On August 6, 2015, the Securities and Exchange Commission (SEC) staff issued important guidance concerning general solicitation and general advertising (collectively, general solicitation), including the use of online platforms by an issuer conducting a private placement. This guidance is contained in a recent no-action letter and in SEC staff Compliance and Disclosure Interpretations (CDIs) as explained below. The guidance includes discussion of investor networks, such as angel groups, and demo days, and the potential impact of offerings involving these types of networks or events.
The Importance of Understanding General Solicitation in Private Placements
Rule 506 of Regulation D under the Securities Act of 1933, as amended (Securities Act) is the most popular exemption from federal securities registration relied upon to raise capital in the U.S.  There are two types of Rule 506 private placements:
- Traditional private placements under Rule 506(b) – in which up to 35 non-accredited investors and an unlimited number of accredited investors can participate. General solicitation is prohibited in traditional private placements under Rule 502(c). 
- Advertised private placements under Rule 506(c) – in which only accredited investors may participate and in which general solicitation is permitted. Issuers are required to take reasonable steps to verify the accredited investor status of purchasers in advertised private placements.
While general solicitation is allowed in advertised private placements, many issuers prefer not to conduct the required accredited investor verification for these types of offerings. Accordingly, traditional private placements continue to be the much more frequent choice for raising capital.
Because of the extensive use of the Internet today and the possibility that the use of a website, or online platform, may involve general solicitation, it is crucial for issuers conducting a traditional private placement to avoid actions that might involve general solicitation. For example, the use of an unrestricted website to offer a security involves general solicitation. See CDI 256.23. Accordingly, it is important for issuers to use websites in a way that does not involve general solicitation if the issuer intends to offer securities in a Rule 506(b) private placement.
Factual business information that does not condition the “public mind” or arouse public interest in a securities offering is not an offer and does not violate general solicitation rules. See CDI 256.24. What constitutes factual business information depends on the specific facts and circumstances. Factual business information typically is limited to information about the issuer and its business, financial condition, products or services, or the advertisement of such products or services (as long as the information is not presented in a manner that constitutes an offer of securities). See CDI 256.25.
Factual business information generally does not include predictions, projections, forecasts or opinions with respect to valuation of a security. For a continuously offered private investment vehicle, information about the past performance of the fund would not be considered factual business information.
Pre-existing Substantive Relationship
An offer to a potential investor with whom the issuer has a pre-existing substantive relationship (PSR) does not involve general solicitation. See CDI 256.26. This interpretation confirms existing guidance. 
A sufficient PSR needs to be both:
- pre‑existing; and
A PSR is one way, but not the exclusive way, to demonstrate the absence of general solicitation.
Pre-existing – A relationship is pre-existing if it was formed by the issuer with an offeree before the start of a securities offering or was established through either a registered broker-dealer or investment adviser before the participation of that registered broker-dealer or investment adviser in the offering.  See CDI 256.29.
There is no specific duration of time that can be relied upon solely to create a PSR.This guidance is a change from previous interpretations by various market participants, which relied upon the expiration of a specific waiting period based on the Lamp Technologies, Inc. SEC no-action letter (available May 29, 1997). Lamp involved a 30-day “waiting period” before a subscriber could invest in an offering.
A limited accommodation has been recognized by the SEC staff in the case of a semi-continuous offering by a private fund, where the relationship will be pre-existing if a prospective investor qualifies as accredited or financially sophisticated and the purchase is made after the end of a waiting period. See CDI 256.30.
Substantive – A relationship is substantive if the issuer (or a person acting on behalf of the issuer) has sufficient information to evaluate, and does in fact evaluate, a prospective offeree’s financial circumstances and sophistication in determining his or her status as an accredited or sophisticated investor. See CDI 256.31. The quality of the relationship between the issuer (or its agent) and the investor is the most important factor in determining whether a substantive relationship exists.
Self-certification alone (by checking a box), without any other knowledge of a person’s financial circumstances or sophistication, is not enough to establish a “substantive” relationship. The SEC staff has made it clear that there is no particular short-form accredited investor questionnaire that can be relied upon to create a PSR by itself.
Whether an issuer has sufficient information to evaluate, and does in fact evaluate, a prospective investor’s financial circumstances and sophistication depends on the specific facts and circumstances.
Procedures to Establish a PSR
Several previous no-action letters have discussed procedures that might be used in various types of offerings to form a PSR. The SEC’s recent Citizen VC, Inc., no-action letter (August 6, 2015) describes procedures that can be used by an issuer to establish a PSR, and accordingly avoid conducting a general solicitation, when using an online platform. While the no-action letter acknowledges the requester’s representation that the procedures described in the no-action request letter (and summarized below) are designed to evaluate a prospective investor’s sophistication, financial circumstances and ability to understand the nature and risks of the securities offered, the SEC staff notes that whether an issuer has sufficient information to evaluate, and does in fact evaluate, the prospective investor’s financial circumstances and sophistication will depend on the specific facts and circumstances.
Context – The following description forms the context for the SEC’s Citizen VC no-action letter guidance. The platform sponsor runs a website (Site) which is generally available to the public on the Internet. People who qualify under the procedures described below are admitted to the restricted (password-protected) part of the website, where they can explore investment opportunities in specifically identified portfolio companies.
Investments would be made through the purchase of interests in special purpose vehicles (SPVs) formed by the platform sponsor to pursue investment opportunities in particular portfolio companies if enough persons having access to the restricted part of the Site express interest in such portfolio companies. The SPVs would be managed by an affiliate of the platform sponsor (Manager).
As the first step, all prospective investors will be required to complete a generic online “accredited investor” questionnaire. Once a prospective investor has completed the online questionnaire and the platform sponsor has evaluated the investor’s self-certification of accreditation, the platform sponsor initiates a “relationship establishment period.”
The Relationship Establishment Period – During the relationship establishment period, the platform sponsor would undertake various actions to connect with the prospective investor and collect information it deems sufficient to evaluate the prospective investor’s sophistication, financial circumstances, and ability to understand the nature and risks related to an investment in the program run by the platform sponsor.
These activities include:
- contacting the prospective investor offline by telephone to introduce representatives of the platform sponsor and to discuss the prospective investor’s investing experience and sophistication, investment goals and strategies, financial suitability, risk awareness, and other topics designed to assist the platform sponsor in understanding the investor’s sophistication;
- sending an introductory email to the prospective investor;
- contacting the prospective investor online to answer questions it may have about the platform sponsor, the Site and potential investments;
- using third-party credit reporting services to confirm the prospective investor’s identity, and to gather additional financial information and credit history information to support the prospective investor’s suitability;
- encouraging the prospective investor to explore the Site and ask questions about the Manager’s investment strategy, philosophy and objectives; and
- generally fostering interactions both online and offline between the prospective investor and the platform sponsor.
The platform sponsor would provide the prospective investor access to the password-protected sections of the Site after the platform sponsor is satisfied that (i) the prospective investor has sufficient knowledge and experience in financial and business matters to enable it to evaluate the merits and risks of the investment opportunities on the Site, and (ii) the platform sponsor has taken all reasonable steps it believes necessary to create a substantive relationship with the prospective investor.
In other words, the offering of interests in an SPV would take place only after qualification of the prospective investor.
It should be noted that in this model, the platform sponsor creates SPVs for investment in specified portfolio companies and not as blind pools for future unidentified investment opportunities. Also, importantly, no-action relief is limited to the requester and the specific facts and circumstances set forth in the request.
One of the CDIs specifically deals with angel investors and other investor networks. See CDI 256.27. This CDI acknowledges that groups of experienced, sophisticated investors, such as angel investors, share information about offerings through their network and members who have a relationship with a particular issuer may introduce that issuer to other members. The SEC staff takes the view that issuers that contact one or more experienced, sophisticated members of an investor network through this kind of referral may be able to rely on the investor network to establish a reasonable belief that other offerees in the network have the necessary financial experience and sophistication. 
However, the fact that an offeree is a member of an investor network does not, by itself, ensure that an issuer has formed a PSR with that member/offeree. Whether there has been a general solicitation is a fact-specific determination. In this CDI, the SEC staff points out that the greater the number of persons without financial experience, sophistication or any previous personal or business relationship with the issuer that are contacted by the issuer (or persons acting on its behalf) through impersonal, nonselective means of communication, the more likely the communications are part of a general solicitation.
Unlike the Citizen VC no‑action letter, this CDI does not discuss specific procedures that an angel group can use to make sure that its members are financially sophisticated and that its methods of vetting potential issuers and offerings would not constitute general solicitation. Accordingly, angel groups, and issuers dealing with angel groups, may want to focus on these matters as part of their offering procedures.
Demo Days and Venture Fairs
The CDIs also discuss demo days and venture fairs. See CDI 256.33
Whether a demo day or venture fair involves general solicitation depends on the specific facts and circumstances.
If a presentation by an issuer does not involve an offer of a security, then the Securities Act registration provisions are not implicated.
Where a presentation by an issuer involves the offer of a security, the presentation should not constitute a general solicitation if the potential investors attending the presentation were invited through means not constituting a general solicitation. For example, the presentation may not constitute general solicitation if attendance at the event is limited to persons:
- with whom the issuer or organizer of the event has a PSR; or
- who have been contacted through an informal personal network, as described under “Investor Networks” above.
The SEC staff notes that Rule 506(c) may be available if the event involves a general solicitation.