What Is General Solicitation?

As a business owner seeking strategies to fuel growth, you might find traditional fundraising avenues too restrictive for your ambitions. Enter “general solicitation” — a strategy that, when properly structured, could unlock access to a wider pool of eager investors ready to transform your business. In this comprehensive article, you will gain expert insights into general solicitation and learn to navigate its numerous compliance requirements to boost your business expansion.

Understanding General Solicitation

At its core, general solicitation involves the public advertising of securities. This occurs when an issuer, like your business, engages in communication efforts designed to generate public interest in the sale of your securities. Types of general solicitation include:

  • Mass mailings
  • Email newsletters
  • Social media posts
  • Publicly available websites
  • Newspaper and magazine advertisements
  • Radio and television broadcasts

The Securities Act of 1933 initially barred companies from publicly advertising securities sales without undergoing the full public offering process, which includes registration with the SEC. Nevertheless, the act provided exemptions, such as Section 4(a)(2), which allows transactions by an issuer that do not involve a public offering to be excluded from registration. Further, Regulation D's Rule 506(b) specifies conditions under which issuers can rely on the Section 4(a)(2) exemption. Notably, one of them is the prohibition against using general solicitation to market the securities.

Why?

When the Securities Act was being enacted, the Stock Market crash of 1929 was a recent memory, prompting Congress to seek protections for investors and ensure the integrity of the market.

However, as time passed, opinions shifted. By the mid-2000s, it was evident that while these regulations protected investors, they also hampered capital formation. It became apparent that regulating the sale of securities was more critical than restricting their marketing.

The JOBS Act of 2012 and Its Implications on General Solicitation

In response, during the Obama administration, Congress passed the Jumpstart Our Business Startups Act (the JOBS Act) on April 5, 2012. This Act specifically revised Rule 506 and instructed the SEC to ease the restrictions on general solicitation in securities marketing.

When the amendment took effect in July 2013, it paved the way for a dual strategy: businesses could use the Rule 506(b) exemption for private placements without general solicitation, or they could opt for Rule 506(c), which allows marketing to a broader audience through general solicitation.

This flexibility, however, introduced a critical requirement.

For companies using Rule 506(c) to market their securities, they must diligently verify that all investors are accredited. Essentially, while the JOBS Act liberalized the marketing of securities, the core regulations governing the sale of securities, as established in the Securities Act of 1933, remained unchanged.

What does this mean for you?

If your business needs capital for growth, you're now permitted to use public channels to attract investors, even those you've never met before. This can include avenues like social media, websites, and email newsletters. Yet, the fundamental rules governing the sale of securities remain unchanged. You can only sell these securities to accredited investors.

This raises important questions: Who qualifies as an accredited investor, and how do you verify that a potential investor meets these criteria? Stay tuned for our next blog to find out.

Conclusion

Are you wondering about any of the issues mentioned above? Please email us at info@wilkinsonlawllc.com or call (732) 410-7595 for assistance.

At Wilkinson Law, we give business owners the documents and advice they desperately need to fund, grow, protect and sell their businesses. We are trustworthy business advisors keeping your business on TRACK: Trustworthy. Reliable. Available. Caring. Knowledgeable.®