The SEC has given the go-ahead to a venture capital firm’s plan to conduct 506(b) private placements online. On August 5, 2015, the Commission issued a no-action letter to Citizen VC, Inc., saying the firm’s proposed online platform pairing investors with portfolio companies does not amount to a general solicitation within the meaning of Rule 502(c) of Regulation D. The SEC emphasized that the proposed platform enabled the venture capital firm to establish the necessary “substantive relationship[s]” with prospective investors because the online system asked probing questions of investors, allowing the venture firm to evaluate investor sophistication, financial circumstance, and ability to appreciate risk.

The letter represents the SEC’s continuing movement toward the lessening of traditional requirements around raising capital using private placements. In 2014, the SEC promulgated Rule 506(c), allowing issuers to publically solicit private placements so long as they verified that all investors were accredited. There have been relatively few Rule 506(c) offerings to date, however, in part because companies found the verification requirements too onerous.

The Bottom Line: Under the new guidance, businesses should find it easier to match investors to investments via the internet, so long as they are careful to observe the guardrails spelled out in the Citizen VC no-action letter. In addition to observing the new guidance, businesses need to avoid taking transaction‑based compensation on any deals so as not to be labeled broker-dealers under Exchange Act Section 15(a).