Tag: Rule 502

Whether the Advertising or Solicitation Was General in Nature Under Rule 502(c)

Barnum and Bailey Limited Stock Certificate Earlier, 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). Yesterday, I focused on the first part of the analysis is Did Advertising or Solicitation to Offer or Sell Securities Occur?

This post focuses on whether the advertising or solicitation was general in nature.

The S.E.C. has interpreted Rule 502(c) to allow for non-general advertising, meaning advertising in which the issuer and offeree have a “pre-existing, substantive relationship.”

In 1982 the SEC gave no-action relief to a partnership that proposed to mail a written offer to three hundred and thirty people who had previously invested in another limited partnerships from the same sponsor. (Woodtrails -Seattle, No Action Letter, 1982 WL 29366, (Aug. 9, 1982)) The Commission found that these investors had a pre-established relationship with the general partner, who was described to have had a reasonable belief that the offerees were knowledgeable and experienced in financial matters.

In comparison, when a partnership dedicated to boarding, breeding, and training race horses sought to solicit investments by conducting a mailing to the Thoroughbred Owners and Breeders Association members, distributing brochures at a horse sale, and advertising in a horse racing trade journal The Commission did not give relief. Aspen Grove, No-Action Letter, 1982 WL 29706 (Dec. 8, 1982). So related interests alone are not enough to create a substantive relationship.

“The types of relationships with offerees that may be important in establishing a general solicitation has not taken place are those that would enable the issuer (or a person acting on its behalf) to be aware of the financial circumstances or sophistication of the person with whom the relationship exists or that otherwise are of some substance and duration.” Mineral Lands Research & Marketing Corp., S.E.C. No-Action Letter, 1985 WL 55694 (Dec. 4 1985).

The other alternative is the use of a broker-dealer. A broker-dealer may establish a relationship through general advertising or general solicitation, so long as such solicitation does not promote the offer or sale of securities. The broker-dealer can then solicit information from a potential investor to see if they have sufficient financial circumstances or sophistication. “A satisfactory response by a prospective offeree to a questionnaire that provides a broker-dealer with sufficient information to evaluate the respondent’s sophistication and financial situation will establish a substantive relationship.” H.B. Shaine Co., S.E.C. No-Action Letter, 1987 WL 108648 (May 1, 1987). The questionnaire cannot be too general otherwise you won’t be able to determine if the offering would be appropriate in light of the suitability standards established by the issuer . Questionnaires to potential investors must be “generic in nature” and can “not make reference to any specific investment currently offered or contemplated for offering.” Bateman, S.E.C. No Action Letter, 1985 WL 55679 (Dec. 3, 1985).

The consequences of making a general solicitation or general advertisement can be seen an administrative action taken against Kenman Corporation. The SEC found that Kenman violated Section 5 of the Securities Act by engaging in a public offering without registration. Kenman’s offering did not qualify for exemption under Regulation D or Section 4(2) because the SEC determined that Kenman had engaged in general solicitation. They had mailed materials to  a large number of people taken from a list of executive officers of Fortune 500 companies, a list of physicians, a list of company presidents in a certian area and other general lists. Kenman Corp. Administrative Proceeding File No. 3-6505 (Apr. 19, 1985)


The image is Barnum and Bailey Limited Stock Certificate in the public domain and available on Wikimedia Commons.

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

BirminghamMotorsStock.jpeg Stock certificate for 10 shares of Birmingham Motors automobile company

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.

Fund Raising Publicity

1903 stock certificate of the Baltimore and Ohio Railroad

Under the U.S. securities laws, it is important for private investment funds to avoid engaging in a “general solicitation” or “general advertising” prior to and during fund raising. The key to private investment funds and the private offering of interests in the funds is that they are “private.”

Assuring the private nature of an offering means that not only the issuer, but any party acting on its behalf, must refrain from generally soliciting potential purchaser. This means that a fund and its agents (which includes all management, personnel, placement agents,attorneys, accountants and other representatives) must be careful during the fund raising period not to make statements to the general public with regard to an investment in a fund.

Rule 502(c) of Regulation D states the limitation as “neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:

1. Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and

2. Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. . . “

If a fund or its agents make statements that could be viewed as a “general advertising” or “general solicitation”, the SEC could impose a “cooling-off period.” This would typically mean a cessation of all fundraising and a moratorium on fund closings for a period of several months. A “general solicitation” could also trigger registration of the fund sponsor or the fund under the Advisers Act or the Investment Company Act.

The SEC has indicated that it believes that the following actions violate Rule 502(c):

1. Mass mailings

2. Speaking to the media about a solicitation when funding or investment matters are discussed, whether such speech is directed at current fundraising efforts or deemed to be an attempt to “condition the market” by making reference to the success or attractive return of previous investments.

3. Print, radio and television advertisements or solicitations regarding funding or investment matters

4. Tombstone advertising (an ad which does no more than give the barest of information) is held by SEC staff to “condition the market” for the securities and therefore constituted an offer even though the tombstone did not specifically mention the transaction in question.

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 image is a 1903 stock certificate of the Baltimore and Ohio Railroad in the public domain and available on Wikimedia Commons.