SEC Advisory Committee Calls to Relax Restrictions on General Solicitation in Private Placement

Robert K. Ranum of Fredrikson & Byron, P.A.

Original Title: SEC Advisory Committee Joins in Call to Relax Restrictions on General Solicitation in Private Placements

On January 6, 2012, the Securities and Exchange Commission (SEC) Advisory Committee on Small and Emerging Companies recommended that the SEC take immediate action to relax or modify the restrictions on general solicitation and general advertising in private offerings that are sold solely to accredited investors. As reported in our January 2012 FredALERT, several bills in the U.S. Congress also propose to relax or eliminate the prohibition on general solicitation under certain circumstances. The Advisory Committee's recommendation thus adds to a growing consensus that the prohibition on general solicitation and general advertising is unnecessary in private offerings that satisfy other conditions for the protection of investors.

Under current law, private placements may not be offered by any means of general solicitation or general advertising, which includes communications in newspapers, magazines, or broadcast over television or radio or over the Internet. As a result, an entrepreneur or small company seeking to raise money by selling securities is prohibited from issuing a press release about the offering or posting an offering summary on a website. The SEC's Advisory Committee is of the view that the restrictions on general solicitation and general advertising prevent many small businesses and smaller public companies from gaining sufficient access to sources of capital and thereby materially limit their ability to raise capital through private offerings of securities. The Advisory Committee believes that the investor protections afforded by the existing restrictions on general solicitation and general advertising are not necessary in private offerings of securities where the securities are sold solely to accredited investors.

An accredited investor is an investor that meets certain financial standards set forth in the SEC's rules. An individual is accredited if that individual: (1) has a net worth or joint net worth with the investor's spouse exceeding $1 million (excluding the value of the investor's principal residence and any debt secured by the principal residence not exceeding the value of the residence); or (2) had an individual income in excess of $200,000 in each of the two most recent years, or joint income with that person's spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year. The SEC's rules make it easier to sell securities to accredited investors, in general, because the SEC considers accredited investors better able than nonaccredited investors to protect their own interests when investing in private placements. The Advisory Committee now recommends that the SEC go one step further and permit general solicitation and general advertising in private offerings of securities to accredited investors.

The January 6, 2012, recommendation of the Advisory Committee is the first of what will be an ongoing series of recommendations to be provided by the Advisory Committee, which was originally formed in September 2011. The Advisory Committee is intended to provide a formal mechanism through which the SEC can receive advice and recommendations specifically related to privately held small businesses and publicly traded companies with less than $250 million in public market capitalization. It is unclear if and when the SEC will act on the Advisory Committee's recommendation, or whether the pending legislation in the U.S. Congress will influence the SEC's consideration of the recommendation.

Robert K. Ranum,

Mr. Ranum advises corporations and their officers and directors on matters involving corporate and securities law, including private and public offerings of securities, mergers, acquisitions, proxy solicitations, stock options and compliance with Securities and Exchange Commission requirements.

Mr. Ranum has assisted entrepreneurs in the formation and financing of development stage companies and worked with established corporate clients in a variety of matters. He joined Fredrikson & Byron in 1983 and became a shareholder of the firm in 1989. Mr. Ranum has spoken about corporate law at continuing legal education seminars and other forums.

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Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from Fredrikson & Byron, P.A. This work reflects the law at the time of writing March 2012.