Private funds seeking to avoid registration of their securities under the 1933 Act in reliance on the Regulation D safe harbor must not sell fund securities by any form of general solicitation or general advertising. The determination of whether a particular communication constitutes a prohibited general solicitation or general advertisement involves two questions:
- Is the communication a general solicitation or general advertisement? A communication will be deemed a general solicitation or general advertisement unless it is directed only to persons with whom the issuer or its agents have a pre-existing relationship. This relationship must be sufficiently substantive to provide a reasonable basis for determining that the person targeted by the communication is an accredited investor and has the financial experience and sophistication needed to evaluate the risks of an investment in the issuer’s securities.
- Is the communication being used to offer or sell securities? Regulation D prohibits general solicitations and general advertisements only if such communications are being made for the purpose of offering or selling the securities for which the exemption is being sought. Any communication that could create interest in an issuer’s securities may be deemed to have been made for the purpose of offering or selling securities.
If the answer to either of these questions is “no,” the communication is permitted by Regulation D.
In order to minimize the risk that a communication will be deemed a prohibited general solicitation or general advertisement, fund advisers should follow certain guidelines:
- Publications. As a communication published in newspapers, magazines or similar media is accessible to the general public, it will be deemed a general advertisement or general solicitation and is prohibited by Regulation D if made for the purpose of offering or selling securities. A fund adviser may use publications to discuss its advisory business, but should not mention its funds in any such publication or indicate that it is seeking investors for a fund’s securities.
- Targeted Communications. As discussed above, emails, letters, phone calls and other communications directed by a fund adviser to persons with whom it has a substantive pre-existing relationship will not be deemed general solicitations or general advertisements and may discuss a prospective investment in fund securities without violating Regulation D.
- Website. If a fund adviser’s website will be publicly accessible, any information posted on it will be deemed a general solicitation or general advertisement. A fund adviser may discuss its advisory business on its website but should not mention its funds or indicate that it is seeking investors for securities of funds. If a fund adviser wishes to make offering materials and other documents regarding its funds available through its website, it should create a password protected portion of its website and issue passwords only to persons with whom it has a substantive pre-existing relationship.
- Conferences. If the public has been invited to a conference or seminar, any statements made there by a fund adviser (e.g., by appearing on a panel, delivering a presentation or distributing printed materials) will be deemed a general advertisement or general solicitation and may not be used to offer or sell securities.