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Presenting a live 90-minute webinar with interactive Q&A

Redefining General Solicitation for Securities

Offerings in the Internet and Social Media Age Update on Recent SEC Guidance and Other Developments

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, JANUARY 31, 2017

Yelena M. Barychev, Partner, Blank Rome, Philadelphia

Stanley Keller, Of Counsel, Locke Lord, Boston

Richard M. Leisner, Shareholder, Trenam Law, Tampa, Fla.

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Redefining General Solicitation and Advertising for Securities Offerings in the Internet and Social Media Age

Yelena M. Barychev

Blank Rome, Philadelphia

Stanley Keller Locke Lord, Boston

Richard M. Leisner Trenam Law, Tampa

January 31, 2017

• “General solicitation” is prohibited in a Rule 506(b)

private offering (Rule 502(c))

⁻ Also prohibited in a Rule 504 offering that is not state registered

⁻ General solicitation is inconsistent with a statutory 4(a)(2) private

offering (CDI §260.13), as well as a 4 (1 ½) or 4(a)(7) resale

• “General solicitation” is permitted in a Rule 506(c) offering

• The choice between relying on Rule 506(b) or (c) puts new

pressure on what constitutes “general solicitation”

• 2015 SEC guidance – CDIs §§256.23-256.33 and Citizen VC

letter

• In the internet era, use of an unrestricted website to offer and

sell securities is general solicitation (CDI §256.23)

Prohibition on General Solicitation

6

• In the absence of an “offer” there cannot be general

solicitation (CDI §256.24)

• Thus, factual business information is not necessarily an

offer

‾ Limited to information about the issuer’s business,

financial condition, products or services, provided not

presented in a manner to constitute an offer of securities

(CDI §256.25)

• Similar to “gun jumping” analysis and use of Rules 168

and 169

What is General Solicitation – Absence of an Offer

7

• Existence of a pre-existing, substantive relationship with

offeree, although not required, negates general solicitation

(CDI §256.26)

• “Pre-existing” means it was formed prior to the offering

or, if formed by a broker or other intermediary, was

formed prior to the intermediaries participation in the

offering (CDI §256.29)

‾ Does it mean before offer to particular investor or before

commencement of the offering?

What is General Solicitation – Pre-existing, Substantive Relationship

8

What is General Solicitation – Pre-existing, Substantive Relationship (cont’d.)

• “Substantive” means sufficient information was obtained

to evaluate person’s “financial circumstances and

sophistication” in determining status as an accredited or

sophisticated investor (CDI §256.31)

‾ Quality of relationship more important than any waiting

period (CDI §256.30 and Citizen VC)

9

• Requisite relationship can be formed by various parties in different ways

• Historic guidance blessed broker “two-call” rule, and that still applies

• That approach is extended to investment advisers (CDI §256.28)

• Issuers can have a pre-existing, substantive relationship, but it is unlikely to be able to create it using “two-call” rule ‾ Success in creating such a relationship depends on “facts and

circumstances” (CDI §256.32)

‾ When may an issuer solicit information from potential investors to establish the relationship without its being an “offer”?

How to Form Pre-existing, Substantive Relationship

10

• However, issuer can rely if justified on relationships

established by others (CDIs §§256.27 and 256.32)

• Thus, issuer may be able to rely on investors within a

network of sophisticated investors, such as an angel

investor network

How to Form Pre-existing, Substantive Relationship (cont’d.)

11

• Online investor platforms can avoid general solicitation

even though widely soliciting potential investors as long

as they establish the requisite relationship before making

any specific offer (Citizen VC)

• Guidance on conducting demo-days, pitch events and

venture fairs (CDI §256.33)

‾ Structure to avoid “offers” – just factual business

information

‾ Limit attendees to persons with whom there is a pre-

existing, substantive relationship or contacted through

network creating that relationship

‾ Use Rule 506(c)

Online Platforms and Events

12

• Authorized by JOBS Act

• Permits general solicitation (without losing status as “not

involving a public offering”)

• Form D filing requirement (not a condition of exemption)

• Condition is purchasers must be solely accredited

investors whose status as such is reasonably verified

• Reasonable steps to verify is a facts and circumstances

determination (unless safe harbor is used for natural

persons)

Use of Rule 506(c)

13

• Safe Harbors based on

‾ Income test

‾ Net worth test

‾ Regulated third-party verification

‾ Grandfathering

• How is Rule 506(c) being used

‾ Experience to date

‾ With general solicitation – “accredited investor

crowdfunding”

‾ As safety net

• Disadvantages of using Rule 506(c)

Use of Rule 506(c) (cont’d.)

14

• Different lessons for different types of participants

‾ Brokers

‾ Investment advisers

‾ Private funds

‾ Online investor platforms

‾ Angel investor networks

‾ Issuers (and their counsel)

• Should not affect determination of accredited investor

status

• Relevance for 4(a)(2), 4 (1 ½) and 4(a)(7) offerings

Some Lessons from SEC Guidance

15

• Rule 506(c) may be available as an alternative or as a

safety net for Rule 506(b) offerings that involve “general

solicitation”

Some Lessons from SEC Guidance (cont’d.)

16

Exemptive Alternatives

• Section 4(a)(2)

‾ no general solicitation

• Regulation D

‾ Rule 504

o restricted (no general solicitation)

o state registered (general solicitation in specified ways)

‾ Rule 505 (will soon be gone and replaced by expanded

Rule 504)

• Crowdfunding (Equity)

‾ General solicitation in specified ways

17

Exemptive Alternatives (cont’d.)

• State Crowdfunding

‾ Intrastate/Rule 147

o no out-of-state offers (what constitutes such an

“offer”?)

o effect of “not an offer outside this state” legends?

‾ Rule 147A

o out-of-state offers permitted but only in-state sales

‾ Rule 504

o regional exemption

18

Exemptive Alternatives (cont’d.)

• Regulation A

‾ Tier 1

‾ Tier 2

‾ General solicitation in specified ways

19

Integration Considerations

• Firewall approach for certain exemptions (Regulation A,

Crowdfunding, Rules 147 and 147A)

• Rule 506(c) offering following completed Rule 506(b)

offering (CDI §256.34)

• What about a 4(a)(2) or Rule 506(b) offering following a

Rule 506(c) offering?

• What about a registered offering after a Rule 506(c)

offering?

20