What Constitutes General Solicitation?

General solicitation involves public marketing of a capital raise. Regulation D, Rule 506(b) forbids the use of general solicitation in securities marketing. An example of general solicitation is informing prospective investors in a news publication about an offering in its terms and giving them an invitation to invest in the securities.

Pre-existing Relationships
The evidence that general solicitation has not occurred is when there is a pre-existing relationship between a potential investor and the issuer. The relationship must be formed prior to the commencement of the securities offering to be pre-existing, or the relationship must have been established through an investment advisor or broker-dealer before either of those participated in the offering.

Generally, a pre-existing relationship must be of some substance and duration. It can develop in social settings, business settings, or other settings. The relationship must develop from real efforts to know the individual rather than just waiting a particular amount of time or going through the motions of “checking a box.”

According to the SEC’s past actions, a third-party broker-dealer may enter into a pre-existing relationship with a potential investor by sending that investor a generic document that includes enough information for the broker-dealer to evaluate the financial circumstance of the potential investor. However, this document may not refer to the issuer’s offering.

Can Engaging in General Solicitation Prevent You From Using Rule 506(b)?
Rule 506(b), Section 4(a)(2) outlines a safe harbor for businesses that adhere to particular requirements. Under this Rule and exemption, there is a prohibition from using general solicitation and other requirements, including:

  • A company must remain available to prospective investors to answer their questions.
  • Accompanies permitted to sell securities to an unrestricted number of accredited investors in addition to a maximum of 35 other non-accredited investors
  • A company’s information to accredited investors must not violate federal security anti-fraud provisions and must not include any misleading or false statements.

Rule 506 does not restrict the number of people to which an issuer may offer securities. However, general solicitation may be assumed if an issuer submits the offering to a significant number of potential purchasers, risking the issuer’s ability to use the private placement exemption.

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