On August 6, 2015, the Securities and Exchange Commission ("SEC") issued (i) new compliance and disclosure interpretations regarding general solicitation or general advertising, and (ii) a no-action letter confirming Citizen VC, Inc.'s conclusions regarding pre-existing, substantive relationships in the context of a private offering made in reliance on Rules 502(c) and 506(b) of Regulation D under the Securities Act of 1933, as amended.[1] For the most part, the SEC did not provide new guidance, but reaffirmed and expanded upon existing guidance. The SEC raises a few points that are worth noting:

  • an issuer's publicly available website reflecting "factual business information"[2] (which does not, for a continuously offered fund, include a track record) does not constitute a general solicitation or general advertising;
  • an issuer may rely on a pre-existing, substantive relationship formed by a registered investment adviser to the prospective investor (e.g., a pension consultant), and not only by a registered broker-dealer; and
  • capital introduction programs should not be considered a general solicitation if the program organizer has a pre-existing, substantive relationship with each of the invitees.

The SEC guidance elaborates on the meaning of a "pre-existing, substantive relationship" with a prospective investor in order to demonstrate the absence of a general solicitation.

  • Pre-existing relationship. A "pre-existing" relationship is one that the issuer has formed with a prospective investor prior to the commencement of the offering or, alternatively, that was established through an intermediary (typically, a registered broker-dealer or a registered investment adviser) prior to the registered broker-dealer or registered investment adviser participating in the offering. As a general matter, the SEC clarified that there is no minimum waiting period required to establish a pre-existing, substantive relationship with a prospective investor. However, the SEC also confirmed prior no-action letter guidance that allows a prospective investor who qualifies as an accredited or financially sophisticated investor to purchase securities in private fund offerings posted on a website platform prior to the investor's subscription to the platform, so long as the purchase was made after the end of a waiting period (generally considered to be 30 days) in view of the fact that subscriptions for interests in private funds are offered and accepted on an ongoing basis (i.e., offered monthly for hedge funds, or routinely during the offering period for private equity funds).[3]
  • Substantive relationship. A "substantive" relationship is one in which the issuer (or its agent) has sufficient information to evaluate, and does, in fact, evaluate, a prospective investor's financial circumstances and sophistication, in determining its status as an accredited or sophisticated investor. Self-certification alone (i.e., by checking a box) is not sufficient. The quality of the relationship between an issuer (or its agent) and a prospective investor is the most important factor. There is no specific duration of time or particular short form accreditation questionnaire that can be relied upon solely to create a "substantive" relationship.

A private fund and other issuer should develop policies and procedures to establish a pre-existing, substantive relationship with a prospective investor prior to offering its interests and to make an appropriate determination of the prospective investor's accreditation, financial sophistication, financial circumstances and ability to understand the nature and risk of the interests being offered.[4]

The SEC guidance makes it clear that a pre-existing, substantive relationship can be established indirectly and not only through registered broker-dealers or registered investment advisers. Where groups of experienced, sophisticated investors share information about private offerings through their networks, members who have a relationship with a particular issuer may introduce that issuer to other members of the network without having the shared information deemed a general solicitation. Issuers that utilize this type of referral may be able to rely on those members' network to establish a reasonable belief that other offerees in the network have the necessary financial experience and sophistication. This guidance may provide comfort to private funds that participate in capital introduction programs, conferences organized by family office associations or similar network meetings that such events will not constitute a general solicitation.