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.

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