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How to Find and Solicit Investors for a Private
Offering of Securities
In
this article I talk about how you find and
solicit investors. I discuss how you get
investors for a private offering or private
placement of securities, whether an angel round
of financing, a VC round or an offering under
Regulation D, Rule 504 or 506 or like state laws
(for example, California’s Section 25102(f)
limited offering exemption). The legal term for
this topic is the “manner of the offering.”
The Rule
Against General Solicitations and Advertisements
Per
Regulation D, Rule 502(c), an issuer may not
offer or sell securities by any form of general
solicitation or general advertising. This rule
applies to the issuer and anyone acting on the
issuer’s behalf (e.g. management companies,
general partners and brokers). Hence you may
not use any advertisement, article, notice or
other communication in any newspaper, TV or
similar media. You may not use seminars whose
attendees have been invited by any general
solicitation or advertising.
Be
Responsible for your Agents
Even
though someone else (e.g. a broker) might
conduct a solicitation for you, you (the issuer)
remain responsible for the person’s acts. You
must monitor and control all persons acting on
your behalf, and make sure they comply with
these rules.
Prior
Substantive Relationship
You
may only solicit investors with whom you have a
prior substantive relationship. When
determining whether a general solicitation has
occurred, the SEC looks to the existence and
substance of prior relationships between the
issuer (or its agents and brokers) and the
investors being solicited. The SEC requires
that the substantive relationship exist
before the solicitation of the investors.
How
much prior does the substantive relationship
have to be? The SEC requires a sufficient time
between the establishment of the relationship
and the offering. The SEC does not say how much
time, however. The time must be sufficiently
long to convince a reasonable person that the
relationship was not established with a specific
offering in mind.
The
prior substantive relationship is important
because it gives the issuer a reasonable basis
for believing that the investor is sophisticated
and can evaluate the offering. The relationship
must enable you to determine whether the
investor is suitable for the investment.
Further, the relationship must be current
because you must evaluate the investor’s
current suitability – knowing that an
investor was rich last year is insufficient for
this year’s offering. If there is no such
relationship, then you have violated Regulation
D whether or not the investor later turns out to
be accredited.
To sum
up, you may not offer or sell securities by any
form of general solicitation or general
advertising. You must have a prior, substantive
relationship with each investor prior to
soliciting the investor.
Why it
Matters – Civil Liability
You do
not want to play around with securities laws.
If your offering does not comply with securities
laws, the investors can bring action against the
issuer (and its control persons in the case of
fraud) to recover what they paid for the
investment, plus interest at the legal rate,
less the amount of any income received from the
security. Punitive damages are generally not
available, except that the investors can attach
a common law fraud cause of action to recover
punitive damages.
Non-compliance is cheaper on the front end, but
it is very painful on the back end.
Next Article
– How a Management Company,
General Partner or Broker Uses General
Advertisements and Solicitations to Get
Investors
In my
next article, I will apply these concepts to a
management company or broker who carries out
offerings for multiple issuers at the same time
– see
How a Management Company, General
Partner or Broker Uses General Advertisements
and Solicitations to Get Investors. The
problem for the management company or the broker
is that it wants to use general solicitations to
find investors, but at the same time, it most
likely will have one or more offerings
underway. How does it prevent its own general
advertising from being an advertisement for a
specific offering?
Shameless Plug
You should hire a securities attorney to help
you with all of your securities transactions.
The job must be done right – the risks are too
high to do it wrong.
If you want to read more about securities, try
my main page,
Securities Attorney. From there
you can link to other pages and articles of
interest.
Call me to schedule
a legal consultation: 510-796-9144 |
