SEC Issues Clarifications on General Solicitation

Earlier in the summer, the SEC issued several statements in response to inquiries about different aspects of general solicitation with respect to Regulation D (particularly Rule 506) offerings. The first statement concerned the ability of angel groups to provide a “preexisting relationship” between issuer and prospective investors for the purpose of the Reg D rules. The SEC clarified that angel investors in a particular group who may have a preexisting relationship with a company can introduce that company to other angels in the group, and rely on the group to have a reasonable belief that its members have the requisite financial sophistication necessary for some of the Reg D rules. The SEC further noted that the greater number of persons in an “angel” group without financial sophistication and the more impersonal, non-selective the methods of introduction in the group are, the more likely the SEC will be to deem such communications general solicitation.

The SEC also provided guidance with respect to demo days. The SEC’s statement clarified that as long as a pitch at a demo day did not involve an offer of a security, then the Securities Act and its regulations were not implicated. However, where any communication at a demo day could be considered to be an offer of a security or alerting persons to the potential offer of securities, the Securities Act could be implicated, and whether or not such communications at a demo day constituted general solicitation depended on the type of invitation to the event — if the event is limited to persons whom the issuer or organizer had a preexisting relationship, then it would not be considered general solicitation, but if members of the general public are invited to the event, then the communications may be deemed general solicitation.

Finally, the SEC also issued a no-action letter where it approved the use of a a password-protected website in order to permit issuers and sophisticated investors to develop a preexisting relationship prior to the offer of any securities, so that the use of a website to make an offer of securities would not constitute general solicitation.

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