General Solicitation

Finally! After nearly 80 years of restrictions – under Rule 506 of Regulation D and Rule 144A of the Securities Act of 1933 – startups, hedge funds, private equities and other ventures looking for investors can publicly advertise they are seeking investment for their business. There is only one problem…few entrepreneurs understand what general solicitation really means. What is worse, they are not even aware of the regulations set forth by the Securities and Exchange Commission (SEC).

My hope with this blog post is to shed some light. This way you may not – unknowingly – fail to comply with the regulations set by the SEC. These mistakes could get you banned from raising funds for an entire year, which can kill your startup from the get-go.

Quick disclosure here: I am not a lawyer and therefore I am not giving advice. Before you decide to use general solicitation, make sure you first seek legal counsel. Ok, now that the formalities are out of the way, the first step you have to take is to thoroughly understand the JOBS Act and Title II. The latter one, went into effect September 23rd, 2013.

For starters, let’s clarify what “general solicitation” means. General Solicitation simply means that now you can publicly advertise your private company’s opening of an investment round via mass communication, such as:

  • Social Media Channels (i.e. Twitter, LinkedIn, Facebook, etc.)
  • Your Own Personal or Corporate Website
  • eMail Campaigns
  • A Third-party website that clearly shows & disclaims your company is raising funds
  • YouTube or other video channels
  • Newsletters
  • Public Speaking events
  • Etc.

Things you can advertise:

  1. Your company, hedge fund, etc. is actively looking for investors
  2. Provide the details of the investment such as the deal terms
  3. Disclose any information about the company that is considered important so that investors can make an informed decision

But wait!

Before you start advertising your fund raising efforts all over offline and online media, there are a few things you must do in order to comply with the new regulations of Title II as they stand today:

1) Make sure you only allow accredited investors into the investment round: In the past, if you used the traditional Regulation D, 506(b) offering; you could have up to 35 investors you could approach…but you had to know these investors. Under the new Regulation D, 506(c) offering, only accredited investors may buy. For a summary comparison between Rule 506(b) and Rule 506(c) read my post “Crowdfunding, 506(b) and 506(c) Summary Comparison

2) Make sure you verify they are accredited investors: “Title II, Section 201(a)(1) of the JOBS Act directs the SEC to amend Rule 506 of Regulation D to permit general solicitation or general advertising provided that all purchasers of the securities are accredited investors. It also says that “such rules shall require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.” This same criteria would apply to EB-5 Immigrant Investors.

The best way to go about doing this is to hire a third-party service. It is too cumbersome for an entrepreneur to do it on his/her own. I am sure there are many services out there. I personally have dealt with ciValidator. Go to their website and click on the AIVS: Accredited Investor Verification tab (see image below). You can order the services right from their website. By the way, I am not endorsing them, I just happen to use their services.
Accredited Investors

3) Declare that you publicly advertised your offering: Under the new 506(c) regulations, you will have to file a Form D with the SEC within 15 days of receiving your first investment. For more details, you can also read the “United States: SEC Amends Rule 506 to Permit General Solicitation in Securities Offerings” published by couple of days ago.

Anyhoo…I will keep you posted as general solicitations rules and updates evolve.


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