.  Going back to basics, if one returns to the statutory private placement exemption (Section 4(a)(2)), an exempt offering has been understood to be an offering to a limited number of financially sophisticated offerees with access to information about the issuer that have some relationship to each other and to the issuer and in which no general solicitation is used. The issuer would have a preexisting relationship with its employees, vendors, suppliers, etc., as well as with existing investors.  An issuer also can establish a preexisting relationship through the efforts of others, such as a placement agent or a matchmaking site or a portal or an existing investor or an angel investor.  Indeed, the SEC Staff has provided a fair bit of guidance regarding the means by which a financial intermediary can establish a relationship with prospective investors.  The notion of a preexisting relationship really is central to thinking about what is or is not a “general solicitation.”  A communication made to individuals with whom the issuer or its agent has a preexisting relationship would not constitute a general solicitation.  Said differently, a general solicitation or general advertising would be a communication that is uncontrolled and not directed at an identified group with which the issuer or its financial intermediary has a preexisting relationship.  A group can be very large.  The notion of a preexisting relationship has never been conditioned on, or premised on, a certain “magic” number of prospective investors.  Instead, the notion of a preexisting relationship was premised on the belief that if an issuer or its financial intermediary knew the prospective investor, they would be aware of that investor’s level of sophistication, investing experience, or financial circumstances.  Also, a prospective investor with an existing relationship presumably also would be more capable of fending for himself, and also of obtaining information about the issuer and the investment opportunity.

Giving relationships their due then might well be helpful as one thinks about whether a communication or a presentation constitutes a general solicitation.