General solicitation involves an advertising effort to publicly raise capital. Regulation D, Rule 506(b) forbids general solicitation for the purpose of advertising securities. An example of general solicitation would be for the issuer of securities to inform potential investors in the immediate publication of the terms of an offering and soliciting them to purchase securities.
Evidence General Solicitation Has Not Occurred
A relationship between the issuer and a potential investor that has existed previously indicates strongly that no general solicitation has occurred. A pre-existing relationship is one that was developed prior to the beginning of a securities’ offering or if it was formed through an investment advisor or registered broker-dealer before the investment advisor or broker-dealer participated in the offering
A pre-existing relationship may occur in various settings, including business, social, or other. Basically, a pre-existing relationship must be of some substance and duration. The relationship must be formed as a result of the genuine effort to get to know the person as opposed to waiting a certain period of time or checking a box.
When Does General Solicitation Exempt You From Utilizing Rule 506(b)?
Rule 506(b) provides for a safe harbor for companies that adhere to certain requirements. Beyond the general solicitation prohibition, the requirements of the exemption include:
- Companies must be available to answer questions from prospective purchasers.
- Information a company provides to accredited investors about itself must not include misleading or false statements and must not violate the anti-fraud terms of federal securities laws.
- Companies are permitted to sell their securities to an unlimited number of accredited investors and a maximum of 35 non-accredited investors.
Rule 506 does not restrict the number of people an issuer may offer securities to, but offers made to a large number of individuals may be accounted as general solicitation and result in the loss of the private placement exemption.
As an example, emailing every individual in your contact list, informing them that you plan to issue securities for a capital raise in the near future may be recognized as general solicitation if:
- The message was dispersed to an audience large enough to be considered public; and
- The content of the email pertained to the offering.
For information about obtaining verification of accredited investor status, contact an experienced verification service today.
