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How
a Management Company, General Partner or Broker
Uses General Advertisements and Solicitations to
Get Investors
In
this article I talk about how a management
company, general partner or broker finds
investors while staying in compliance with
Regulation D’s rule against general
advertisements and solicitations.
In
brief, the management company or broker usually
is engaged in two activities at the same time:
attracting investors and conducting offerings.
It uses general advertising to attract
investors, so how does it prevent its own
general advertising from being an advertisement
for a specific offering in violation of
Regulation D?
In my
prior article,
How to
Find and Solicit Investors for a Private
Offering of Securities, I explained the
basics of how you find and solicit 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. The main
idea from my prior article is this: 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.
This
article applies the concepts I explained in the
prior article.
Background –
Simultaneous Offerings and General Advertising
for Services.
Frequently a management company (or general
partner) will control an issuer. The management
company might operate multiple issuers and
solicit investors for the issuers at various
times. Sometimes a broker will have multiple
issuers as clients and will regularly find
investors for the issuers.
The
management company or broker constantly will be
looking for new investors for its issuers’
offerings. They might be in the business of
finding investors for their issuers. [The
management company might need to register as a
broker, but that’s another issue.] They
probably have general advertising programs where
they solicit investors for future offerings.
This is called conditioning the market.
The Problem –
Separate the Offerings from the General
Advertising
The
problem is this: the management company or
broker likely will have running at the same time
both offerings for its issuers and
advertisements for its general services. How do
they prevent the SEC from considering their
general advertising an illegal solicitation for
this or that offering?
The
general advertising programs comply with
Regulation D if: (1) they are generic in nature,
only seek data about the investor and do not
reference any specific offering; and (2) the
management company or broker has procedures that
prevent an offering to the investor around the
time of the solicitation. In other words, the
management company or broker may not use general
advertising that references a current or future
offering – the advertising program may only
describe the background and success of the
management company or broker. In addition, they
must wait some period of time after they obtain
an investor before presenting a particular
offering to the investor.
The
line between legal and illegal conditioning of
the market is gray. Issuers should be safe and
put a maximum amount of time between the
solicitation and the offering. When a general
solicitation or advertising coincides in time
with the offer of securities, the SEC will
presume that they are related.
Using
Questionnaires
Brokers and management companies will attract
potential investors through their general
advertising, then they will use questionnaires
to see if the investors are accredited. This is
legal and it can establish the required
substantive relationship.
You
should be able to guess the important points by
now: (1) the questionnaires must give the issuer
sufficient information to determine the
investor’s suitability; and (2) a time lapse
must occur between the establishment of the
relationship and the commencement of the
offering. The SEC does not want to see the
issuer use questionnaires to form a relationship
then immediately solicit the investor.
Shameless Plug
Recall
from my prior article,
How to
Find and Solicit Investors for a Private
Offering of Securities, that you do not want
to play around with securities laws. Legal
compliance is always cheaper in the long run.
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 |
