The SEC has approved a new rule that allows private funds to engage in general solicitations of their securities, provided sales are only made to accredited investors. The changes to Rule 506 of Regulation D allow general solicitation so long as the issuer “takes reasonable steps to verify that investors are accredited investors” and the issuer reasonably believes such persons are accredited investors. The SEC indicated that a tax form with a purchaser representation about income or a confirmation from a broker or investment adviser may be used to verify “accredited investor” status, although the SEC said the methods are non-exclusive. The SEC also proposed a new rule requiring any issuer that intends engage in a general solicitation to file an extensive information form with the SEC before engaging in the solicitation and include several disclosures. Additionally, the SEC proposed applying to private fund advertising the same rule (Rule 156) currently applicable to mutual fund advertising.
OUR TAKE: The ability to engage in general solicitation eliminates the requirement that an issuer must have a pre-existing relationship with every prospect. However, the SEC is going to make a general solicitation as difficult as possible, given its Congressional mandate. Although an issuer is not required to get a tax return or a broker/RIA confirmation of income, the SEC implies that the burden will be on the issuer if it did not receive this proof and an investor turns out not to be accredited. Also, the proposed filing requirement will force issuers to create a form of disclosure document for the SEC. We do agree with applying Rule 156 to private fund general solicitation as a reasonable safeguard against misleading claims.