Recently, Craig Lewis, the Chief Economist and Director of the SEC’s Division of Economic and Risk Analysis, commented (see speech at: ) on the economic impact of various JOBS Act reforms, or the effects on “efficiency, competition, and capital formation” (ECCF).

In his remarks, Lewis notes that smaller companies may face informational frictions that may affect negatively their ability to raise capital.  Of course, smaller companies now reach investors beyond those with whom they have a pre-existing relationship through use of general solicitation in certain Rule 506 offerings or by using matchmaking services that may rely on general solicitation to reach investors.  In the future, smaller companies might be able to rely on Regulation A+ offerings to cast a wider net and conduct offerings that use general solicitation.  Presumably, these approaches lessen the informational frictions.  However, in practice, at conferences, presenters frequently note that companies that “need” to use general solicitation may be companies that are not appealing to venture or private equity funds.  This would make it sound like using general solicitation is a last resort rather than a desired approach and suggests that there is some stigma, at least within certain communities, associated with communicating more broadly.  It would be an unfortunate result to assume that companies are relegated to using general solicitation when they have run out of options or are unable to attract experienced investors.  These perceptions in fact may counter all the rational conclusions that may be reached regarding lower search costs and lessened informational frictions.

Many companies may engage a placement agent or financial intermediary that has close relationships with institutional investors, but the companies may still find it appealing to engage in communications that may be construed as “general solicitation” in order to raise awareness about their businesses.  Funds may choose to engage in a broader range of communications even if they continue to seek investments principally from high net worth individuals, family offices and institutional investors.

Many assume that if a news article discussing an issuer is published at or around the time of an offering that would necessarily constitute a general solicitation.  Over time, however, the Staff of the Securities and Exchange Commission has provided guidance on this matter–both in the context of (traditional) private offerings and also of public offerings.  Generally, one should consider whether the issuer or anyone acting on the issuer’s behalf has participated in the preparation of the article or has reviewed or approved the article.  This analysis should consider whether employees or affiliates of the issuer participated in the article.  The Staff also has considered whether an issuer provided information for inclusion in the article or paid for preparation of the article.  Of course, if it has done so, the article will be viewed as a general solicitation.  It is important to consider whether the article is being used by the issuer or its financial intermediary to offer or sell securities in a current or a prospective offering.  This last prong may be difficult to evaluate if an issuer is regularly engaged in financings.

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.

In its annual list of risks posed to investors and small businesses, NASAA once again identifies private offerings.  NASAA notes that “[f]raudulent private placement offerings continue to rank as the most common product or scheme leading to investigations and enforcement actions by state securities regulators.”  NASAA notes that the relaxation of the ban on general solicitation for certain Rule 506 offerings may increase the possibility for fraudulent practices.  In its new threats to smaller businesses, NASAA cites crowdfunding-type platforms, which may create new areas of risk for start-ups and entrepreneurs who may not be familiar with securities law requirements associated with capital raising.  Along the same lines, NASAA identifies “unregulated third party service providers,” such as portals or crowdfunding platforms that may not be regulated entities as well as unregulated entities providing investor verification services.  NASAA cautions that users should undertake careful diligence regarding service providers.  The full list is available at:

Shortly after the Securities and Exchange Commission (SEC) adopted the final rule relaxing the prohibition against general solicitation in connection with offerings made pursuant to new Rule 506(c) and Rule 144A, we provided our perspective on various interpretative questions that might arise as issuers and financial intermediaries began to avail themselves of the new offering exemption and the ability to communicate more broadly.  In this alert, we provide our views on additional questions that we have received from market participants.  To read the alert, click here.

Last Monday, the 80-year ban on the use of general solicitation in certain exempt securities offerings was relaxed. General solicitation can now be used in private offerings conducted under Rule 506(c) of Regulation D and Rule 144A under the Securities Act. While the dust has yet to settle, we have already seen several examples of how such solicitation can be conducted.

  • Email. It’s hardly a surprise that today’s most ubiquitous form of communication is being used to advertise investment opportunities to the general public. Thus far, such emails are primarily being sent to individuals with a pre-existing relationship with the sender. For example, Betaworks, a product development company, has solicited investments from its community of thousands of beta testers. Similarly, Tim Ferriss, an early investor in Facebook and Twitter, has asked the 1.4 million monthly readers of his blog to invest alongside him in his next endeavor.
  • Online Pitches. Pitches traditionally conducted behind closed doors can now be streamed online for the world to see. Flashstarts, a Cleveland-based startup accelerator, scheduled its “demo day” for last Monday so that its companies could pitch the world through a live broadcast.
  • Online Matchmaking Sites. Online matchmaking sites have been connecting companies and accredited investors for several years. However, such sites have been operating as closed communities, with investment opportunities accessible only to accredited investors registered with the site. However, as of last Monday, companies can now make investment opportunities publicly available.  There are now over 1,000 investment opportunities publicly listed on AngelList.   

After an 80-year ban on general solicitation, it will obviously take longer than a week for market norms to develop, and we’ll continue to monitor the evolving landscape.

In September 2013, the SEC’s Office of Investor Education and Advocacy issued an alert for investors relating to the SEC’s new general solicitation rules.  In addition, a second bulletin provides details on the definition of “accredited investor.”  These documents are available on the SEC’s website at the following links:

The general solicitation alert reminds investors that private placements often involve a variety of risks, including that the relevant offering documents do not typically contain the same amount of information relating to an issuer and the offering as is the case for a registered offering.  In addition, if an issuer does not take steps to verify an investor’s accredited investor status, it could be a warning sign that something isn’t quite kosher about the offering.

The SEC’s “accredited investor” bulletin is designed to help individuals determine whether they are in fact accredited investors.  The bulletin includes a few examples as to how the “net worth” test may be (or may not be) satisfied in different scenarios.

These bulletins reflect the SEC’s continuing efforts to ensure that market participants do not utilize the new rules in an inappropriate manner, and that private placement investors understand the risks of their investments.

Quite a number of collective investment vehicles, including funds, and other entities that may not be viewed by the CFTC as “operating companies” may, in the absence of specific relief or an available exemption, be a “commodity pool.”  Many entities rely on the CFTC’s Rule 4.13 de minimis exemption (given their limited use of swaps or commodity interests) from the commodity pool characterization.  Reliance on the de minimis exemption is subject to satisfaction of various conditions, including that fund interests not be offered publicly.  Is a 506(c) offering a “public offering” for purposes of this rule?  In the absence of clarification from the CFTC, many who rely on this exemption will not be able to avail themselves of the ability to use general solicitation or general advertising.

Today is a big day for issuers seeking to raise capital in private placements.  For 80 years, issuers have been constrained in their private capital raising efforts: allowed only to reach out to those potential investors with whom the issuer or the broker dealer engaged to assist with the offering have a pre-existing relationship.  Today, thanks to the JOBS Act, all that changes, as the SEC’s rules allowing issuers to generally solicit go into effect. The implication of choosing to generally solicit under new Rule 506(c) is that issuers must take reasonable steps to verify the accredited investor status of potential investors.  The new rules include a non-exclusive list of steps that an issuer can take that will be deemed to be reasonable, including reviewing documentation evidencing net income or net worth itself or engaging a regulated entity (registered broker dealer, registered investment adviser, lawyer, or CPA) to do the review on its behalf.  As a result, SecondMarket (a registered broker-dealer) is offering a general solicitation solution that allows an issuer to offload much of the administration burden involved in closing a Rule 506(c) private placement – on-boarding potential investors, verifying their accredited investor status by through manual review of documents uploaded onto our platform, electronic transaction document execution, and funds transfer.  More details and a cool presentation showing our product are available here:  At the end of the verification process, we will provide the issuer with a report for their files that certifies which investors were determined to be accredited.  We will also maintain all materials provided by investors for three years in accordance with FINRA’s books and records requirements.  As the day progresses, I am seeing a growing range of funds and startups taking advantage of the ability to publicly discuss the fact that they are raising capital.  It is so exciting to see these issuers take the first steps into previously forbidden territory!  The private placement market will never be the same.

Annemarie Tierney is General Counsel at SecondMarket Holdings, Inc.

The SEC recently approved FINRA’s rule change to permit dissemination of trade data for 144A bonds on TRACE (see:  FINRA will publish a regulatory notice within 60 days of the rule approval, which was earlier this month, providing additional details.  As we previously reported in an earlier post, the relaxation of the prohibition on general solicitation mandated by the JOBS Act made the decision to disseminate trade data for 144A deals simpler.

Certain dissemination caps (applicable now to bond deals) will apply – $5 million for Investment Grade corporate bonds and $1 million for Non-Investment Grade – to Rule 144A corporate bond transactions.   As a result, the size of a Rule 144A Investment Grade corporate bond transaction in excess of $5MM would be displayed as “$5MM+” and the size of a Rule 144A Non-Investment Grade corporate bond transaction in excess of $1MM would be displayed “$1MM+.”