Clearer Guiding Principles Analyzed and Possible Future Best Practices Considered
By: Richard M. Leisner
PART TWO
Note: The article is scheduled for publication in Securities Regulation Law Journal, Summer 2016 Edition, a Thomson Reuters Publication. For more information about this publication please visit www.legalsolutions.thomsonreuters.com.
Should it Matter Who Makes the Solicitation?
Before Citizen VC, the pre-existing business relationship pathways of permissible general solicitation, despite the obvious benefits and advantages, were not widely traveled by conventional issuers. The problem was not so much satisfying the elements to build the appropriate relationships but rather limitations on the entities that could travel the pathways.
Before Citizen VC, with rare exception, only registered broker-dealers, their affiliates or other similar financial professionals were recipients of favorable general solicitation no-action or interpretative letters.33 The favorable Legacy Interpretative Advice no-action and interpretative letters were issued to broker-dealers or similar third-party financial professionals.34 To the author’s knowledge, prior to Citizen VC no conventional issuer had received a favorable letter.35 Informally, senior staffers echoed the negative responses received by conventional issuers and reinforced the logic for limiting favorable letters to registered broker-dealers and other financial professionals.
The activities of broker-dealers or similar intermediaries were seen by the staff as a buffer between prospective investors and the issuers of securities. The SEC’s 2000 Electronic Media Release commented on permissible activities in conducting Regulation D private offerings.36 After first noting that “a general solicitation is not present when there is a pre-existing, substantive relationship between an issuer, or its broker-dealer, and the offerees,” the SEC focused on the special role played by financial intermediaries:
| “[T]raditional broker-dealer relationships require that a broker-dealer deal fairly with, and make suitable recommendations to, customers, and, thus, implies that a substantive relationship exists between the broker-dealer and its customers.” 37 |
For registered broker-dealers, part of their normal dealings with customers would be gathering facts regarding prospective customers’ financial wherewithal and investment sophistication.38 From the staff’s perspective, such required regulatory broker-dealer factual inquiries could be undertaken without making an “offer” to sell securities to the customer. Conventional issuers were not subject to these regulatory obligations.
Following the guidance in the first several favorable no-action letters in the Legacy Interpretative Advice, broker-dealers refined their use of impersonal non-selective general solicitation activities such as “cold-calling” and impersonal direct mail campaigns to solicit prospective investors to establish substantive relationships.
The author has received many “cold calls” from broker-dealers pursuing this scenario. The broker introduces herself (or himself) and almost immediately announces “I don’t want to sell you anything; I just want to find out a bit more about you and your investment objectives.”
After the initial contact, the broker-dealer could use additional telephone calls and mail exchanges (and after the mid-1990s, the internet and email) to obtain information about the financial wherewithal and investment sophistication of the prospective investor, thereby successfully establishing the substantive (business) relationship before making an offer to sell securities. After the establishment of the substantive (business) relationship, future securities offering communications with prospective investors would not be treated as general solicitation prohibited by Rule 502(c).
In 1997 and 1998, the Division of Investment Management, joined by the Division of Corporation Finance, provided favorable no-action letters to Lamp Technologies, a data processing and web site developer involved in the investment fund industry that was not registered as a broker-dealer.39 Lamp Technologies planned to use a password-protected internet site to provide information about private investment funds to prospective investors in such funds. The prospective investors were to be prequalified as accredited investors before being granted access to the website. The staff agreed that the proposed activities would not constitute impermissible general solicitation prohibited by Rule 502(c).
Two years later, the SEC issued the 2000 Electronic Media Release on April 28, 2000, providing staff guidance on the interaction of the internet and other new technologies with the federal securities laws. The Release comprises 28 single-spaced pages of 10 pt. type. Although fewer than two pages are devoted to private offerings, several of the Legacy Interpretative Advice letters are mentioned in the text or footnotes, including the Lamp Technologies letters.
The several years between the Lamp Technologies letters and the 2000 Electronic Media Release afforded the staff a prescient opportunity to consider the possibility of extending to other non-broker-dealers the procedures endorsed in the Lamp Technologies letters.40 Instead, in criticizing unprotected websites purporting to comply with the requirements noted in favorable no-action letters (including Lamp Technologies), the staff emphatically limited the application of the Lamp Technologies letters to their particular circumstances:
| We understand that securities lawyers may have interpreted staff responses to Lamp Technologies, Inc. as extending the “pre-existing, substantive relationship” doctrine to solicitations conducted by third parties other than a registered broker-dealer. . . . We disagree. In the Lamp Technologies no-action letters, the staff of the Divisions of Investment Management and [the Division of] Corporation Finance recognized a separate means to satisfy the “no general solicitation” requirement solely in the context of offerings by private hedge funds that are excluded from regulation as investment companies pursuant to Sections 3(c)(1) and 3(c)(7) of the Investment Company Act. (Citations to statutes and Lamp Technologies letters omitted.)41 |
Standing in bizarre juxtaposition to its narrow reading of the Lamp Technologies letters, the staff offered its views about the ability of non-broker-dealers to successfully create pre-existing substantive relationships without engaging in prohibited general solicitation:
| We have long stated . . . that the presence or absence of a general solicitation is always dependent on the facts and circumstances of each particular case. Thus, there may be facts and circumstances in which a third-party, other than a registered broker-dealer, could establish a “pre-existing, substantive relationship” sufficient to avoid a “general solicitation.”(footnotes omitted)42 |
Regrettably, the staff did not offer any examples of what “facts and circumstances” would allow a non-broker-dealer to successfully create a pre-existing substantive relationship. In these circumstances, as far as careful securities lawyers were concerned, there was little practical value in the staff’s theoretical insistence that non-broker-dealers could successfully establish pre-existing substantive relationships with prospective investors.
For careful securities lawyers advising conventional issuers, the staff’s positions vis-à-vis the Lamp Technologies letters meant that all but the most limited communications programs might be deemed to run afoul of the general solicitation prohibitions of Rule 502(c). Certainly, it would be too risky to advise a conventional issuer that it could solicit prospective investors following the procedures the staff approved for registered broker-dealers and Lamp Technologies.
In May 2003, the staff was presented with an opportunity to consider the proposed interactions of a conventional issuer with prospective investors. Counsel to Agristar Global Networks, Ltd. requested a no-action letter and related interpretative advice regarding certain proposed activities.43 In view of the similarities to those outlined by Citizen VC nearly a dozen years later, the details of the Agristar incoming letters are worthy of careful consideration.
Agristar planned to offer satellite-based communications systems for farmers and ranchers. Agristar had access to an extensive database of information about the prospective service subscribers developed over several decades that included current detailed financial and other pertinent business information on approximately two million ranches and farms. In addition, Agristar had substantive business relationships with the database entities, many dating back more than 20 years. Agristar proposed soliciting the “top 1%” of entities in the database to complete detailed generic questionnaires aimed at determining the recipients’ accredited investor status. Based on the database information and years of experience with the database entities, Agristar believed even before sending out the generic questionnaires it had a reasonable basis to believe that the “top 1% entities” would be accredited investors. The questionnaires would not be accompanied by any offer to sell specific securities and there would be no solicitation of an offer to buy securities.
Counsel to Agristar referred to the Legacy Interpretative Advice that had permitted the broad distribution of investor questionnaires not accompanied by an offer regarding a specific investment.44 Counsel to Agristar augmented the information in its initial request with an additional letter in September 2003. In February 2004, without substantive explanation, the staff declined to issue the requested no-action letter or interpretative advice.
There has been no formal staff explanation for the differing results obtained in the Citizen VC and Agristar letters. The planned policies and procedures of both companies seem to be similar to one another. If anything, it appears that Agristar’s plans to pre-select prospective investors to be solicited were significantly more selective than Citizen VC’s plans to first interact with prospective investors with an open public website.
As noted above, one persuasive explanation for concluding that broker-dealers could gather information about prospective investors without engaging in prohibited general solicitation was that gathering information about customers was a normal and FINRA (nee NASD) mandated part of broker-dealers’ day-to-day business. Citizen VC and Agristar, however, were alike in that neither had any regulatory obligations independent of complying with Rule 502(c) to gather information about prospective investors. Accordingly, this historical explanation was not available to differentiate the results in Citizen VC from those in Agristar.
Should their differing businesses alone account for differing SEC advice? Citizen VC planned to be an active participant in the financial services industry. In contrast, Agristar was a conventional issuer with an ongoing business separate from any participation in the financial services industry.
Which Communications are “Not Offers”?
As noted above, one explanation for differentiating treatment of financial services intermediaries from that accorded to conventional issuers was that such intermediaries could solicit information from prospective investors without making an “offer” to sell securities. Broker-dealers and investment advisers had regulatory obligations to become informed about the net worth, investment objectives and investment sophistication of their clients, who were also their prospective investors. In contrast, according to this explanation, most conventional issuers would have “no reason” to communicate with prospective investors other than to offer the issuer’s securities for sale.45
In the author’s opinion, this logic is subject to two fatal flaws: First, it omits any opportunity to take into account “all the facts and circumstances” that may be present in the activities of a particular conventional issuer and, in so doing, assumes its own conclusion that an “offer” must be part of any issuer contact.46 Second, it ignores the fact that the “only reason” the financial intermediary (or broker-dealer) is communicating with prospective investors is just the same as that ascribed to the conventional issuer – to sell a security to investors at some time in the reasonably foreseeable future.
If the SEC sincerely wishes to fairly implement the agency’s oft-repeated “all the facts and circumstances” standard, the ultimate objective of limited initial communications with prospective investors is but one fact to consider.47 The ultimate objective to sell a security – whether the sale is later made indirectly through a broker-dealer or directly through a conventional issuer – should not reasonably compel a conclusion that communications free from the indicia of an “offer” must nevertheless be seen as impermissible “offers” made in violation of Rule 502(c).
In the author’s opinion, under Citizen VC and the Companion C&DIs, a careful conventional issuer should be able to use impersonal means of mass communication with prospective investors without making an “offer” in violation of Rule 502(c). The issuer’s initial communications with prospective investors would omit any details about the nature of the security that might be offered in the future and instead concentrate on the initial steps in establishing the required substantive relationship.
Current and Future Best Practices for Conventional Issuers
To date, the staff has not endorsed the logic supporting the use by conventional issuers of “no offer” communications outlined above. As a result, conventional issuers and their advisers today are likely to conclude it is too risky to use Citizen VC and the Companion C&DIs as a template for general solicitation of prospective investors as a first step to establishing substantive relationships. However, the author expects that, over time, the uncertainties of the current environment for permissible general solicitation by conventional issuers will give way to more certain and more liberal best practices.
There are several likely sources for such improvements. First, the Division of Corporation Finance could issue a favorable no-action or interpretative letter to a conventional issuer. While it is true that, in the several decades since the adoption of Regulation D, no conventional issuer received a favorable letter, there is, nevertheless, a basis for a bit of optimism.48
The staff has repeatedly said that facts and circumstances (not status as a broker-dealer) determine whether favorable no-action and interpretative letters were issued. In this regard, the absence of broker-dealer registration did not disqualify Citizen VC from receiving the same favorable staff advice as had registered broker-dealers in the Legacy Interpretative Advice.49 This favorable result in Citizen VC must be seen as both a significant change in the regulatory environment and also as a harbinger of a possibly favorable result in the future for a conventional issuer with the “right facts and circumstances.” Perhaps the favorable results will be forthcoming if the staff is now presented with facts and circumstances similar to those in Agristar.
Another source for more liberal compliance best practices for conventional issuers would be one or more court decisions requiring the staff to take a less restrictive view of what behavior was an impermissible “offer” or constituted impermissible general solicitation.50
Finally, it is inevitable that custom and practice will experience gradual changes (sometimes pejoratively referred to as “exemption creep”). Compliance practices that might raise concerns today could be well accepted in general use in a decade.51
The discussion that follows below suggests certain hypothetical future best practices that might emerge through one or more of the change agents discussed above. The author cautions readers that neither the staff nor any court has endorsed the procedures reviewed below as the “right facts and circumstance” to avoid characterization as impermissible general solicitation in violation of Rule 502(c).
The “exemption creep” process may begin by conventional issuers and their advisers modeling interaction with prospective investors based on the content and mechanics of Citizen VC letter and website, the relevant Companion C&DIs and the Legacy Interpretative Advice.
An issuer could start with its publicly available web page and include a generic invitation to individuals and companies who might be “interested in finding out more about our company” and asking them to “tell the company more about you.” Interested visitors would fill out a general questionnaire that would be the first of several steps needed to establish the appropriate substantive relationship.
The crucial webpage design objective would be avoiding any content that might be seen as an “offer” to sell securities. The content of the Citizen VC website may prove helpful in avoiding any “offer.”
Given how well known Citizen VC has become since August 2015, it seems a fairly safe assumption that its publicly available web pages do not constitute impermissible “offers” of securities. If the public web page content did constitute “offers,” it is highly likely there would have been a well-publicized staff public comment or other public event.52 Therefore, the content on Citizen VC’s publicly available web pages provides a useful disclosure template for conventional issuers desiring to interest prospective investors but avoid making any “offers.”
Consider the following excerpts from Citizen VC website at http://citizen.vc/.
| On the home page: |
| Startup investment, simplified
citizen.vc gives accredited investors direct access to private offerings from Silicon Valley’s most promising startups |
| Under the “Invest” tab: |
| An alternative to traditional VC funds
Our Investment Criteria: We identify and cultivate opportunities exclusively in late- and growth-stage companies, C Round or later, with a 2-4 year time horizon to a liquidity event. Additional investment criteria include underwrite opportunities that can at a minimum yield a 3x or better, an outstanding management teams, and a fertile marketplace for the company to deploy the investment for growth. We source our own deal flow We discretely source our own deals and only the best make it through our filter. Companies seeking to raise capital on our platform disclose all the due diligence information available to insiders, the larger institutional investors and venture capital firms. |
| Under the “Invest” and then “Our Platform” tabs: |
| Investing with citizen.vc
Citizen.VC clients enjoy exclusive access to investment opportunities through a proprietary web-based platform. With the Citizen.VC platform investors track available opportunities, transact and monitor each of their investments. Citizen.vc is run by investment professionals for investment professionals |
| On the “Invest” and then “Qualify” tabs: |
| Only approved investors qualify to invest with us. If you would like to be considered for approval please fill out our questionnaire.
U.S. securities laws limit the types of investors who can invest with us. This questionnaire will help us determine whether you meet suitability requirements for future investments. Any information you provide here will be kept in strict confidence, but we reserve the right to present your completed questionnaire to parties that we, in our sole discretion, deem necessary in order to complete an investment on your behalf, or, if requested by a governmental or legal authority or required by any laws applicable to us. Please click below to access our questionnaire:53 |
For a hypothetical conventional issuer’s website, the initial online invitation (and the website content) would include a clear “no offer” disclaimer similar to that used by Citizen VC. Nothing on the conventional issuer’s website or in communications taking place before the establishment of the substantive relationship would disclose any significant information about any planned offering.54
After processing the initial generic questionnaire, the follow up process could again model itself on the procedures outlined in Citizen VC and could include personal interviews via telephone and more detailed digital questionnaires. Among other things, such questionnaires would elicit detailed information about financial wherewithal (e.g., annual income, net worth, and investment portfolio makeup and liquidity) and investment objectives, experience and sophistication.55
The portions of the web pages that might include information about any planned or ongoing securities offering would be password-protected and passwords would be issued to prospective investors only after they had established the necessary substantive relationship with the issuer.
Although not deemed in the Companion C&DIs as mandatory, the hypothetical conventional issuer will be advised to impose a “cooling off” period of at least 30 days between the time when the substantive relationship is established and an “offer” is communicated to a prospective investor. Such a hiatus would harmonize with the assertion that no “offers” were involved in the initial communications and subsequent interchanges establishing the substantive relationship.
Only time will tell if the foregoing hypothetical best practices for conventional issuers based on the logic underlying Citizen VC become tomorrow’s generally accepted custom and practice for permissible general solicitation in Rule 506(b) offerings.
* * * * *
Epilogue: Why Not Use Rule 506(c)?
Substantial time and effort will be needed to comply with the foregoing hypothetical conventional issuer Rule 506(b) permissible general solicitation best practices. A fair reaction might be to suggest modifying the planned offering to qualify for compliance with Rule 506(c). Under Rule 506(c), unrestricted general solicitation is permitted.
There are several reasons why practitioners may prefer Rule 506(b). First, there are several decades of experience with Rule 506(b) transactions on which to draw. In contrast, Rule 506(c) has been available only since September 2013. In this regard, outside of safe-harbor procedures promulgated by the staff, many practitioners have not yet developed a comfort level with the steps needed to satisfy the Rule 506(c) compliance requirement to “take reasonable steps to verify” accredited status for all purchasers. Under Rule 506(b) accredited investor status is established under Rule 501(a) in either of two less challenging ways: (1) the prospective investor actually meets one or more accredited investor requirements or (2) there is a “reasonable belief” that the prospective investor meets such requirements.
If, for some reason, the Rule 506(c) exemption is lost, the admitted presence of “general solicitation” will make it very difficult if not impossible to qualify for a “fall back” federal exemption under the statutory private placement securities registration exemption of Section (4)(a)(2) of the Securities Act of 1933. General solicitation is simply incompatible with the federal statutory private placement registration exemption. If, however, a Rule 506(b) offering exemption is lost, in the author’s opinion, it will be a much less daunting task to qualify for the federal statutory private placement exemption, even if the non-compliance is alleged to have involved impermissible general solicitation.
There are no state securities registration exemptions that parallel Rule 506(c) and allow for general solicitation in exempt private offerings. Thus, for state securities law registration exemptions, practitioners in structuring Rule 506(c) transactions rely on the preemption of state securities law registration requirements provided by Section 18(b)(4) of the Securities Act of 1933. Similarly, the presence of general solicitation is incompatible with virtually every state securities law private placement exemption and the loss of federal preemption might make it impossible to satisfy applicable state securities registration exemptions, including some with which a Rule 506(b) offering could comply.
* * * * *
Richard M. Leisner is Trenam Law’s senior securities lawyer. Richard’s broad-based corporate and securities law practice encompasses virtually all stages of the life cycle for public and private companies and their leaders and owners, including Regulation D private placements. A substantial portion of Richard’s practice is devoted to service as a consultant and expert witness in corporate and securities litigation matters. For more information about Richard’s expert witness services, visit www.witnessthedifference.com.
33 Non-broker dealer sponsors of private investment funds did receive favorable no-action letter responses from the SEC Division of Investment Management in Lamp Technologies, Inc. 1998, May 29, 1998, SEC No-Act. LEXIS 615 Royce Exchange Fund, Quest Advisory Corp., August 28, 1998, 1996 SEC No-Act. LEXIS 706. The staff of the Division of Corporation Finance, as noted infra, made it clear that the logic in these letters would not be extended to actions by conventional issuers.
34 Note 8, supra.
35 For an example of a negative staff response to a no-action request with facts not dissimilar to those in Citizen VC, see Agristar Global Networks, Ltd. (February 9, 2004) 2004 SEC No-Act. LEXIS 203. Also, for other negative staff responses, see Gerald F. Gerstenfeld (December 3, 1985) 1985 SEC No-Act. LEXIS 2790; Mineral Lands Research & Marketing Corporation (December 4, 1985) 1985 SEC No-Act. LEXIS 2811; Webster Management Assured Return Equity Management Group Trust (February 7, 1987) 1987 SEC No-Act. LEXIS 1595; and Circle Creek AquaCulture V, L.P. (March 26, 1993) 1993 SEC No-Act. LEXIS 524.
36 2000 Electronic Media Release, “Private Offerings Under Regulation D.”
37 Ibid.
38 Under applicable FINRA (and previously, NASD) rules, broker dealers are subject to “fair dealing” (Rule 2010), and “suitability” obligations (Rule 2111) and, in addition to the obligations noted above, the further regulatory obligation to “know your customer” (Rule 2090), available at https://www.finra.org/industry/finra-rules (last visited April 11, 2016).
39 Lamp Technologies, Inc. 1997 SEC No-Act. LEXIS 638 (May 29, 1997) and Lamp Technologies, Inc. 1998 SEC No-Act. LEXIS 615 (May 29, 1998). In 1996, the Division of Corporation Finance issue a favorable no-action letter to another non-broker-dealer on permissible general solicitation involving investors in private investment funds; Royce Exchange Fund. Quest Advisory Corp 1996 SEC No-Act. LEXIS 706 (August 28, 1996).
40 Indeed, when the Lamp Technologies letters were first issued, many practitioners interpreted the letters as the staff’s endorsement of the use by conventional issuers of the broker-dealer approved permissible general solicitation procedures.
41 2000 Electronic Media Release, Note 88.
42 The staff’s policy of an “all the facts and circumstances” approach echoed language in a 1989 Release: “the staff has never suggested, and it is not the case, that prior relationship is the only way to show the absence of a general solicitation.” Securities Act Release No. 6825 (March 15, 1989) [54 FR 11369] n. 12.
43 Agristar Global Networks, Ltd. 2004 SEC No-Act. LEXIS 203 (February 9, 2004).
44 IPO Net, H.B. Shaine & Company, Inc., E.F. Hutton Company and Bateman, Eichler, Hill Richards, Inc., supra.
45 As additional support for the differing treatment of conventional issuers from that accorded to financial intermediaries it has been asserted that communications by financial intermediaries with prospective investors were free from an “offer” to sell securities because, at the time of the initial contact, the issuer and investment terms would not be disclosed to the prospective investor. In contrast, according to this explanation, prospective investors in communications with conventional issuers would “know” the identity of the likely issuer, making the existence of an “offer” in the initial communication almost unavoidable. Of course, in such initial communications, the conventional issuer could refrain from revealing the specific identity of the ultimate issuer (it could be an affiliate of the party making the communication) as well as the specific terms of the security that might later be offered for sale.
46 The term “offer” has been broadly defined in statutory provisions, rules, interpretative releases and litigation (e.g., Section 2(a)(3) of the Securities Act of 1933). The SEC has issued rules narrowing the breadth of the statutory definition (e.g. Rules 135(a)-(e) under the Securities Act of 1933) that make “non-offers” of conduct and communications that would otherwise be “offers.” Ultimately, whether an “offer” has been made should depend on the particular facts and circumstances. See Reg D 1983 Q&A Release. More than two decades ago, Linda Quinn, long-time Director of the Division of Corporation Finance, in assessing the future of private offering regulation, suggested there may have been too much concern with regulating “offers” and that it was preferable instead to focus regulatory effort on protecting actual purchasers. “Reforming the Securities Act of 1933: A Conceptual Framework,” Speech at the Federal Regulation of Securities Committee of the Business Law Section of the American Bar Association 1995 Fall Meeting, Insights, January 1996, Section: From The Podium; Vol. 10, No.1; Pg. 25.
47 Companion C&DI Question 256.32, citing to 2000 Electronic Media Release, which in turn cited to Securities Act Release No. 6825 (March 15, 1989) [54 FR 11369] n. 12.
48 Citizen VC was issued more than dozen years after the negative response in the Agristar letter and some 15 years after the negative comments in 2000 Electronic Media Release about the inability of non-broker-dealers to model their conduct on the permissible general solicitation activities approved for broker-dealers and certain private hedge funds. For references to unsuccessful no-action and interpretative letters, see note 35, supra.
49 Question 256.28 in the Companion C&DI stated that registered investment advisers could provide services similar to those of broker-dealers in establishing pre-existing substantive relationships without engaging in impermissible general solicitation.
50 See SEC v. Schooler, 106 F. Supp. 3d 1157, 2015 U.S. Dist. LEXIS 67382, *13 (May 19, 2015). The SEC does not always get its way regarding the scope of behavior proscribed by Rule 502(c):
| Contrary to the SEC’s arguments, the Court finds that the evidence cited by the parties indicates a dispute of material fact as to whether the GP units were generally solicited or advertised by Western. . . . Indeed, the SEC has issued a no-action letter recognizing that offers to clients obtained through general solicitation may not constitute general solicitation if ‘sufficient time’ passes between establishment of the relationship and [the] offer. (Citations omitted). |
51 For example, when Regulation D was first adopted, senior staffers categorically stated that self-certification by “checking a box” in a subscription agreement would not provide a “reasonable basis” for establishing accredited investor status under Rule 501(a). Initially, careful practitioners advised clients it was necessary to collect and retain information about prospective investors in addition to that provided in the subscription documents. Over time, practitioners modified subscription documents to require substantially more from prospective investors than merely “checking a box” asserting “I am an accredited investor.” The self-certification process today frequently requires prospective investors to “fill in” information, such as the specific type of accredited investor the prospective investor is, the actual dollar amount or level of annual income and net worth, the value of the investor’s principal residence and debts affecting such residence, investment experience and nature of investment portfolio. Today, most practitioners view self-certification via a reasonably detailed subscription agreement as meeting the reasonable belief requirement of Rule 501(a), particularly for prospective investors personally known to the issuer. Informally, the staff and Companion C&DIs warn against “checking the box” self-certification; however, such generic warnings of certain noncompliance from such simplistic self-certification ordinarily have not extended to the content of subscription documents eliciting significantly more fulsome information about prospective investors.
52 The term “offer” in broadly defined in Section 2(a)(3) of the Securities Act of 1933 and offers and solicitations of offers to buy have been found to exist in the context of enforcement proceedings. Such a broad definition of “offer” does not appear to have been applied to the Citizen VC website.
53 At the time of the author’s last visit to the Citizen VC website, it was not possible to access a questionnaire. Clicking on the “questionnaire” button returned an error message rather than a questionnaire; clicking the “Login” tab returned the following message: “Access to citizen.vc is currently by invitation only.” Available at http://citizen.vc/ (last visited April 19, 2016).
54 Among the “non-disclosed information” would be the factual information that would typically accompany an offer to sell securities, including identity of the issuer, dollar amount to be raised,, classification of the security or securities to be offered, whether common stock, preferred stock, or other equity security; or a debt security, conversion features for debt and preferred stock, anti-dilution provisions, interest and dividend rates for debt and preferred stock, negative covenants or other limitations on management operational discretion, duration of the offering, use of proceeds, information about capital structure, minimum purchase requirements and any investor suitability or financial wherewithal preconditions.
55 Details for questionnaire content are generally beyond the scope of this article. For links to exemplars including the form and substance of such questionnaires and detailed instructions for use in compliance with applicable provisions of Regulation D and other securities laws, see Practical Law Company Regulation D Private Placement Toolkit, available at http://us.practicallaw.com/4-543-3925#null (last visited April 22, 2016).
