General solicitation, as permitted by the U.S. Securities and Exchange Commission (SEC), refers to the public advertising of private investment opportunities. This practice allows businesses to promote their offerings through various public channels, such as websites, social media, and email campaigns. However, the connection between general solicitation and accredited investors is crucial. While businesses can widely advertise, they are still restricted to selling securities only to accredited investors – individuals who have the financial sophistication and resources to handle the risks involved.
Rule 506(c) and Accredited Investors
The JOBS Act of 2012 significantly changed how businesses could use general solicitation. Prior to the Act, private companies seeking investors were prohibited from advertising their offerings to the general public. This changed with the introduction of Rule 506(c), which allows businesses to use general solicitation to attract investors, provided they take extra steps to verify that all investors meet accredited investor requirements.
This verification process can involve reviewing bank statements, and tax documents, or working with a third-party verification service. The use of general solicitation under Rule 506(c) provides businesses with the ability to tap into a much larger pool of potential investors, but only accredited individuals can actually participate in these investments.
For accredited investors, this shift means greater access to exclusive investment opportunities that were once reserved for a smaller, less advertised market. Businesses, particularly startups and emerging companies, can now reach a wider audience while still preserving the necessary protections for investors.
The Importance of Verification
One of the key aspects of using general solicitation under Rule 506(c) is the mandatory verification process. Companies are required to take reasonable steps to ensure any potential investor meets the financial qualifications to be considered accredited. This is not a simple self-certification process but involves documented proof of net worth or income. The emphasis on verification serves as a protective measure, making sure only those with the financial capability to absorb potential losses are allowed to participate in these private placements.
The use of general solicitation has expanded opportunities for both businesses and accredited investors. While public advertising is now allowed, the sale of securities remains exclusive to accredited investors, who meet strict financial qualifications. This connection ensures that while the investment market becomes more accessible, the risks are still mitigated for investors who can handle them.
