With general solicitation rules becoming effective on September 23, 2013, it has never been more important for companies to implement effective compliance programs when raising capital in private placement offerings.  The securities markets have been a go-to source for financing for many businesses in South Florida and throughout the United States due to the limited availability of bank financing in recent years.  The general solicitation rules will make it significantly easier for companies to find investors for their offerings, which will undoubtedly result in more companies looking to access these markets.

Whenever a company offers to sell corporate stock, limited partnership interests, limited liability company interests, notes or debentures, it often involves an offer of securities.  This is important because comprehensive federal and state laws apply to the offer and sale of securities in the United States unless an exemption is available.  The private placement exemption provided by Section 4(2) (now Section 4(a)(2)) of the Securities Act of 1933 and the Securities and Exchange Commission’s (SEC’s) safe harbor rules under Regulation D are the most widely relied upon exemptions, with hundreds of billions to trillions of dollars raised each year using these exemptions.

No More Safety Net

Historically, if a company was outside the technical requirements of the SEC’s safe harbor rules under Regulation D, often times the general private placement exemption of Section 4(a)(2) could be relied upon as a safety net so long as there was no general solicitation of investors.  If that safety net is ever needed, an exemption also is required under the state securities laws (so-called “blue sky” laws) in each state where offers are made since, unlike the Regulation D safe harbor, securities transactions relying only upon Section 4(a)(2) do not preempt the state laws.  However, companies operating under the new general solicitation rules will not have the luxury of a safety net since Section 4(a)(2) and the state securities laws do not allow general solicitation of investors and, thus, compliance with the SEC’s safe harbor rules will be a must.

All Communications Are Subject To Scrutiny

With the widespread use of social media platforms, and growing interest in using social media as a tool to help raise funds, there will be significantly more communications and types of communications that will be deemed to be soliciting material.  All of these communications will be the subject of potential fraud claims if they contain misrepresentations or misleading omissions under the securities laws.  Therefore, it will be important for all of these communications to be carefully worded and include appropriate disclaimers.

It will continue to be customary for private placement issuers to prepare an offering memorandum containing the information that an investor requires in order to be able to make a fully-informed investment decision.  A well-prepared offering memorandum helps to avoid successful securities fraud claims by establishing the record of what information was communicated to prospective investors during the offering.  All solicitation materials should make clear that the offer of securities is being made only pursuant to the offering memorandum and that prospective investors should not rely on any information other than what is included in the offering memorandum and related agreements in deciding whether or not to purchase the securities offered.