Earlier this month the SEC issued concurrently (i) the Citizen VC No Action Letter (in response to a request for guidance authored by Mintz Levin) relating to the use of 506(b) for a private placement online and (ii) a series of CDIs (compliance and disclosure interpretations) relating to private placements under Regulation D. Reading the Citizen VC No Action Letter together with the new CDIs, it is apparent that the SEC is staking out a “common sense” approach as to whether a private placement offering involves a “general solicitation” (and is thus subject to the more onerous requirements of the relatively new Rule 506(c)).
For example, Question 256.27 of the new CDIs addresses the scenario in which companies present an offering of securities to an angel investing club. Common sense tells us that a presentation of this type to a group of sophisticated and vetted investors in a private setting should not be considered a general solicitation, and now it is clear that the SEC agrees. With respect to presentations of an offering of securities to large groups at venture fairs and demo days, however, the SEC is more cautious, as reflected in their response to Question 256.33. The SEC takes the position that whether a general solicitation exists in this example depends on who attends and the purpose of the event. If the company is presenting an offering of securities to a large group of people who have no specific relationship to the organizers, then one can reasonably conclude that this is, in fact, a general solicitation.
Questions 256.29 through 256.31 of the new CDIs deal with many of the same specific issues addressed in the Citizen VC No Action Letter. Specifically: what constitutes a “pre-existing relationship”; is there a minimum waiting period to create a pre-existing relationship; and, what makes a relationship “substantive” so that contact with an investor is not considered a “general solicitation”? According to the SEC, the answers are: a pre-exiting relationship requires some interaction; there is no need for a specific waiting period to create a pre-existing relationship; and, it is the quality of the relationship that will determine whether this pre-existing relationship is substantive. In other words, the SEC’s approach is to say that one size does not fit all and there are no specific bright line tests. Rather, the key is to look at the specific facts and circumstances and the context of the interaction. It is our point of view that a common sense approach will help companies and their agents and advisors determine if there is indeed a “general solicitation” which would necessitate compliance with Rule 506(c).
The French philosopher Voltaire once said that “common sense is not so common.” But we believe that by following a common sense approach – an approach now endorsed by the SEC – a company and its agents can navigate the challenges they will encounter when trying to conduct a private placement in compliance with Regulation D.