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General Solicitation, Reg D, and the SEC

Post on: October 22, 2014 | Jim Raper | 0

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Dawn Lim’s piece in the Wall Street Journal, What Keeps Private Equity Up at Night was largely a synopsis of a recent survey conducted by the Association of Corporate Growth asking fund managers to weigh in on the recent attention their funds’ are receiving by the SEC.

Not unexpectedly, managers were concerned with the additional oversight that 2010’s Dodd-Frank Act had given to the SEC, and for good reason. Andrew Bowden, the director of the SEC’s Office of Compliance Inspections and Examinations, said that more than 50% of the examinations review of fees and expenses resulted in a finding that a law had been violated or that there was a material weakness in the fund’s controls.

Then there is the issue of general solicitation. Most private security offerings prevent firms from using general solicitation to attract investors to their offerings. General solicitation is a broad brush catch all that prevents any disclosure of a private security offering to anyone with whom a preexisting client relationship does not exist and cannot be demonstrated.

For example, if John Public visits a fund’s website and on the website sees, “Fund X Currently Funding” – that’s general solicitation. The communication of an investment opportunity in an exempt offering has occurred. That is a problem if the fund chose a Reg D 506(b) exemption to create their fund. It does not matter if the investor is accredited or not, only that no preexisting client relationship existed.

As Lim’s article points out, some funds are beginning to consider Reg D 506(c), created within the JOBS Act, as a compliant means to generally solicit their private security offerings. 506(c) offerings allow general solicitation, but place an obligation on the issuer (the fund) to ensure that the investor is accredited in exchange for the privilege. That is a fair trade – potential increased investor pool in exchange for only allowing accredited investors to invest…those folks that previously were not in a firm’s customer relationship database.

WealthForge LLC; a member of FINRA and SIPC, provides online private security transaction infrastructure for both 506(b) and 506(c) compliant securities transactions. WealthForge efficiently administers the issuer, offering, and investor diligence required by the regulations which govern exempt private security transactions. What is becoming more apparent, is that when properly administered, compliant online private security transactions add efficiency and transparency where, to a great degree, neither historically existed.

Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice.

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Jim Raper

Jim Raper is the Chief Compliance Officer at WealthForge Securities, LLC, who is among the top 5 broker-dealers as measured by the number of original Form D filings over the past two years.
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