Investment Solicitation Laws: Everything You Need to Know
Investment solicitation laws are in place to protect you and your company when it comes to selling securities.3 min read
Updated July 10, 2020:
General Solicitation Rules
Securities laws remain relevant to a startup company, and failing to comply with the general solicitation law can cause the company to lose exemption status. The Securities Act of 1933 states that companies cannot sell securities except through a registration statement. Founders must pay attention to Regulation D and general solicitation requirements before pitching their company.
Regulation D has several aspects to it, including Rule 504, 505, and 506. Rules 504 and 505 are less common because issuers must comply with securities laws in each state where they sell the securities. Rule 506 allows a company to raise an unlimited amount of capital from accredited investors.
Regulation D doesn't specifically define general solicitation, but it does offer a few examples of prohibited solicitations:
- It prohibits advertisements published in any type of media, such as newspapers, magazines, television, radio, the Internet, and cold calls.
- It prohibits meetings whose attendees received an invitation via general advertising.
General solicitation means to publicly advertise the opening of a private company's investment round by using mass communication. This includes the following:
- Announcing that the private company is looking for investments.
- Giving specific investment details, such as the terms of the deal.
- Providing other information that investors might want to know to garner an informed decision.
Tips on General Soliciting
When you think about participating in general soliciting for your business, take these tips into consideration:
- Set up your company's investments and make sure you can generally solicit.
- Have your accounting systems and processes up and running.
- Consider the risks.
- Know the securities law, or hire a lawyer.
- Construct a general solicitation plan.
- Get the board to approve the plan.
General Solicitation Restrictions for Private Placement Issuers
The SEC issued several Compliance and Disclosure Interpretations (CDIs) in regards to general solicitation or general advertising. These CDIs help companies seeking to raise capital in private placement pertaining to Rule 506:
- If the company wants to raise capital in the short term, widely distributed communication gives the intent of generating interest. This is a type of general solicitation.
- Factual business information involves information about the issuer itself, including the general financial condition, products or services it offers, and advertising of its products or services.
- An issuer or agent can give information about securities offered to someone that he or she doesn't have a pre-existing relationship with. This is not a type of general solicitation. However, both parties should exercise caution because if the SEC finds out that there was a relationship, it will affect the general solicitation rule.
- To fulfill a legal and financial duty the investment adviser must determine that the client has financial security. The client must also have enough experience to financially invest in the issuer's securities.
- When it comes to a pre-existing relationship, the issuer must form the relationship with the potential client before he or she begins to sell the company's securities. If the two parties formed a relationship through an investment adviser or broker dealer, the relationship began before the adviser or dealer entered the process.
- There is no minimum timeframe for the issuer to form a relationship with a possible investor before he or she can begin a securities offering. However, as long as the relationship began before the securities offering, the issuer can offer securities without committing general solicitation.
- When it comes to a substantive relationship, the SEC defines it as one where the issuer has enough information to assess and does so.
- A broker dealer and investment adviser aren't the only ones who can form a substantive and pre-existing relationship with a possible investor to show the lack of general solicitation. Anyone can do so. Keep in mind that this involves the relationship between the dealer or adviser and the client rather than the realization that there is a relationship.
- It's best to avoid hosting a venture fair or demonstration day to represent general solicitation. To determine if such an event signifies general solicitation depends on several circumstances, but it mainly depends upon what you present and who is in the audience. It's better to avoid holding an event like this to err on the side of caution.
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