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 business law page, Business Lawyer.  From there you can link to other pages and articles of interest.

Call me to schedule a legal consultation: 510-796-9144