United States: Avoiding Relationship Drama In Capital Raising: SEC Staff Issues New Guidance On General Solicitation

Last Updated: November 16 2015
Article by Nova D. Harb and David H. Pankey

On August 6, 2015, the Securities and Exchange Commission (SEC) staff issued important guidance concerning general solicitation and general advertising (collectively, general solicitation), including the use of online platforms by an issuer conducting a private placement. This guidance is contained in a no-action letter and in SEC staff Compliance and Disclosure Interpretations (CDIs) as explained below. The guidance includes discussion of investor networks, such as angel groups, and demo days, and the potential impact of offerings involving these types of networks or events.

The Importance of Understanding General Solicitation in Private Placements

Rule 506 of Regulation D under the Securities Act of 1933, as amended (Securities Act) is the most popular exemption from federal securities registration relied upon to raise capital in the U.S.1 There are two types of Rule 506 private placements:

  • Traditional private placements under Rule 506(b) – in which up to 35 non-accredited investors and an unlimited number of accredited investors can participate. General solicitation is prohibited in traditional private placements under Rule 502(c).2
  • Advertised private placements under Rule 506(c) – in which only accredited investors may participate and in which general solicitation is permitted. Issuers are required to take reasonable steps to verify the accredited investor status of purchasers in advertised private placements.

While general solicitation is allowed in advertised private placements, many issuers prefer not to conduct the required accredited investor verification for these types of offerings. Accordingly, traditional private placements continue to be the much more frequent choice for raising capital.

Because of the extensive use of the Internet today and the possibility that the use of a website, or online platform, may involve general solicitation, it is crucial for issuers conducting a traditional private placement to avoid actions that might involve general solicitation. For example, the use of an unrestricted website to offer a security involves general solicitation. See CDI 256.23. Accordingly, it is important for issuers to use websites in a way that does not involve general solicitation if the issuer intends to offer securities in a Rule 506(b) private placement.

Factual business information that does not condition the "public mind" or arouse public interest in a securities offering is not an offer and does not violate the general solicitation rules. See CDI 256.24. What constitutes factual business information depends on the specific facts and circumstances. Factual business information typically is limited to information about the issuer and its business, financial condition, products or services, or the advertisement of such products or services (as long as the information is not presented in a manner that constitutes an offer of securities). See CDI 256.25.

Factual business information generally does not include predictions, projections, forecasts or opinions with respect to valuation of a security. For a continuously offered private investment vehicle, information about the past performance of the fund would not be considered factual business information.

Pre-existing Substantive Relationship

An offer to a potential investor with whom the issuer has a pre-existing substantive relationship (PSR) does not involve general solicitation. See CDI 256.26. This interpretation confirms existing guidance. 3

A sufficient PSR needs to be both:

  • pre‑existing; and
  • substantive.

A PSR is one way, but not the exclusive way, to demonstrate the absence of general solicitation.

Pre-existing – A relationship is pre-existing if it was formed by the issuer with an offeree before the start of a securities offering or was established through either a registered broker-dealer or investment adviser before the participation of that registered broker-dealer or investment adviser in the offering. 4 See CDI 256.29.

There is no specific duration of time that can be relied upon solely to create a PSR. This guidance is a change from previous interpretations by various market participants, which relied upon the expiration of a specific waiting period based on the Lamp Technologies, Inc. SEC no-action letter (available May 29, 1997). Lamp involved a 30-day "waiting period" before a subscriber could invest in an offering.

A limited accommodation has been recognized by the SEC staff in the case of a semi-continuous offering by a private fund, where the relationship will be pre-existing if a prospective investor qualifies as accredited or financially sophisticated and the purchase is made after the end of a waiting period. See CDI 256.30.

Substantive – A relationship is substantive if the issuer (or a person acting on behalf of the issuer) has sufficient information to evaluate, and does in fact evaluate, a prospective offeree's financial circumstances and sophistication in determining his or her status as an accredited or sophisticated investor. See CDI 256.31. The quality of the relationship between the issuer (or its agent) and the investor is the most important factor in determining whether a substantive relationship exists.

Self-certification alone (by checking a box), without any other knowledge of a person's financial circumstances or sophistication, is not enough to establish a "substantive" relationship. The SEC staff has made it clear that there is no particular short-form accredited investor questionnaire that can be relied upon to create a PSR by itself.

Whether an issuer has sufficient information to evaluate, and does in fact evaluate, a prospective investor's financial circumstances and sophistication depends on the specific facts and circumstances.

Procedures to Establish a PSR

Several previous no-action letters have discussed procedures that might be used in various types of offerings to form a PSR. The SEC's recent Citizen VC, Inc., no-action letter (August 6, 2015) describes procedures that can be used by an issuer to establish a PSR, and accordingly avoid conducting a general solicitation, when using an online platform. While the no-action letter acknowledges the requester's representation that the procedures described in the no-action request letter (and summarized below) are designed to evaluate a prospective investor's sophistication, financial circumstances and ability to understand the nature and risks of the securities offered, the SEC staff notes that whether an issuer has sufficient information to evaluate, and does in fact evaluate, the prospective investor's financial circumstances and sophistication will depend on the specific facts and circumstances.

Context – The following description forms the context for the SEC's Citizen VC no-action letter guidance. The platform sponsor runs a website (Site) which is generally available to the public on the Internet. People who qualify under the procedures described below are admitted to the restricted (password-protected) part of the website, where they can explore investment opportunities in specifically identified portfolio companies.

Investments would be made through the purchase of interests in special purpose vehicles (SPVs) formed by the platform sponsor to pursue investment opportunities in particular portfolio companies if enough persons having access to the restricted part of the Site express interest in such portfolio companies. The SPVs would be managed by an affiliate of the platform sponsor (Manager).

As the first step, all prospective investors will be required to complete a generic online "accredited investor" questionnaire. Once a prospective investor has completed the online questionnaire and the platform sponsor has evaluated the investor's self-certification of accreditation, the platform sponsor initiates a "relationship establishment period."

The Relationship Establishment Period – During the relationship establishment period, the platform sponsor would undertake various actions to connect with the prospective investor and collect information it deems sufficient to evaluate the prospective investor's sophistication, financial circumstances, and ability to understand the nature and risks related to an investment in the program run by the platform sponsor.

These activities include:

  1. contacting the prospective investor offline by telephone to introduce representatives of the platform sponsor and to discuss the prospective investor's investing experience and sophistication, investment goals and strategies, financial suitability, risk awareness, and other topics designed to assist the platform sponsor in understanding the investor's sophistication;
  2. sending an introductory email to the prospective investor;
  3. contacting the prospective investor online to answer questions it may have about the platform sponsor, the Site and potential investments;
  4. using third-party credit reporting services to confirm the prospective investor's identity, and to gather additional financial information and credit history information to support the prospective investor's suitability;
  5. encouraging the prospective investor to explore the Site and ask questions about the Manager's investment strategy, philosophy and objectives; and
  6. generally fostering interactions both online and offline between the prospective investor and the platform sponsor.

The platform sponsor would provide the prospective investor access to the password-protected sections of the Site after the platform sponsor is satisfied that (i) the prospective investor has sufficient knowledge and experience in financial and business matters to enable it to evaluate the merits and risks of the investment opportunities on the Site, and (ii) the platform sponsor has taken all reasonable steps it believes necessary to create a substantive relationship with the prospective investor.

In other words, the offering of interests in an SPV would take place only after qualification of the prospective investor.

It should be noted that in this model, the platform sponsor creates SPVs for investment in specified portfolio companies and not as blind pools for future unidentified investment opportunities. Also, importantly, no-action relief is limited to the requester and the specific facts and circumstances set forth in the request.

Investor Networks

One of the CDIs specifically deals with angel investors and other investor networks. See CDI 256.27. This CDI acknowledges that groups of experienced, sophisticated investors, such as angel investors, share information about offerings through their network and members who have a relationship with a particular issuer may introduce that issuer to other members. The SEC staff takes the view that issuers that contact one or more experienced, sophisticated members of an investor network through this kind of referral may be able to rely on the investor network to establish a reasonable belief that other offerees in the network have the necessary financial experience and sophistication. 5

However, the fact that an offeree is a member of an investor network does not, by itself, ensure that an issuer has formed a PSR with that member/offeree. Whether there has been a general solicitation is a fact-specific determination. In this CDI, the SEC staff points out that the greater the number of persons without financial experience, sophistication or any previous personal or business relationship with the issuer that are contacted by the issuer (or persons acting on its behalf) through impersonal, nonselective means of communication, the more likely the communications are part of a general solicitation.

Unlike the Citizen VC no‑action letter, this CDI does not discuss specific procedures that an angel group can use to make sure that its members are financially sophisticated and that its methods of vetting potential issuers and offerings would not constitute general solicitation. Accordingly, angel groups, and issuers dealing with angel groups, may want to focus on these matters as part of their offering procedures.

Demo Days and Venture Fairs

The CDIs also discuss demo days and venture fairs. See CDI 256.33

Whether a demo day or venture fair involves general solicitation depends on the specific facts and circumstances.

If a presentation by an issuer does not involve an offer of a security, then the Securities Act registration provisions are not implicated.

Where a presentation by an issuer involves the offer of a security, the presentation should not constitute a general solicitation if the potential investors attending the presentation were invited through means not constituting a general solicitation. For example, the presentation may not constitute general solicitation if attendance at the event is limited to persons:

  • with whom the issuer or organizer of the event has a PSR; or
  • who have been contacted through an informal personal network, as described under "Investor Networks" above.

The SEC staff notes that Rule 506(c) may be available if the event involves a general solicitation.


1. Section 4(a)(2) of the Securities Act provides an exemption from the federal securities registration requirement for "transactions by an issuer not involving any public offering." Rule 506 provides a safe harbor mechanism for complying with this exemption.

2. General solicitation includes, but is not limited to, the following:

  • any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and
  • any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. See Rule 502(c) of Regulation D.

3. See, for example, Mineral Lands Research & Marketing Corp. (available December 4, 1985); Bateman Eichler Hill Richards, Inc. (available December 3, 1985); E.F. Hutton & Co. (available December 3, 1985); and H.B. Shaine Co., Inc. (available May 1, 1987).

4. The specific recognition that a registered investment adviser can form a PSR is a change from prior guidance, which had recognized that a registered broker could form a PSR and that other third parties might be able to form a PSR. The new guidance indicates that in some situations, a PSR may be formed through angel groups or other investor networks, depending on the facts, and other third parties may be able to form a PSR.

5. We note that angel groups have made a very significant attempt to convince the SEC that membership in an angel group, by itself, should result in accredited investor status. Click here for access to our article which includes a discussion of these efforts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.