August 29, 2013
While most of the debate around lifting the bans on general advertising and general solicitation have focused on measures to protect against fraud and verifying accredited investors, the SEC has yet to provide much guidance on how hedge funds and private equity firms are to actually communicate in this new world order.
Much of the potential confusion is directly related to the fact that the SEC has never actually defined general advertising or general solicitation. The interpretation of what constitutes general solicitation, and practices to implement that interpretation, can vary widely from firm to firm and among compliance, legal, marketing and communications people within those businesses. The SEC has provided a few samples, and some other examples can be tracked down via no-action letters, but at no time during this JOBS Act process has the SEC offered a more comprehensive view on what tactics encompass the term.
Previously, a catchall like general solicitation deterred any and all activity. But with a green light ahead, and given the fact that firms could be employing modern communication methods, much more attention needs to be paid to: 1. What will be permitted, 2. What will be monitored and/or submitted and 3. What, if anything, will still be prohibited.
In the current rule proposal on Regulation D amendments, guidance focuses almost exclusively on written general solicitation materials, the legends and disclosures that will need to be included, and the process in which they need to be filed with the SEC. This would probably suffice if this was 1990, but in todays environment, controlled, written material only scratches the surface.
Almost entirely ignored was direction on verbal communication, indirect communication via media outlets (broadcast, digital or published) where the final product is not under an issuers control, and use of social media (while often written is incapable of including disclosure language).
While I do no think it is necessary (or even prudent) to request the SEC to provide an exclusive definition of general solicitation (as communication platforms will continue to evolve quickly), a detailed, non-exclusive definition will be greatly beneficial if we are to remove the haze of ambiguity. Without more clear-cut guidance, a far smaller percentage of firms will opt to participate in general solicitation, which would defeat much of the benefit the SEC has articulated would favor investors.
Consistent with last years rule proposal, firms will have a choice in if they are going to participate in general solicitation. Without more understanding and guidance on the tactical rules of engagement, firms will certainly be hesitant to step forward in fear they have too much to lose.
While part of the intent of the proposed rule is to level the playing field among issuers, as it is currently written, general solicitation will most favor bigger firms with deeper resources and more robust marketing capabilities. They are the firms that have the budget to buy advertising space in top journals, sponsor events and cast as wide a net as possible. Smaller firms with limited budgets would likely lean more heavily on public relations (third-party press coverage) and social media efforts to get their word out. But without guidance, they will be reticent to make a mistake.
The irony of such an outcome would be unfortunate.
The good news is that there is still time to bring clarity to the term general solicitation. The burden of the details certainly will fall within the final rule on Regulation D amendments. Like the SECs decision to provide a non-exclusive list of what constitutes an accredited investor, so too can they provide a better framework on what general solicitation encompasses and how the industry should engage in its deployment.