Private Placements and General Solicitation

Most exemptions from federal securities registration prohibit general solicitation or advertising of the security. Be sure that you understand what this requirement will mean for your firm and how you can follow the law in your promotion methods.

Definition of General Solicitation

The federal law gives the following definition of “general solicitation and advertising”:

a) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio; and
b) any seminar or meeting whose attendees have been invited by any general solicitation of general advertising

Although not in existence at the time this document was written, public advertising on the internet via a website, text ads, or banner ads would be included.

Normal advertising for the company’s products and services can certainly continue during a private placement. However, a new, extraordinary advertising campaign started at the time of a private placement offering may raise the suspicions of regulators that it is intended to tie into promoting the private placement offering.

Appropriate Means of Promotion

The issuer of the offering is allowed to approach parties with whom it has a “substantial and pre-existing relationship”, such as business contacts, banks, and other institutions. In the absence of this relationship, the issuing company should tread carefully, making sure that no activities can be construed as “general solicitation”. Precedent has shown that computerized matching services meeting certain restrictions may be allowed. The best way of promoting your private placement is to work with a registered broker-dealer who brings with them their own relationships which can be solicited for investment.

Recordkeeping

No matter what methods you use, it is important to carefully document the steps you have taken to follow the law. Note what promotion methods you use and how you go about reaching out to each investor (or how each investor found your firm). Also ask each subscribing investor to sign a form to state that they were not reached through general solicitation or advertising. This recordkeeping helps to protect your interests in the case that you are accused of breaking the general solicitation stipulation, whether willfully or through negligence.

 

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Private Placements and General Solicitation
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