Do 506(c) Offerings Allow General Solicitation And Advertising?
Do 506(c) Offerings Allow General Solicitation And Advertising? In prior Lawcasts in this series I have been drilling down on the question of what constitutes general solicitation and advertising for purposes of determining whether particular solicitations would require a company to rely on Rule 506(c) as opposed to 506(b) in connection with their offering. As a reminder, under Rule 506(b) sales can be made to an unlimited number of accredited investors and up to 35 unaccredited investors, and a company may rely on the investors own representation as to accreditation. In a 506(c) offering, sales are strictly limited to accredited investors and a company must take extra steps to verify accredited status – the investor cannot merely check a box or self-verify.
Also as talked about SEC interpretations and case law have established the principle that where there is a pre-existing, substantive relationship with offerees, offers will not be considered a general solicitation. A “pre-existing” relationship is one that the company, or someone acting on the company’s behalf such as through a broker-dealer or investment adviser, has formed with the prospective investor prior to the commencement of the offering. the existence of a pre-existing relationship depends on facts and circumstances. There is no set minimum amount of time that a relationship must exist to be considered pre-existing but rather it is the quality of the relationship.
A “substantive” relationship is one in which the company, or someone acting on the company’s behalf such as a broker-dealer, has sufficient information to evaluate, and in fact does evaluate, such prospective investors’ financial circumstances and sophistication and established accreditation. Self-certifying by checking a box is not enough to establish a “substantive” relationship. A process can be established to “create” pre-existing substantive relationships.
On August 3 2015 the SEC issued a no action letter to Citizen, VC related to its procedures for creating online pre-existing substantial relationships with prospective investors such that subsequent offers and sales to such investors would not constitute general solicitation and advertising under Rule 506. The SEC confirmed that Citizen VC’s procedures were effective to establish a pre-existing substantive relationship. I urge people to review the entire letter available on the SEC website, however as a summary, Citizen VC has the following procedures. Citizen VC has a publicly accessible website and potential members can initially apply for membership using a publicly available application on the website. Citizen VC only solicits its “members” for investments. Particular offering documents and offering information and information about portfolio companies are password-protected and only available to members. Citizen VC has written policies and procedures for establishing a relationship prior to accepting an applicant for membership.The specific procedures include (i) contacting the prospective member offline by telephone and having person-to-person discussions related to the prospective member’s sophistication, financial circumstances and ability to understand the nature and risks related to the types of investment Citizen VC undertakes; (ii) sending an introductory e-mail; (iii) contacting the prospective member online to answer questions; (iv) utilizing third-party credit reporting services to confirm the member’s identity and to gather additional financial information, including credit history; (v) encouraging the prospective member to explore the website and ask questions about Citizen VC’s and a particular SPV manager’s investment strategy, philosophy and objectives; and (vi) fostering both online and offline relationships between Citizen VC and the prospective member. Moreover, the prospective member is informed that offerings have a minimum investment requirement of $50,000 or higher, with many of them significantly higher. A membership application is only accepted after Citizen VC is satisfied as to the accreditation and sophistication of the potential member and as mentioned, offering are only presented to established members.
