General solicitation rules allow companies to broadly advertise their capital raise to a wide audience via newspapers, magazines, public websites, television, radio broadcasts, and other forms of communication. This helps facilitate investment marketing to reach potential investors and inform them of the investment opportunity. However, general solicitation is not allowed in every securities exemption.
What is General Solicitation?
General solicitation is broadly defined as publicly advertising an active capital raise to a broad audience. Forms of general solicitation include communications or activities that “arouse public interest in the issuer or in its securities”.
Certain security exemptions allow general solicitation, and in others, general solicitation is not allowed. Securities offerings made pursuant to Section 4(a)(2) and Rule 506(b) of Regulation D cannot be publicly marketed.
General solicitation is permitted in certain circumstances for Regulation Crowdfunding, both tiers of Regulation A, and Rule 504 of Regulation D, and it is broadly permitted pursuant to Rule 506(c) of Regulation D. In the following sections, we will break down some of the specific general solicitation rules by securities exemption.
Rule 506(c) of Regulation D enabled general solicitation when adopted by the SEC in July 2013. This exemption allows for broad public marketing of a securities offering made pursuant to 506(c); however, issuers must take reasonable steps to confirm that all investors are accredited and meet the other applicable requirements of Rules 501, 502(a), and 502(d).
Under a public offering like regulation crowdfunding, general solicitation is permitted upon filing a Form C with the SEC. A Reg CF securities offering may be broadly advertised, but certain parameters guide the content of these communications. Issuers are not allowed to advertise the terms of the offering except in a notice that directs investors exclusively to the intermediary’s platform. Terms of the offering are defined by the SEC as the amount of securities offered, the nature and price of the securities, the closing date, planned use of proceeds, and the issuer’s current progress. Issuers can also broadly communicate “non-terms” information, such as their company mission, their product and product roadmap, quotes from founders, etc. Note that a communication can contain terms of the offering or soft non-terms information; the two cannot be included in the same communication.
Issuers planning to raise capital pursuant to Regulation A are permitted to “test the waters”, or solicit interest from the general public for a potential offering either before or after the filing of the offering statement. All solicitation materials must follow the final rules and after publicly filing the offering statement, need to contain a notice informing potential investors where and how the most current preliminary offering circular can be obtained.
Materials used to “test” the waters under public offerings like Regulation Crowdfunding and Regulation A are subject to specific conditions outlined in each rule. In general, communications must specify the issuer is considering the offering of a security, but they are not allowed to solicit or accept money for the offering. The indication of interest does not involve any obligation to invest, and no terms of the upcoming offering have been disclosed.
Types of General Solicitation
Communications that are typically considered general solicitation include, but may not be limited to:
- Mass mailings
- Email newsletters
- Social media posts
- Publicly available websites
- Newspaper and magazine advertisements
- Radio and television broadcasts
On the other hand, these communications are not typically considered to be general solicitation:
- Demo days organized by a group or entity that invite issuers to present their business to potential investors with the aim of securing investments
- Communications between the issuer and an investor with whom the issuer has a pre-existing substantive relationship, such as an individual or entity that has previously invested
The SEC defines a pre-existing relationship as one that “is formed before the start of the offering or is established through a broker-dealer or investment adviser prior to that investment professional’s participation in the offering” and a substantive relationship as one that “is formed when the entity offering securities (i.e., the company or its broker-dealer or investment adviser) has sufficient information to evaluate and evaluates a potential investor’s status as an accredited investor”.[1]
Key Considerations
It is important to be aware that all communications that fall within general solicitation must be submitted and archived with version controls to be readily accessible for a potential audit. Selling securities is a highly regulated activity, and while general solicitation rules allow for the advertisement of securities, the communication standards of the SEC must be followed. It is unlawful to make any false or misleading statements, including omitting information, about the company, the offered security, or the offering itself. Additionally, issuers should not fully rely on general solicitation to reach their funding goals. General solicitation is one way to help get more eyes on your offering but doesn’t have to be the primary method of obtaining investments.
[1] https://www.sec.gov/education/capitalraising/building-blocks/general-solicitation
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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
