The Securities Exchange Commission (SEC) appears ready to dramatically change the circumstances under which investors are legally solicited. Historically, since 1933 in fact, the law prohibits companies and brokers from conducting a “general solicitation” unless the SEC has declared a registration statement effective. This concept breaks down into two components: (i) what is a general solicitation; and (ii) what is a registration statement.
In summary, a general solicitation is a mass advertisement to the public, announcing that a company is raising money. General solicitations have been prohibited without a registration statement. For example, companies cannot place an advertisement in the newspaper asking that potential investors call them. This would be the commencement of what the SEC called an “unregistered public offering” in violation of state and federal securities laws.
The Registration Statement
An exception to this general rule is the filing of a registration statement with the SEC, typically referred to as a public offering. Under existing law, it is only through the filing and declaring effective of a registration statement that companies can “generally solicit” (i.e. advertise). The costly and time-consuming process of filing a registration statement has historically prevented smaller companies from seeking registration.
General Solicitation under the JOBS Act
The JOBS Act is certainly suggesting that this model is going to change. The SEC is pointing to the advent of new technologies rendering the archaic concept of a “general solicitation” as obsolete. While this conclusion can certainly be questioned, the new law will potentially allow companies to raise money by advertising, although they may only sell these securities to accredited investors ($200,000 in income or $1 million in net worth, excluding principal residence). So there does not appear to be any requirement that companies pre-qualify those that receive their advertisement; however, there does appear to be an increased burden of ascertaining accredited investor status. These rules are now in the comment stage, but we anticipate they will be enacted prior to the end of this year. Stay Tuned.
If you have any questions about the current solicitation rules and how it may affect your company’s fundraising, or if you would like to hear more about the potential changes coming, please contact Larry Horwitz at lhorwitz@horwitzarmstrong.