General Solicitation and Raising Capital

by | Aug 9, 2021 | Money and Finance

General solicitation is the process of publicly raising capital. There is a prohibition against general solicitation for marketing securities under Rule 506(b) of Regulation D. The SEC takes instances of general solicitation that are potentially outside of the proper process on a case-by-case basis.

Rule 506(c) and General Solicitation
Rule 506(c) has changed the process of conducting private placements. It permits issuers of securities to use general solicitation and advertising as long as they adhere to the Rule’s requirements. Although the requirements are strict, there are advantages to the issuer that utilizes Rule 506(c). It is important for issuers to understand the basic requirements of this exemption if it is to be used properly and effectively.

Some of the most important items to be aware of as an issuer that plans to offer securities under Rule 506(c) includes:

Rule 506(c) Is Strict
Rule 506(c) has strict requirements. An example is that under the Rule, making a sale to a single non-accredited investor may disqualify the issuer from using the exemption.

Accredited Investors Only
If the issuer uses general solicitation in a Rule 506(c) offering, the securities may only be sold to accredited investors.

No Bad Actors
Issuers cannot depend on Rule 506(c) if the issuer or its owners, officers, managing members, or directors who hold 20% or more of its equity securities, finders, or placement agents have been subject to certain events that disqualify unless it is able to prove it did not know and could not have known in the exercise of reasonable care about the bad actor disqualification. Only offerings conducted under Rule 506(c) apply to the bad-actor disqualification and this is regardless of whether or not the issuer uses general solicitation and advertising.

No Simultaneous Offerings Allowed
Issuers of securities are not permitted to engage in offerings under Rule 506(c) and 506(b) at the same time.

Accredited Investor Verification Is Required
Under Rule 506(c), issuers must perform reasonable steps to verify the accredited investor status of investors. The issuer must make an objective determination about the accredited status of an investor based on specific circumstances and facts.

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