Advertising or Solicitation to Offer or Sell Securities Under Rule 502(c)

Yesterday, I posted on Fund Raising Publicity. I ended by pointing out that Rule 502(c) prohibits general solicitation or general advertisement that occurs in connection with a Regulation D securities offering. This is to separate typical company advertising if a company advertises with no intention to “offer or sell the securities of the issuer” then such advertising should not violate rule 502(c).

The first part of the analysis is Did Advertising or Solicitation to Offer or Sell Securities Occur?

In one example, Printing Enters. Management Science Inc. wanted to engage in promotional activities relating to the products and services that it offered. Since these promotional activities were to occur simultaneously with a private securities offering, the SEC was confronted with the question of whether these marketing activity were intended to facilitate the offer or sale of securities. (Printing Enters. Management Science, Inc., No Action Letter (issued Apr. 25, 1983)).The SEC declined to grant no-action relief stating that it could only evaluate whether the advertisement was in direct support of an offer or sale of securities by evaluating all the specific facts surrounding this promotion.

The SEC expanded the coverage of Rule 502(c) in its Gerstenfeld No-Action letter (Gerstenfeld, No-Action Letter, 1985 WL 55681 (Dec. 3, 1985)), explicitly prohibiting advertisements that occurred even when a private placement was not simultaneously occurring. In Gerstenfeld, a syndicator wished to place an advertisement generally stating that it sells securities, and inviting parties to contact the syndicator for further information. The SEC declined to recommend no-action.The staff concluded that the advertisement constituted a “general” advertisement and was designed to sell securities of entities that are, or will be, affiliated with the syndicator. It did not matter whether the syndicator was then in the process of selling partnership interests since the primary purpose of the advertisement is to sell securities and to condition the market for future sales.

In Alma Securities Corp. (August 2, 1982) the Staff took the position that tombstone advertisements published following the completion of a private placement could violate Rule 502(c) if they help solicit investors to invest in contemporaneous or future offerings. As stated by the staff, “where a sponsor or issuer conducts an ongoing program of private or limited offerings, tombstone announcements for the completion of each individual offering could be used to solicit investors to the program as a whole.”

The advertisement need not be one from the issuer. Third party advertisement can also cause problems. The SEC has declined to provide no-action relief regarding whether an advertisement would violate Rule 502(c) if the issuer did not sponsor the advertisement and it was published in an independent source (Oil and Gas Investor, No-Action Letter (Jan. 23, 1984)). The SEC declined to provide no-action relief to a question regarding whether an independent source could distribute reviews and analyses of various private offerings to a limited group of paid subscribers. (Tax Inv. Information Corp., No Action Letter, 1983 WL 29834 (Feb. 7, 1983)). The SEC seems to review these on a case by case basis.

Image is a Stock certificate for 10 shares of Birmingham Motors in the public domain, available on Wikimedia Commons.