22 Oct SEC Clarifies “Pre-Existing Substantive Relationship” In Regulation D 506(b) Offerings

How’s that for an exciting blog post title? Actually for those of us slogging away on some old-fashioned pre-JOBS Act style private placements, the SEC no-action letter issued to Citizen VC, Inc. in August is very helpful indeed. In fact it goes further in creating flexibility for issuers than most of us thought was the case.

As we know, the Jumpstart our Business Startups (JOBS) Act allowed general solicitation of private offerings for the first time, as long as certain conditions are met, including a third party verification of accredited investor status. If you don’t want that burden, you stick with the old rules, with no general solicitation allowed in exchange for getting the protection of Regulation D’s promise that you are not deemed to be conducting a public offering.

The SEC has always said avoiding general solicitation under the old rules requires a substantive, pre-existing relationship between the potential investor and the company or someone acting on its behalf. We also generally require investors to sign a special document confirming that they are and how they are accredited. In Citizen VC, the SEC said, essentially, if someone comes on your website, fills out a detailed questionnaire, and has an actual conversation with someone representing the issuer to assess their financial circumstances and sophistication all before they are offered any securities, even if it’s 5 minutes later, that’s enough to have a pre-existing relationship. My commentary: good.