When raising capital under Regulation D, small businesses may need to find new investors to fund their operations, future growth or other strategic initiatives. The act of publicly marketing a security offering to new investors is known as General Solicitation, and until recently was banned under Regulation D filings. The SEC relaxed General Solicitation rules under the 2013 Jobs Act, but it remains important for issuers to understand what constitutes General Solicitation and how the SEC enforces it. Failure to adhere to SEC rules could result in an SEC enforcement or private lawsuits.
General Solicitation in Practice
The meaning of General Solicitation has changed since it was banned under the Securities Act of 1933 (meant to protect investors from fraudulent investment schemes). Back then, General Solicitation would include advertising an offering in a widely distributed newspaper. Today, General Solicitation includes advertising over modern communication networks such as email or via crowdfunding websites such as Kickstarter. General solicitation could even include pitching your startup or small business at an investor forum, known as “Demo Days”.
Small businesses raising capital must adhere to Rule 506(b) or Rule 506(c) of Regulation D. Both rules allow businesses to raise an unlimited amount of capital from an unlimited amount of investors. When offering securities using 506(b), issuers can only market to accredited investors that have a pre-existing relationship with the issuer. With 506(b), the issuer can also rely on certifications from the investor of their accredited status. Under 506(c) however, issuers can market their offerings publicly to accredited investors, but the issuer must take certain steps to verify an investor’s accredited status.
The SEC has a zero-tolerance policy for violating general solicitation rules, and small businesses are advised to determine ahead of time which Rule they will take advantage of. For example, if a small business general solicits but eventually only accepts money from accredited investors through which it has a pre-existing relationship, the issuer will still have run afoul of SEC rules.
If you have any questions regarding General Solicitation as it applies to Regulation D filings, we can help. At Blue Sky Filings, we take care of the entire blue sky filing process for you. If you need more information about Blue Sky Laws or to get assistance with your blue sky filings, please contact us at Blue Sky Filings by calling (844) 723-4537 or by filling out our online form.