Questionnaires are frequently used to qualify investors to participate in private placements under Rule 506. These questionnaires allow prospective investors to speak to their sophistication and financial wherewithal, and their purpose is to establish a substantive relationship between the prospective offeror and offeree. The question arises, then, whether time must pass between the creation of the relationship and the offer to sell, and if so, how much. The answer requires an understanding of the Securities and Exchange Commission’s treatment of general solicitation.
General solicitation is forbidden in connection with private offerings under Rule 506. (This will change once the SEC promulgates new rules under the JOBS Act, but even then “quiet” 506 offerings will remain an option, and avoiding general solicitations will remain important.) The SEC has never drawn a sharp line separating communications that qualify as general solicitations from those that do not. However, in a line of no-action letters, it has explained that if a substantive relationship exists between the offeror and the offeree at the time the offer is made, it will not find that the offer is a general solicitation. The SEC has emphasized the temporal element of this analysis: the relationship must be pre-existing, and offerees may not participate in any offering that was ongoing at the time the relationship was established.
On certain occasions, the SEC has indicated that a “cooling off” period must take place between the establishment of the substantive relationship and the offer to sell. However, it has never specified the amount of time that must elapse. In one no-action letter, Lamp Technologies, Inc. (May 29, 1997), it noted with approval a 30-day waiting period between the creation of the relationship and the solicitation of offers, but it has never indicated that such a waiting period is necessary in all cases.
In other no-action letters, the SEC has not required a cooling off period. The most significant of these is IPONET (July 26, 1996). In that case, a website operator granted accredited investors password access to view notices of private offerings online. In giving its blessing, the SEC noted that (a) the questionnaire used to verify investors’ accredited status was generic and did not mention specific transactions; (b) investors would be given password access only after they had been qualified; and (c) a potential investor could participate only in those offerings that were posted after the investor had been qualified.
It therefore appears that the longer the intervening period between the qualification of the accredited investor and the offer, the less likely it will be that the SEC will find a general solicitation. Nonetheless, the SEC has provided guidance sufficient to conclude that does not demand a minimum cooling off period in all cases. Provided that it exists and is demonstrable, it is unlikely the SEC will find a general solicitation on those grounds.
Robert S. Hatfield III, firstname.lastname@example.org
Robert S. Hatfield III is a corporate associate in the Boston office of Sullivan & Worcester.
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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 Robert S. Hatfield III. This work reflects the law at the time of writing.