Guest post by Daniel DeWolf – Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
The SEC has finally provided clarity as to how an issuer of securities can conduct a private placement in a password protected web page under Rule 506(b), without it being deemed a “general solicitation” and thereby being subject to the additional requirements imposed by the new Rule 506(c). The guidance has been provided by the issuance of the Citizen VC No Action Letter (the “CVC Letter”), which request was authored by Mintz Levin.
Today, many enterprises conduct their business activities online. The challenge for issuers of private securities is how to conduct their offerings online in a manner that is consistent with the legal regulations applicable to offering securities. This is especially challenging as technology is constantly jumping ahead of the regulations. Since the final regulations of the JOBS Act were published by the SEC in September of 2013, it has been unclear as to how an issuer would or could conduct a private placement offering online under Rule 506(b). The last guidance by the SEC on how one could conduct an online offering as a private placement under Regulation D without a general solicitation was in 1997.
As set forth in the CVC Letter, an issuer can now develop a specific set of policies and procedures that will take the offering outside of being considered a “general solicitation”. The key is that certain procedures are created and followed which enable the issuer and the potential investor to develop a “pre-existing substantive relationship” before any securities are offered. These procedures are designed to enable the issuer to evaluate the prospective investor’s financial sophistication, circumstances, suitability, and his or her ability to understand the nature and risks of a potential investment. If there is no general solicitation, then the issuer is not required to obtain independent verification of the accredited status of the investor.
In essence, the approach under the CVC Letter is to make the online private placement offering similar in policies and procedures to an offline private placement. The pre-existing relationship is not time based nor is it satisfied by answering a mere two questions. Rather, the establishment of a pre-existing relationship depends on the QUALITY of the relationship between the issuer and a potential investor. We believe the guidance set forth in the CVC Letter will be viewed as “best practices” by issuers who want to raise capital in a password protected web page under the new Rule 506(b). While the vast majority of online offerings will clearly fall within the new Rule 506(c), the CVC Letter does spell out a way to conduct a true private placement in a password protected web page that does not give rise to a general solicitation.
Click Here to view the No Action Letter
Daniel DeWolf is Co-chair of Mintz, Levin’s Venture Capital & Emerging Companies Practice Group and Chair of its Technology Practice Group. In addition to his active legal practice, he is an adjunct professor of law at the NYU Law School and he has a wealth of experience in private equity and venture capital, having co-founded Dawntreader Ventures, an early stage venture capital firm based in New York.