Here is a brief discussion of how to locate and solicit investors for a private placement. This article covers offerings for angels or VCs under Regulation D, Rule 504 or 506.
PROHIBITIONS AGAINST GENERAL SOLICITATIONS AND ADVERTISING
An issuer may not, per Regulation D and/or Rule 502(c), offer to sell nor actually sell securities via any form of general advertising or solicitation. The rule applies to both the issuer and anyone acting on the issuer’s behalf. Therefore you may not use any form of advertisement, article, nor may you communicate the information via any newspaper or television or similar media.
YOU ARE RESPONSIBLE FOR YOUR AGENTS
You remain responsible for any party you contract to solicit for you. It does not matter if it is a third party such as a broker, you must make certain they comply with the rules. The issuer cannot contract his liability away.
The SEC permits solicitations of investors with whom you have had a prior substantive relationship. While the SEC does not provide a specific guideline, they do indicate that the relationship must have been of a significant amount of time such that a reasonable person would believe the relationship was not established with a specific offering in mind.
To further evaluate whether the prior relationship is substantive enough to pass muster, it must:
- Provide the issuer with a reasonable basis that the investor can evaluate the offering; and
- Enable the issuer to evaluate whether the investor is a good match for the investment; and
- Must be a current relationship so that the issuer can determine current suitability (i.e. knowing an investor had money last year does not provide a basis for determining the investor has funds available this year).
PROTECT YOURSELF FROM CIVIL LIABILITY
While non-compliance with securities laws may prove beneficial and cost effective on the front end, it results in civil liability which can prove far more expensive if not disastrous or criminal in long the run. A dissatisfied investor can bring a civil suit against the issuer and recoup the entirety of their investment, plus interest. While punitive damages are generally prohibited, the attachment of a civil cause of action, such as fraud, can allow for punitive damages in addition to the above. Simply put, it is good business to protect yourself on the front end. internet piracy statistics .