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I am now past the middle of the semester for the course that I co-teach at Georgetown Law called “Beyond the IPO: Exempt Securities Offerings,” and one of the topics that we spend a good deal of time on in class is the topic of what constitutes a “general solicitation” and how to avoid it when conducting a private placement offering (relying on, e.g., Section 4(a)(2) or Rule 506(b) of Regulation D). With the SEC Staff paying close attention to private placements in recent years, avoiding general solicitation problems has become even more important for companies seeking angel and venture capital. This is an area where companies are not always following the counsel’s guidance, or they are not running communications by their counsel, or counsel is just letting things go that seem to clearly be a general solicitation in connection with private placement transactions.

The consequences of getting a general solicitation issue wrong are what I always tell my class are the reasons why securities lawyers do not sleep well at night. Under Section 12(a)(1) of the Securities Act, if an offering is not registered or exempt from registration, it is illegal and private placement investors could recover their investment in full through a recission right. At the same time, the SEC could bring an action against the company for violating Section 5 of the Securities Act, and against individuals for causing the violation. A company can be disqualified from conducting private placements under Regulation D and relying on other exemptions with bad actor disqualification provisions as a result of an SEC enforcement action.

To make things more challenging, the SEC has never explicitly defined the terms “general solicitation” or “general advertising” in its rules, but we typically think of these terms as relating to communications seeking to generate interest in an offering which is inconsistent with the notion of a private placement. Generally, you look at the medium of dissemination and the number of recipients, as well as the type of information contained in the communication, to determine if it is a general solicitation.

What can issuers seeking angel and venture capital do to avoid having a general solicitation take place in connection with a private placement? Here are my top five suggestions:

1. Do not speak to the press, grant interviews or otherwise provide media with materials relating to the offering, replying with “no comment” if someone form the media asks about the offering;
2. Do not discuss the fact that the company is offering securities at a conference, seminar, or forum where the attendees were invited through a general solicitation;
3. Do not discuss the company’s performance in a public setting in a manner that could be viewed as conditioning the market or hyping up the company for the offering;
4. Do not put out press releases about the offering while it is ongoing, and do not post information about the offering on social media or on a website that is generally available; and
5. Do not contact prospective investors unless the company or its financial intermediary has a substantive, pre-existing relationship with those investors.

It is important to keep in mind that companies can continue to publish regularly released factual business information that would not be deemed an offer of securities during the course of an exempt offering. Perhaps most importantly, communications with prospective investors with which a company (or the company’s financial intermediary) has a substantive pre-existing relationship would not be deemed a general solicitation.

If you have ever tried to communicate these principles to an entrepreneur that is seeking to raise capital for a start-up, you have no doubt received a considerable amount of pushback. I encourage you to stick to your guns, because this is not an area today where you want to blow up a private placement based on a general solicitation issue.

– Dave Lynn