The U.S. Securities and Exchange Commission (the “SEC”) on August 6, 2015, issued a no-action letter to Citizen VC, Inc. (the “Citizen Letter”) and new compliance and disclosure interpretations (“C&DIs”), providing clarification and guidance on what constitutes general solicitation in the context of a private placement offering pursuant to Rule 506(b) of Regulation D. In the Citizen Letter and C&DIs, the SEC clarifies the type of (i) website that an issuer can use to facilitate a private placement offering, (ii) information that can be included on the issuer’s website and (iii) investors that can view the website.
Rule 506(b) provides issuers with a means of conducting an offering of securities without registering the transaction with the SEC as long as such transaction does not involve a “public offering.” To avoid being characterized as a “public offering,” sales must be made to “accredited investors” and not more than thirty-five “non-accredited investors.” Issuers conducting Rule 506(b) private placements must comply with Rule 502(c) of Regulation D, which prohibits issuers from using general solicitation or general advertisement to market their securities. The SEC’s recent guidance makes clear that the use of an unrestricted, publicly available website to make an offer constitutes a general solicitation that would be inconsistent with the limitations on general solicitation and general advertisement under Rule 502(c). Although issuers can disseminate “factual business information” on a publicly available website without running afoul of the Rule 502(c) prohibitions, they should be mindful that predictions, projections, forecasts (or, for a continuously offered fund, information about past performance) or opinions with respect to the valuation of a security are generally outside the scope of factual business information and should be posted only to a website that has restricted access.
The SEC guidance indicates that any such restricted website may be made available only to investors with whom the issuer had a “pre-existing, substantive relationship,” which, according to the Citizen Letter, will depend on the facts and circumstances. Neither the C&DIs nor the Citizen Letter specify the minimum duration of time prior to which the relationship must have been formed for there to be a pre-existing relationship. The Citizen Letter simply states that the investment opportunity should only be presented after such investor joins the website. The CD&Is clarify that a “substantive relationship” is one in which the issuer or an agent acting on its behalf has sufficient information to evaluate, and does, in fact, evaluate, a prospective investor’s financial circumstances and sophistication, in determining his or her status as an accredited or sophisticated investor. Self-certification alone (i.e., by checking a box) without any other knowledge of a person’s financial circumstances is not sufficient to form this relationship.
The Citizen Letter and the new C&DIs from the SEC provide a guideline for issuers to follow in order to conduct private placements pursuant to Rule 506(b) without running afoul of Rule 502(c) prohibitions.