When it becomes effective on Sept. 23, 2013, the SEC’s new Rule 506(c) (PDF) will permit private-placement issuers to avoid making the often-difficult determination of whether their offering-related activities may violate the prohibition against general solicitation and general advertising in the SEC’s Rule 502(c) (“General Solicitation”). As counsel to issuers conducting or proposing to conduct private placements or offerings under existing Rule 506 (which will continue as Rule 506(b)) are well aware, determining or giving advice regarding the activities that do or do not constitute General Solicitation can only be a matter of judgment, based primarily on certain SEC pronouncements and responses to various no-action letter requests. It appears likely that some private-placement issuers will elect not to rely on new Rule 506(c), however, because of one or more of the conditions to that Rule or because of the possible adoption of one or more future conditions or restrictions that the SEC has proposed for that Rule. Accordingly, the prohibition against General Solicitation, and therefore the scope of General Solicitation, will continue to be relevant.

Although General Solicitation is described, on a non-exclusive basis, in Rule 502(c), there is no definitive or authoritative statement of it. Such a statement would have to come from the SEC or its staff. For years the SEC or its staff has, perhaps reasonably enough, consistently maintained that what constitutes General Solicitation is a matter of particular facts and circumstances and, therefore, has not provided a “bright-line” test that might be applied.

The SEC staff has focused on the existence of a “pre-existing substantive relationship” between an issuer or other offeror (such as a broker or placement agent) and an offeree to avoid a General Solicitation. Other factors which the SEC has apparently considered — but which appear not to be as critical — include how an offeree was identified or contacted, an offeree’s suitability as a potential investor in the private offering, the relationship between the offeror (if not the issuer) and the issuer, and the number of offerees. The focus on a pre-existing substantive relationship is apparently intended to assure that the issuer or other offeror is in a position, before even making an offer, to determine that a proposed offeree has such knowledge and experience in financial and business matters that the offeree is capable of evaluating the merits and risks of the prospective investment. The SEC staff believes that such a position should be based upon the issuer’s or other offeror’s actual knowledge of or familiarity with the proposed offeree’s current situation, and not just on the offeree’s general characteristics (such as whether the proposed offeree is an apparently highly compensated doctor or company executive or a person with a high net worth).

In the absence of a definitive or authoritative statement or a “bright-line” test, it may be worthwhile to identify some of the key sources of the SEC’s views that counsel to a private-placement issuer should review, in addition to Rule 502(c), as guidance for determining or advising on General Solicitation. Those sources include the following:

A couple of law-review articles which summarize the SEC’s views, in the context of arguing against the prohibition of General Solicitation, may also be helpful:

OUR TAKE: Because it appears that the prohibition against General Solicitation will continue to be relevant after the effectiveness of new Rule 506(c), an effort to understand the SEC’s views regarding General Solicitation will continue to be necessary.