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 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