More Questions About General Solicitation

General SolicitationThere is a lot of confusion about the SEC’s new rules that will allow, starting September 23rd, the general solicitation and general advertisement of private company securities offerings under Rule 506(c) of Regulation D.

If you want to read these final rules yourself, you can find them HERE

I received the following question the other day.

Investor Forms W-2

Do I have to review the Forms W-2 of my investors?

The answer to this is–not necessarily.  You only have to review Forms W-2, or other financial statements of your investors, if, after September 23rd, you generally solicit your offering.  You don’t have to generally solicit your offering.  Instead, you can conduct your offering in accordance with old Rule 506, now known as 506(b), which continues to prohibit general solicitation.

The potential trouble with this approach? If you are trying to conduct your offering in accordance with Rule 506(b) and you inadvertently generally solicit your offering (e.g., you tell a reporter when they call that you are raising money, and they report it), then you will have to conduct your offering in accordance with Rule 506(c).

What is General Solicitation?

The SEC doesn’t define the terms “general solicitation” or “general advertising.”  Instead, the SEC provides examples.

  1. Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and
  2. Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

The SEC has interpreted general solicitation to include posting anything on the Internet. (”The placing of the offering materials on the Internet would not be consistent with the prohibition against general solicitation or advertising in Rule 502(c) of Regulation D.”).

The SEC has also said that a general solicitation is not present when there is a “pre-existing, substantive relationship between” a startup and the persons whom it is talking to about selling its shares.

If You Generally Solicit, What You Must Do?

If you generally solicit your offering, you will have to do the following three things:

  1. You will only be able to take money from “accredited investors.”  There is no allowance for up to 35 non-accredited investors (although that allowance in offerings that are not generally solicited isn’t really very helpful in any event).  “Accredited investor” means someone with income of at least $200,000 a year for the last two years, with the expectation of the same in the year of investment, or $300,000 with spouse; or $1 million net worth excluding the investor’s primary residence.
  2. You will have to take additional steps to verify the accredited investor status of the company’s investors, and keep records that it did so.  This means reviewing Forms W-2, 1099s, etc.  This is potentially a touchy issue for angel investors.  Angel investors may balk at giving this information to a startup.
  3. You will have to make a note on its Form D that it generally solicited. The Form D is the form companies have to file with the SEC and state securities regulators announcing that they have raised money.  It is due 15 days after first sale of securities in the offering.

Conclusion

Always exercise caution when you are conducting a securities offering.  Consult with your legal counsel regularly along the way.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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