Redefining General Solicitation and Advertising for Securities Offerings in the Internet and Social Media Age

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1 Presenting a live 90-minute webinar with interactive Q&A Redefining General Solicitation and Advertising for Securities Offerings in the Internet and Social Media Age Navigating Recent SEC Guidance and Other Developments TUESDAY, FEBRUARY 2, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Yelena M. Barychev, Partner, Blank Rome, Philadelphia Stanley Keller, Of Counsel, Locke Lord, Boston Richard M. Leisner, Shareholder, Trenam Law, Tampa, Fla. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

2 [This article was published in the September 2015 issue of INSIGHTS] SEC Guidance on General Solicitation Provides New Opportunities by Stanley Keller The Securities and Exchange Commission s Division of Corporation Finance recently provided helpful guidance on what activities do not involve general solicitation or general advertising 1 within the meaning of Rule 502(c) of Regulation D under the Securities Act of 1933 (Securities Act), either because those activities do not involve an offer or because there is a pre-existing, substantive relationship with the offerees. The absence of general solicitation is important in order to be able to rely on the exemption from registration under Rule 506(b) because compliance with the condition of Rule 502(c) that there be no general solicitation is an express requirement. 2 In addition, the absence of general solicitation avoids the need to comply with Rule 506(c), with its requirement to verify the status of all investors as accredited investors. Use of Rule 506(c) also forecloses the ability to sell to non-accredited investors. Moreover, although not an express requirement, the absence of general solicitation is significant for reliance on the statutory Section 4(a)(2) private offering exemption. 3 The SEC guidance takes the form of several Compliance and Disclosure Interpretations (CDIs), namely CDIs (August 6, 2015), 4 and a no action letter, Citizen VC, Inc. (August 6, 2015). 5 This guidance is significant for practitioners advising clients on permissible fundraising activities, for operators of angel investor networks, for sponsors of both physical and electronic investor platforms and for funds engaged in continuous offerings. 1 The term general solicitation is used throughout to include general advertising. 2 This condition also applies to exempt offerings under Rule 504 that are not state registered and under Rule 505. Although the guidance is focused on Rule 506 offerings, presumably it can be applied more broadly. 3 The guidance is limited to Regulation D but it should be relevant to assessing the availability of an exemption under Section 4(a)(2) of the Securities Act. Since the so-called 4(1 1/2) exemption for resales is based upon the Section 4(a)(2) exemption, the guidance also should be relevant to the exemption for private resales. 4 Avail. at 5 Avail. at

3 Importantly, the ability of certain third-parties to establish a pre-existing, substantive relationship and of issuers to rely on networks of investors to avoid general solicitation is expanded. At the same time, the SEC guidance will require reexamining some of the fundraising practices of online investor platforms that have become common. Overall, by adding clarity and expanding what is permissible, the SEC guidance helps bring the private investment world truly into the electronic age and should contribute to facilitating capital formation. Background The concept general solicitation first explicitly came into use with the adoption of Regulation D in It substituted for the prior requirement to identify the number and nature of offerees as a key basis for distinguishing a private offering from a public offering. However, the principles underlying the ban on general solicitation as elements of a private offering existed at least as far back as the U.S. Supreme Court s Ralston Purina decision 6 and even can be traced to a 1935 SEC General Counsel Letter. 7 Under these principles, the knowledge of the investor and its relationship with the issuer were key factors in establishing a private offering. 8 Regulation D does not define general solicitation but indicates in Rule 502(c) that it includes any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio or any seminar or meeting whose attendees have been invited by general solicitation. This concept was later extended to internet activity. 9 Shortly after the adoption of Regulation D, the SEC staff made clear that the existence of a pre-existing, substantive relationship negated that the investor was attracted through general 6 SEC v. Ralston Purina Co., 345 U.S. 119 (1953). 7 Letter of General Counsel Discussing the Factors to be Considered in Determining the Availability of the Exemption from Registration Provided by the Second Clause of Section 4(1), SEC Release (Jan. 24, 1935). 8 See SEC Release No (1962) (relevance of requisite association with and knowledge of the issuer ). 9 See SEC Release No (1995) and SEC Release No (2000). 2

4 solicitation 10 and indicated ways that such a relationship could be established. 11 The SEC staff subsequently indicated how the internet could be used in certain circumstances to establish the requisite relationship. 12 The new SEC guidance is an extension of this prior guidance, and recognizes developments in use of the internet and current offering practices. Guidance on General Solicitation The SEC guidance confirms and amplifies prior SEC positions on what constitutes general solicitation. It begins by confirming that the use of an unrestricted website to offer and sell securities is general solicitation (CDI ). It then identifies activities that are permissible. Offers The SEC guidance makes clear that if there is no offer of a security, there cannot be general solicitation (CDI ). Thus, providing factual business information, even if widely disseminated (for example, on a website), is not an offer if it is not used to condition the market. In the SEC s view, such information typically is limited to information about the issuer and its industry and generally does not include projections and, in the case of funds that continually offer interests, statements of past performances (CDI ) See, e.g., Mineral Lands Research & Marketing Corp. (Mar. 21, 1985); Bateman Eichler Hill Richards, Inc. (Dec. 3, 1985); E.F. Hutton & Co. (Dec. 3, 1985); and H.B. Shaine & Co. (Mar. 31, 1987). 11 E.F. Hutton & Co. and Bateman Eichler indicated that broker-dealers could establish a relationship with a customer through the account-opening process. 12 See IPONET (July 26, 1996) and Lamp Technologies, Inc. (May 29, 1997); but see AgriStar Global Networks, Ltd. (Feb. 9, 2004). See also, Michigan Growth Capital Symposium (May 4, 1995) (venture fair did not involve general solicitation) and Woodtrails-Seattle, Ltd. (Aug 9, 1982) (no general solicitation for offers to existing investors). 13 The limitation on use of projections and other forward-looking information should be read as applying in the context of determining if there has been a general solicitation and should not be read to restrict otherwise permissible activities, such as information provided in reliance on Rule

5 Pre-Existing, Substantive Relationship The SEC guidance reaffirms that there is no general solicitation if there is a pre-existing, substantive relationship with the investors (CDI ). However, it also confirms that this is only one way to avoid a general solicitation, and that a pre-existing, substantive relationship is not required for the exemption to be available. A relationship is pre-existing if it is formed prior to the offering or, if formed by a third-party such as a broker-dealer, prior to that party s participation in the offering (CDI ). A relationship is substantive if sufficient information is obtained to evaluate the person s status as an accredited or sophisticated investor (CDI ). Self-certification alone is not sufficient for this purpose. The guidance then addresses how a pre-existing, substantive relationship can be formed. Forming a Pre-Existing, Substantive Relationship Earlier SEC guidance had made it clear that a registered broker-dealer can create a relationship with an investor and then use that relationship to make an offer as placement agent for an issuer without that offer being a general solicitation. 14 This is the so-called two call rule that permits making an investor a customer with one call and then to follow up with a second call offering a specific investment opportunity. An issuer, however, ordinarily cannot create that relationship using the two-call approach, although it can have a pre-existing, substantive relationship with an investor through various other means, such as the person being an existing investor or having a business relationship as a customer or supplier. The SEC guidance expands how a pre-existing, substantial relationship can be created in several ways. First, the SEC makes clear that registered investment advisers can form the 14 See note 11, supra. 4

6 requisite substantive relationship the same as registered broker-dealers (CDI ). 15 Significantly, under certain circumstances, other third parties also can form the requisite relationship with investors, including (as discussed below) operators of angel investor networks and investor platforms. Most importantly, the SEC indicates that an issuer can rely on the relationship established by others, when that reliance is justified (CDI and ). Thus, an issuer can make offers to investors introduced by a broker-dealer or an investment adviser even if that introducing party is not acting as an agent of the issuer, as a placement agent would. In addition, depending upon the facts and circumstances, an issuer may be able to rely on investors within a network typically understood to be comprised of sophisticated investors to establish the pre-existing, substantive relationship. This network may be members of a formal angel investor organization or an informal network of persons experienced investing in private offerings. An issuer will need to take care to satisfy itself that it is entitled to rely on these arrangements and relationships in order to avoid general solicitation and establish a reasonable belief regarding the status of the investors as accredited or sophisticated. For example, it would likely be easier for an issuer to get comfortable with an established angel investor network that subscribes to a code of conduct regarding its membership 16 than it would be with an informal network of acquaintances. 17 Also of importance, the SEC makes clear that the quality of the substantive relationship is more important than any waiting period (CDI ). It has been common, although not 15 Broker-dealers have had little difficulty establishing the requisite relationship because of the information they need to obtain to satisfy their duties as regulated persons. The same is true of investment advisers. Therefore, issuers can most easily rely on relationships established with investors introduced by these regulated entities. 16 See, e.g., Angel Capital Association Member Code of Conduct, avail. at 17 The SEC staff cautions in CDI that the greater the number of persons without financial experience, sophistication or any prior personal or business relationship with the issuer that are contacted by an issuer or person acting on its behalf through impersonal, non-selective means of communication, the more likely the communications are part of a general solicitation. 5

7 universal, under the two-call approach to require a waiting period of as much as 30 days from establishing the relationship before an investor is invited to invest in a specific offering. Although a waiting period may still be useful in some situations to establish that the relationship was created before an offering or participation in an offering commenced, the SEC guidance provides that no minimum waiting period is required if a sufficient substantive relationship is created. Thus, an intermediary or platform operator may create a relationship with an investor by obtaining sufficient information about the investor and then immediately make an investment opportunity available (see the discussion of the Citizen VC letter below). As an exception to the requirement that the relationship be formed prior to the offering, the SEC, in recognition of its position in Lamp Technologies, 18 will permit a private fund (i.e., one relying on the exclusion in Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940) engaged in a continuing offering to create the relationship after the offering commenced so long as there is a reasonable waiting period before the actual investment (CDI ). Demo-Days, Pitch Events and Venture Fairs Much ink has been spent on trying to distinguish between demo-days and pitch events and figuring out where venture fairs fit. Demo-days are events where companies make presentations about their company to a group of interested persons, typically investors, but without discussing a specific financing. Pitch events are similar but with an express effort to raise money. Venture fairs are usually events sponsored by some credible organization, like a university, that can be either of the foregoing. The problem, of course, is that even demo-days are designed to raise money with discussions often taking place after the presentation or as Captain Renault said to Rick in Casablanca: I m shocked, shocked to find that gambling is going on here. 18 See note 12, supra. 6

8 The SEC guidance attempts to cut through this by providing a practical roadmap for dealing with these events, indicating that such an event does not necessarily involve a general solicitation (CDI ). First, the guidance provides that there may not be an offer at all if the presentation is appropriately structured to avoid there being an offer (as discussed above). Next, even if there is an offer, the event may not involve a general solicitation under a facts and circumstances analysis for example, if the attendees are limited to persons with whom the issuer or the event organizer has a pre-existing, substantive relationship or who have been contacted through a network that the issuer or event organizer can rely upon to create that relationship. Finally, even if the invitations to the event are widely disseminated so that there is a general solicitation, the issuer may then be able to use Rule 506(c). Some Practical Considerations Relationship of Rule 506(b) and Rule 506(c) It is ironic that at a time when general solicitation can be undertaken by using Rule 506(c), with its manageable additional verification requirement, we now have guidance that can help to avoid general solicitation and the need to use Rule 506(c), in some cases by following a more rigorous process to establish a pre-existing, substantive relationship than that which satisfies the verification requirement of Rule 506(c). However, in the securities world, things turn slowly and there has been resistance in many quarters to using Rule 506(c). 19 Some of that resistance may be justified due to the natural reluctance to undertake verification steps and to the limitation on sales to nonaccredited investors, not only in the particular offering but in any other offering that might be integrated. Consequently, the SEC guidance is helpful by providing added flexibility. In fact, it may have the effect of slowing the acceptance of Rule 506(c) by expanding 19 The SEC notes in several places in the CDIs that if the issuer cannot avoid general solicitation, Rule 506(c) may be available. 7

9 what safely can be done under Rule 506(b). There are similarities between the steps necessary to form a pre-existing, substantive relationship and those necessary to establish (i.e., have a reasonable belief ) or to verify accredited investor status. However, it is important to keep separate what is necessary to form the requisite substantive relationship to avoid general solicitation and what is necessary to establish or verify a purchaser s accredited investor status. While self-certification might not be sufficient to create a substantive relationship to avoid general solicitation, it might, depending on the circumstances, be sufficient to establish a reasonable belief that an investor is accredited. If Rule 506(c) is being used, more will be necessary to verify the investor s status as accredited, and there are specified safe harbors for natural persons that can be relied on, which also are likely sufficient to form the requisite substantive relationship. Thus, the SEC guidance on general solicitation should not change practice for dealing with accredited investor status, including under Rule 506(c). Significance for Issuers and Their Counsel The SEC guidance, as a practical matter, offers new opportunities for issuers to seek investors for Rule 506(b) offerings, as well as for Rule 504 offerings that are not state-registered and Rule 505 offerings. As noted above, it also should help when the statutory Section 4(a)(2) exemption is relied on. In addition, issuers will benefit from the increase in liquidity for their securities from the potential expansion of resale opportunities using the 4(1 1/2) exemption. These new opportunities derive mostly from the expanded permissible activities of intermediaries and the ability to rely on networks of investors without triggering general solicitation. However, use of the new opportunities will require care on the part of issuers and their counsel because the determinations necessary to avoid general solicitation will be highly 8

10 facts and circumstances dependent. This will create a special challenge for counsel in giving no registration opinions when expanded offering activities are undertaken in reliance on the guidance. In addition, issuers must realize that some of the activities that are permissible for thirdparties may not be available to them. For example, while certain third-parties may establish the requisite relationship in contemplation of a securities offering, it would be extremely difficult for an issuer to do so because of the difficulty of separating its communications from the offering. Significance for Angel Investor Networks The SEC guidance validates many of the activities angel networks and angel investor groups have engaged in with some uncertainty. It thus provides clear ground rules under which they can operate and expand their activities. This in turn will help issuers with their capital raising. In particular, the guidance will allow reliance on the vetting activities of angel investor networks in admitting members. Because issuers will have to be satisfied that they can rely on these prequalification efforts, angel investor networks should continue their rigorous vetting processes. The guidance also provides a roadmap that angel investor networks and other event sponsors can use to conduct their group activities in a way that will satisfy securities law requirements, whether they are structured as demo-days or pitch events. Significance for Private Funds Private funds have been given guidance that confirms their ability to engage in continuous private offerings using Rule 506(b) while avoiding general solicitation that would require use of Rule 506(c). Thus, a private fund can continue to establish the requisite substantive relationship even though its offering is ongoing, although in doing so it will have to 9

11 continue to impose a waiting period. On the other hand, although private funds can continue to broadly provide information about themselves without there being an offer, this information may not include reference to past performance because of concern over the promotional aspects of such information. Significance for Investor Platforms The combination of the CDI guidance and the Citizen VC letter gives operators of investor platforms a clear path for conducting their activities, especially with respect to online platforms. Citizen VC, an online investor platform, asked the SEC to confirm that it could rely on Rule 506(b) in connection with its online offering activities. Those activities involve selling interests in special purpose vehicles it forms for investing in independent private companies to investors with whom Citizen VC created a relationship by first evaluating an investor s selfcertification through an online questionnaire and then following up through various actions to obtain information sufficient to evaluate the investor s sophistication, financial circumstances and ability to understand the nature and risks of an investment. The SEC staff confirmed that these procedures were sufficient to establish a pre-existing, substantive relationship that avoided general solicitation and that the quality of that relationship was what was important. The SEC staff added that no specific waiting period or particular short form questionnaire can be relied upon solely to create such a relationship, but that whether there is sufficient information to evaluate a potential investor s financial circumstances and sophistication is dependent on the facts and circumstances. The SEC guidance could lead to an increase in the platforms that make investment opportunities available to investors, both for offerings by issuers and potentially for resales. The key benefit for investor platforms will be their ability to solicit potential investors widely to 10

12 become participants in the platform and then, once the requisite substantive relationship has been established, to be able to offer them separate investment opportunities without its being a general solicitation. 20 It should not matter whether the subsequent opportunities are for investment directly in the particular companies or, as in Citizen VC, through investment in a special purpose vehicle formed by the platform sponsor to invest in particular companies. If the quality of the substantive relationship that is established is sufficient, no waiting period would be required before investment opportunities are provided to the investor. 21 The Citizen VC letter identifies procedures that online investor platforms can follow to establish the requisite substantive relationship. It begins with an investor questionnaire to establish accredited investor status followed by several pro-active steps to create a direct relationship to evaluate the investor s financial position, sophistication and investment objectives. The request letter to the SEC provides a list of possible steps that generally include a follow up contact with the investor, giving the investor an opportunity to ask questions, some external verification and meaningful thresholds on each offering. These are not mandatory but rather provide an indication of what might be done to create the relationship. An open question is whether the traditional approach of obtaining information, typically online, about accredited investor status without further actions and then waiting a reasonable period before making an offer will still be acceptable. The CDI guidance and the Citizen VC letter put this practice, which has been followed by a number of online platforms, into question by indicating that self-certification and a waiting period alone is not necessarily enough to create 20 It is important to remember that the investors will have to qualify as accredited or sophisticated investors when actual investments are made in reliance on Rule 506(b). 21 If an investor platform does more than provide a matching service but provides investment advice, it may have to register as an investment adviser under the Investment Advisers Act of If the investor platform also effects transactions, it may have to register as a broker-dealer, and depending on the nature of its activities even as an exchange, under the Securities Exchange Act. See AngelList LLC (Mar. 28, 2013) for circumstances when brokerdealer registration was not required for an investor platform. 11

13 the requisite relationship. A clear message from the SEC guidance is that online investor platforms will have to up their game if they are to widely solicit and enroll members without engaging in general solicitation. What actions, perhaps coupled with a waiting period if the actions are not as extensive as suggested in Citizen VC, will suffice is not clear. I expect that practice will evolve, ranging from use of procedures along the lines identified in the Citizen VC letter, with no specific waiting period, to a combination of certain actions and some waiting period that will be considered acceptable. Conclusion The SEC guidance on general solicitation provides welcome flexibility for conducting exempt securities offerings while avoiding general solicitation that would require use of Rule 506(c). This flexibility will benefit issuers raising capital, validate the activities of angel investor networks and create new opportunities for online investor platforms. It also might increase liquidity for investors of restricted securities if resale platforms develop. At the same time, practices followed before by some online investor platforms can be expected to be upgraded. The SEC staff is to be applauded for taking the sensible approach reflected in the guidance and recognizing existing practices and for bringing capital raising activities into the electronic age. AM

14 Compliance and Disclosure Interpretations: Securities Act Rules 1 of 9 Section 256. Rule 502 General Conditions to be Met Question Question: An issuer conducts offering A under Rule 504 that concludes in January. Seven months later the issuer commences offering B under Rule 506. During that seven-month period, the issuer s only offers or sales of securities are made in offering C under an employee benefit plan C. Must the issuer integrate A and B? Answer: No. Rule 502(a) specifically provides that A and B will not be integrated. Rule 502(a), however, does not provide a safe harbor to the possible integration of offering C with either offering A or B. In resolving that question, the issuer should consider the factors listed in the Note to Rule 502(a). [Jan. 26, 2009] Question Question: Would simultaneous offerings by affiliated issuers, such as a corporate general partner and its limited partnership, selling their securities as units in a single plan of financing for the same general purpose be considered to be an integrated offering? Answer: Yes. See the Intuit Telecom Inc. no-action letter (Mar. 24, 1982) issued by the Division. [Jan. 26, 2009] Question Question: May the reference in Rule 502(b)(2)(ii)(A) to the annual report to shareholders for the most recent fiscal year include the annual report prepared for the previous year? Answer: Yes, provided that delivery of the annual report for the present year is not yet required under Exchange Act Rules 14a-3 or 14c-3, and the prior year s report meets the requirements of Rule 14a-3 or 14c-3. [Jan. 26, 2009] Question Question: A reporting company with a fiscal year ending on December 31 is making a Regulation D offering in February. The company has filed all the material required to be filed under Sections 13, 14 and 15(d) of the Exchange Act in the last 12 calendar months. It does not have an annual report to shareholders, an associated definitive proxy statement, or a Form 10-K for its most recently completed fiscal year. The issuer s last registration statement was filed more than two years ago. What is the appropriate disclosure under Regulation D? 6:37:18 PM]

15 Compliance and Disclosure Interpretations: Securities Act Rules Answer: The issuer may base its disclosure on the most recently completed fiscal year for which an annual report to shareholders or Form 10-K was timely distributed or filed. The issuer should supplement the information in the report used with the information contained in any reports or documents required to be filed under Sections 13(a), 14(a), 14(c) and 15(d) of the Exchange Act since the distribution or filing of that report and with a brief description of the securities being offered, the use of the proceeds from the offering, and any material changes in the issuer s affairs that are not disclosed in the documents furnished. See Rule 502(b)(2)(ii)(C). [Jan. 26, 2009] 2 of 9 Question Question: If the issuer is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, what information does Regulation D require to be delivered to non-accredited investors in a Rule 505 or 506 offering? Answer: In these types of offerings, Rule 502(b)(2)(ii) of Regulation D sets forth two alternatives for disclosure: the issuer may deliver certain recent Exchange Act reports (the annual report, the definitive proxy statement, and, if requested, the Form 10-K) or it may provide a document containing the same information as in the Form 10-K or Form 10 under the Exchange Act or in a Form S-1 or Form S-11 registration statement under the Securities Act. In either case, the rule calls for the delivery of certain supplemental information. [Jan. 26, 2009] Question Question: Under Rule 502(b)(2)(iii), an issuer that must provide a disclosure document, whether it is a reporting or non-reporting issuer, is required to identify and make available those exhibits that would accompany the registration form or report upon which the disclosure document is modeled. Does a Regulation D issuer have to make available an opinion of counsel as to the legality of the securities being issued and, if there are representations made as to material tax consequences, a supporting opinion of counsel regarding such tax consequences? Answer: Yes. [Jan. 26, 2009] Question Question: In an offering under Regulation D, must the opinion of counsel regarding the legality of the issuance of the securities contain an opinion as to whether the issuer has a valid claim to the Regulation D exemption? Answer: No. [Jan. 26, 2009] Question Question: What type of information specified in Rule 502(b)(2) is an issuer required to furnish for any corporate general partner in a Regulation D offering where the issuer is a limited partnership? Answer: The issuer should furnish for any corporate general partner an audited balance sheet as of the most recently completed fiscal year. [Jan. 26, 2009] Question :37:18 PM]

16 Compliance and Disclosure Interpretations: Securities Act Rules Question: Under Rule 502(b)(2)(i)(B)(2) and (3), if a limited partnership issuer cannot obtain the required financial statements for a Regulation D offering without unreasonable effort or expense, it may provide tax basis financials. Do these provisions also apply to the financial statements required in a Regulation D offering for general partners as well as properties to be acquired? 3 of 9 Answer: Yes. [Jan. 26, 2009] Question Question: What are the information delivery requirements under Rule 502(b) for an investment company excluded from registration by virtue of Section 3(c) of the Investment Company Act of 1940 that sells securities to non-accredited investors relying on Rule 506? Answer: Such a company must furnish to non-accredited investors, to the extent material to an understanding of the company, its business, and the securities being offered: the same kind of non-financial information as would be required in a registration statement under the Securities Act for a registered investment company on a form that it would be entitled to use if it were registering the offering under the Securities Act, such as a registration statement on Form N-1A, or Form N-2; and financial statement information equivalent to that required of operating companies under Rule 502(b)(2)(i)(B). [Jan. 26, 2009] Question Question: May an issuer of securities provide the disclosure required by Rule 502(b) by means of electronic delivery, such as an message with electronic attachments? Answer: Yes. Rule 502(b) requires only that the disclosures be furnished. It contains no requirement that the disclosures be provided or delivered using a particular medium. The Commission s views regarding the use of electronic delivery are provided in Securities Act Release No (Apr. 28, 2000). [Jan. 26, 2009] Question Question: An issuer furnishes potential investors a short form offering memorandum in anticipation of actual selling activities and the delivery of an expanded disclosure document later. Does Regulation D permit the delivery of disclosure in two installments? Answer: So long as all the information is delivered a reasonable amount of time before sale, the use of a fair and adequate summary followed by a complete disclosure document is permitted under Regulation D. Disclosure in such a manner, however, should not obscure material information. [Jan. 26, 2009] Question Question: Under Rule 502(b)(2)(i)(B), for a non-reporting issuer that has been formed with minimal capitalization immediately before a Regulation D offering, must the Regulation D disclosure document contain an audited balance sheet for the issuer? 6:37:18 PM]

17 Compliance and Disclosure Interpretations: Securities Act Rules Answer: In analyzing this or any other disclosure question under Regulation D, the issuer starts with the general rule that it is obligated to furnish the specified information to the extent material to an understanding of the issuer, its business, and the securities being offered. Thus, in this particular case, if an audited balance sheet is not material to the investor s understanding, then the issuer may elect to present an alternative to its audited balance sheet. [Jan. 26, 2009] 4 of 9 Question Question: Rule 501(b)(2)(ii)(B) refers to the information contained in a registration statement on Form S-1. Does this requirement envision delivery of Parts I and II of the Form S-1? Answer: No, only Part I. [Jan. 26, 2009] Question Question: May a Canadian issuer filing under the MJDS use its most recent filing on Form 40-F, F-9 or F-10 to satisfy the information requirements of Rule 502(b)? Answer: Yes. Although Rule 502(b)(2)(ii)(D) permits a foreign private issuer to use its most recent Form 20-F or Form F-1 to meet Rule 502 s information requirements, but does not mention the MJDS forms, an MJDS filer may use its most recent filing on Form 40-F, F-9 or F-10 to satisfy Rule 502(b) s information requirements. [Jan. 26, 2009] Question Question: Does Rule 502(c), which prohibits general solicitation and general advertising in connection with the offer and sale of securities, bar product advertising? Answer: Rule 502(c) does not bar product advertising, although such advertising is not permitted under the rule when it involves the solicitation of an offer to buy a security. Whether or not particular product advertising constitutes a solicitation in contravention of Rule 502(c) depends on the facts and circumstances. [Jan. 26, 2009] Question Question: A reporting company proposes to offer securities under Regulation D. Because of the size and price of the offering, the company feels compelled by Section 10(b) of the Exchange Act to issue a press release discussing the offering. Would such a press release by the issuer constitute general solicitation or general advertising, activities which are not permitted by Rule 502(c) in connection with most Regulation D offerings? Answer: The company should refer to the Rule 135c safe harbor for reporting issuers giving notice of proposed unregistered offerings. [Jan. 26, 2009] Question Question: If a solicitation were limited to accredited investors, would it be deemed in compliance with Rule 502(c)? Answer: The mere fact that a solicitation is directed only to accredited investors will not mean that the solicitation is in compliance with Rule 502(c). Rule 502(c) relates to the nature of the offering, not the nature of 6:37:18 PM]

18 Compliance and Disclosure Interpretations: Securities Act Rules the offerees. [Jan. 26, 2009] 5 of 9 Question Question: An issuer is preparing a private placement in reliance on Rule 506. The offering will require the issuance of more than 20% of the outstanding stock of the corporation, triggering an NYSE shareholder approval requirement. Thus, the issuer must file a proxy statement at the same time as the beginning of the offering. At the time of filing the proxy statement, the offering will not be subscribed. Would the information about the private placement required in the proxy statement by the NYSE rule and Item 11 of Schedule 14A violate the ban on general solicitation in Rule 502(c)? Answer: The issuer may seek to rely upon the safe harbor in Rule 135c when filing the proxy statement with the Commission that includes information about the private placement as required by the NYSE rule and Item 11 of Schedule 14A. If the proxy statement disclosure about the private placement does not satisfy the requirements of Rule 135c(a), then the disclosure will violate the ban on general solicitation in Rule 502(c). In general, issuers should be mindful that, unless the closing of the offering and the solicitation of shareholder votes are timed correctly, the information about the private placement included in the proxy statement could be viewed as conditioning the market for the securities offered in the private placement. [Jan. 26, 2009] Question Question: An investor in a Regulation D offering wishes to resell the securities within three months after the offering. The issuer has agreed to register the securities for resale. Will the proposed resale under the registration statement violate Rule 502(d)? Answer: No. The function of Rule 502(d) is to restrict the unregistered resale of securities. Where the resale will be registered, however, such restriction is unnecessary. [Jan. 26, 2009] Question Question: A "private" money market fund undertakes to comply with Rule 2a-7 under the Investment Company Act in order to permit registered investment companies to invest in the fund under Rule 12d1-1 under the Investment Company Act in excess of the limits set forth in Section 12(d) of the Investment Company Act. Pursuant to Rule 2a-7(c)(12), a "private" money market fund is required to post monthly on its publicly available web site specific information about securities in its portfolio as well as the weighted average maturity and weighted average life maturity of its portfolio. Would compliance with the conditions of this web posting requirement cause the fund to violate the prohibition on general solicitation and advertising in Rule 502(c) under the Securities Act? The fund relies on the exception provided in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act to the definition of "investment company" in Section 3(a) of that Act. Sections 3(c)(1) and 3(c)(7) both require that a fund not make or propose to make a public offering of its securities. Answer: The fund will not be deemed to violate the prohibition on general solicitation and advertising by posting information on its web site in compliance with Rule 2a-7 for purposes of permitting registered investment companies to invest in the fund under Rule 12d1-1 in excess of the limits set forth in Section 12(d) of the Investment Company Act, so long as the fund posts only the information required by the rule and does not use its 6:37:18 PM]

19 Compliance and Disclosure Interpretations: Securities Act Rules web site to offer or sell securities or in a manner that is deemed to be general solicitation or advertising for offers or sales of its securities. [Aug. 11, 2010] 6 of 9 Question Question: If an acquiror seeks written consents from the target s shareholders, which include non-accredited investors, to approve a business combination transaction involving the issuance of securities in reliance on Rule 505 or 506 of Regulation D, when must the financial statement and other information specified in Rule 502(b)(2) be provided to those target shareholders that are non-accredited investors? Answer: Rule 502(b)(1) requires such information to be delivered to nonaccredited investors in a reasonable amount of time prior to sale. The delivery of a written consent constitutes the sale of securities in an offer conducted in reliance on Rule 505 or 506. Accordingly, to comply with the timing requirement set forth in Rule 502(b)(1), an acquiror issuing securities in a Rule 505 or Rule 506 offering must provide the disclosure required by Rule 502(b)(2) to non-accredited investors in a reasonable amount of time prior to obtaining any written consents from them. [May 16, 2013] Question Question: Rule 502(c) prohibits an issuer or any person acting on the issuer s behalf from offering or selling securities by any form of general solicitation or general advertising when conducting certain offerings in reliance on Regulation D. Does the use of an unrestricted, publicly available website to offer or sell securities constitute a general solicitation for purposes of Rule 502(c)? Answer: Yes. As the Commission stated in Securities Act Release No (Apr. 28, 2000), the use of an unrestricted, publicly available website constitutes a general solicitation and is not consistent with the prohibition on general solicitation and advertising in Rule 502(c) if the website contains an offer of securities. However, Rule 506(c) which does not require compliance with Rule 502(c) may be available to issuers when offering or selling securities through unrestricted, publicly available websites or other forms of general solicitation. [August 6, 2015] Question Question: What information can an issuer widely disseminate about itself without contravening Rule 502(c)? Answer: Information not involving an offer of securities may be disseminated widely without violating Rule 502(c). For example, factual business information that does not condition the public mind or arouse public interest in a securities offering is not an offer and may be disseminated widely. Information that involves an offer of securities through any form of general solicitation would contravene Rule 502(c). [August 6, 2015] Question Question: What is factual business information? Answer: What constitutes factual business information depends on the facts and circumstances. Factual business information typically is limited to information about the issuer, its business, financial condition, products, 6:37:18 PM]

20 Compliance and Disclosure Interpretations: Securities Act Rules services, or advertisement of such products or services, provided the information is not presented in such a manner as to constitute an offer of the issuer s securities. Factual business information generally does not include predictions, projections, forecasts or opinions with respect to valuation of a security, nor for a continuously offered fund would it include information about past performance of the fund. (Release No ). [August 6, 2015] 7 of 9 Question Question: Does an offer of securities in a Regulation D offering to a prospective investor with whom the issuer, or a person acting on the issuer s behalf, has a pre-existing, substantive relationship constitute a general solicitation in contravention of Rule 502(c)? Answer: No. The existence of such a pre-existing, substantive relationship is one means, but not the exclusive means, of demonstrating the absence of a general solicitation in a Regulation D offering. See Securities Act Release No (Mar. 15, 1989), at fn. 12. Accordingly, an offer of the issuer s securities to the person with whom the issuer, or a person acting on its behalf, has such a relationship would not constitute a general solicitation and, therefore, would not be in contravention of Rule 502(c). [August 6, 2015] Question Question: Are there circumstances under which an issuer, or a person acting on the issuer s behalf, can communicate information about an offering to persons with whom it does not have a pre-existing, substantive relationship without having that information deemed a general solicitation? Answer: Yes. The staff is aware of long-standing practices where issuers and persons acting on their behalf are introduced to prospective investors who are members of an informal, personal network of individuals with experience investing in private offerings. For example, we acknowledge that groups of experienced, sophisticated investors, such as angel investors, share information about offerings through their network and members who have a relationship with a particular issuer may introduce that issuer to other members. Issuers that contact one or more experienced, sophisticated members of the group through this type of referral may be able to rely on those members network to establish a reasonable belief that other offerees in the network have the necessary financial experience and sophistication. Whether there has been a general solicitation is a fact-specific determination. In general, the greater the number of persons without financial experience, sophistication or any prior personal or business relationship with the issuer that are contacted by an issuer or persons acting on its behalf through impersonal, non-selective means of communication, the more likely the communications are part of a general solicitation. [August 6, 2015] Question Question: Is someone other than a broker-dealer able to form a preexisting, substantive relationship with a prospective offeree as a means of establishing that a general solicitation is not present in a Regulation D offering? Answer: Yes. We believe investment advisers registered with the Securities and Exchange Commission may be able to form a pre-existing relationship with prospective offerees that are clients of the adviser. As fiduciaries, such advisers owe their clients the duty to provide only suitable investment 6:37:18 PM]

21 Compliance and Disclosure Interpretations: Securities Act Rules advice. To fulfill the obligation, an adviser must make a reasonable determination that the investment advice provided is suitable for the client based on the client s financial situation and investment objective, such that a substantive relationship could exist. [August 6, 2015] 8 of 9 Question Question: What makes a relationship pre-existing for purposes of demonstrating the absence of a general solicitation under Rule 502(c)? Answer: A pre-existing relationship is one that the issuer has formed with an offeree prior to the commencement of the securities offering or, alternatively, that was established through either a registered broker-dealer or investment adviser prior to the registered broker-dealer or investment adviser participation in the offering. See, e.g., the E.F. Hutton & Co. letter (Dec. 3, 1985). [August 6, 2015] Question Question: Is there a minimum waiting period required for an issuer, or a person acting on its behalf, to establish a pre-existing, substantive relationship with a prospective offeree in order to demonstrate that a general solicitation is not involved? Answer: No. While there is no minimum waiting period, the issuer must establish such a relationship prior to the commencement of the offering, or, if the relationship was established through either a registered broker-dealer or investment adviser, the relationship must be established prior to the time the registered broker-dealer or investment adviser began participating in the offering. The staff, however, has allowed a limited accommodation for offerings by private funds that rely on the exclusions from the definition of investment company set forth in Sections 3(c)(1) and 3(c)(7) of the Investment Company Act. This limited accommodation permits an individual who qualifies as an accredited or sophisticated investor to purchase, after the end of a waiting period, securities in private fund offerings that were posted on a website platform prior to the investor s subscription to the platform, in view of the fact that private fund offerings are made on a semicontinuous basis (quarterly or annually). See the Lamp Technologies, Inc. letter (May 29, 1997). [August 6, 2015] Question Question: What makes a relationship substantive for purposes of demonstrating the absence of a general solicitation under Rule 502(c)? Answer: A substantive relationship is one in which the issuer (or a person acting on its behalf) has sufficient information to evaluate, and does, in fact, evaluate, a prospective offeree s financial circumstances and sophistication, in determining his or her status as an accredited or sophisticated investor. Self-certification alone (by checking a box) without any other knowledge of a person s financial circumstances or sophistication is not sufficient to form a substantive relationship. [August 6, 2015] Question Question: Can anyone other than registered broker-dealers and investment advisers form a pre-existing, substantive relationship with a prospective offeree as a means of establishing that a general solicitation is not involved in a Regulation D offering? Answer: Yes. The Commission has stated that: 6:37:18 PM]