Rule 506(b versus Rule 506(c

Last month the SEC issued a no action letter and

some compliance and disclosure interpretations
relating to the use of 506(b by an online private
placement under Regulation D.

The issue?

Which private placement offerings will be found to

involve a general solicitation and are therefore
subject to the more challenging requirements of the
new Rule 506(c, and which private placement
offerings can still qualify under the tried and true
506(b.

Noteworthy observations but only speaking generally.

An offering of securities to an angel investing

club is not a general solicitation

With large groups it depends who attends and

the purpose of the meeting. If the company is
presenting an offering of securities to a large

group of people who have no specific

relationship to the organizers, then one can
reasonably conclude that this is, in fact, a
general solicitation.

There is no specific waiting period to create a

pre-existing relationship.

Whether an issuer has sufficient information to

evaluate an investors financial circumstances
and sophistication will turn on the facts.

The SEC apparently (reading between the lines

somewhat) prefers an issuer to use a series of
special purpose vehicles for investment in
portfolio companies, rather than using blind
pools.
Operative SEC language:
. . . . the quality of the relationship between an
issuer (or its agent) and an investor is the most
important factor in determining whether a
substantive relationship exists.
A "substantive" relationship is one in which the
issuer (or its agent) has sufficient information to
evaluate an offeree's financial circumstances and
sophistication when determining status as an
accredited or sophisticated investor. See,

e.g., Bateman Eichler, Hill Richards, Inc. (Dec. 3,

1985).

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