General Solicitation becomes legal on September 23, allowing companies to make public announcements and public advertisements for the sale of preferred stock, convertible notes and common stock.
Section 4(a)(2) of the Securities Act provides an exception to the registration requirements for transactions “not involving a public offering”. Rule 502 of Regulation D which provides, among other things, a safe harbor for transactions to qualify under Section 4(a)(2), says that “neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising…” So what is a general solicitation? It means that an issuer has used some form of public media or made a public announcement advertising the sale of securities.
While this seems pretty straightforward, the devil is in the details, and you might be surprised to find out what constitutes a general solicitation.
Obvious General Solicitations
- “Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio.” This comes directly from Rule 502(c)(1).
- “By interpretation, the Commission has confirmed that other uses of publicly available media, such as unrestricted websites, also constitute general solicitation and general advertising.” This comes from the final SEC Regulations approving and implementing Rule 506(c) and allowing general solicitation. So, what does this mean? Issuers that advertise or post securities offering materials on their own or third-party websites that are open to the public (meaning that any web site visitor can see the advertisement for the issuer’s sale of securities) are making general solicitations by doing so. This doesn’t seem like a stretch. After all, the whole point of listing an offering on a website (whether the issuer’s own or a third party web site) is to get broad reach.
- “The elimination of the prohibition against general solicitation for a subset of Rule 506 offerings will enable issuers to solicit potential investors directly, through both physical (such as mailings, newspaper advertisements and billboards) and electronic (such as the Internet, social media, email and television) means.” Social media (such as LinkedIn, Facebook and Twitter) communications as well as email campaigns also, not surprisingly, constitute general solicitations.
Not So Obvious General Solicitations
- “Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising….” Rule 502(c)(2). What does this mean? Any “pitch day” or “demo day” event that is open to the public and advertised or announced by any public means, including an unrestricted web site, will be a general solicitation. This means that events like TechCrunch Disrupt and the Rice Alliance pitch events will be general solicitations. But wait a minute, aren’t companies doing this already? The answer is yes, and they have been in violation of Regulation D and Section 4(2) of the Securities Act, although these violations have not been enforced. It appears that one of the benefits of Rule 506(c) is to legalize certain illegal activities that are already taking place, albeit under new Rule 506(c) with greater compliance requirements.
Completely Unobvious General Solicitations…Maybe
- “An issuer that solicits new investors through a website accessible to the general public, through a widely disseminated email or social media solicitation, or through print media, such as a newspaper, will likely be obligated to take greater measures to verify accredited investor status than an issuer that solicits new investors from a database of pre-screened accredited investors created and maintained by a reasonably reliable third party.” This passage comes from the SEC release on the final 506(c) rules. Although the passage is discussing the reasonable steps issuers will need to take to verify accredited investor status when making a general solicitation (see related blog post What are Reasonable Steps to Verify Accredited Investors?), has the SEC just indicated that submitting investor materials to a database of pre-screened accredited investors, such as to angel investors on Angellist, EquityNet, Gust or similar services, is a general solicitation? Whoa, if that’s the case it’s going to be very hard for any startup technology company to ever conduct a true “private placement.” Many angel investor groups will look at potential deals only if they are submitted through Gust.
[For an update on this section, see Is Submitting Offering Materials Through Gust/AngelList/EquityNet a General Solicitation?]
So, what is a general solicitation? It looks like many communications that seem commonplace today are general solicitations. We need more guidance from the SEC. In the meantime, however, talk to your securities attorney and plan for the worst-that your transaction will involve a general solicitation.
Where to Get the Legal Documents for Offerings that Include General Solicitation
Get a term sheet for a preferred stock, convertible note, or common stock financing and the full set of closing documents for a preferred stock, convertible note, or common stock financing at VentureDocs. Beginning September 23, 2013 (the effective date of Rule 506(c) allowing general solicitation), our term sheets, stock purchase agreements and convertible note purchase agreements for the purchase of securities in reliance on Rule 506(c) will contain appropriate legends and representations and warranties for Rule 506(c) securities law compliance.