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General solicitation - what you need to know


Simply put general solicitation is an act of marketing capital raise publicly, but things are mot that simple. General solicitation is not precisely defined in statues and rules so Securities and Exchange Commission (SEC) takes case by case approach in case of violation "no general solicitation' requirement of Rule 506(b).

It all started with JOBS Act in 2012, with purpose to make securities regulations friendlier form small businesses. General solicitation was banned since 1933 and Securities Act of 1933 in order to protect investors from scams and frauds. The Jobs Act required from SEC to amend existing and create new exemptions that will permit issuers of securities to raise capital without SEC registration. On July 19, 2013 SEC adopted amendments to Rule 506 of Regulation D. Another Rule of the same regulation, 506(b) provided issuer with conditions to rely on in order to met requirements of Section 4(a)(2) of Securities Act that exempts from registration "transactions by an issuer not involving any public offering".One of the requirements under Rule 506(b) is ban on general solicitation. General solicitation includes advertisement published in newspapers and magazines, public websites, broadcast over television or radio or seminars and meetings whose attendees have been invited by any general solicitation or advertising. Any attempt to "condition the market, in an interview for example is also considered solicitation. In no-action letter SEC stressed the importance of pre-existing relationships with potential investors as a key indicator in determining whether communication is general solicitation.

Paragraph c is added to Rule 506 to implement Section 201(a) which permits issuers to generally solicit and advertise an offering but only if all purchasers in the offering are accredited investors, the issuer takes reasonable steps to verify the purchasers accredited investor status and if certain other conditions of Regulation D are satisfied. Accredited investor must have annual income of $200.000 or net worth of $1 million or entity such as bank, corporation or trust whose assets exceed $5.000.000 in value. Issuer must take reasonable steps to verify accredited investor status  and consider: the nature of the purchaser and type of accredited investor he claims to be, amount and type of information that issuer has about purchaser and nature of the offering  (how purchaser was solicited, minimum investment amount etc.) Rule 506(c) includes non-exclusive list of verification method that issuer may but is not required to use.
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