By John Puccio
Now that the party on Madison Avenue is starting to
wind down, perhaps it's a good time to take a sober look at
what the SEC actually announced on July 10th.
Everyone is painfully aware of how long it has
taken for the SEC to decide a final rule on lifting the general
solicitation ban for most private security offerings. Frankly,
new SEC chair Mary Jo White deserves the credit for getting
done what Mary Schapiro refused to accomplish on her watch.
But what has been reported as done isn't
necessarily the case.
While two final rules have been handed down (one
lifting the ban and the other disqualifying "bad actors"), the
detail surrounding amendments to Regulation D was only a rule
proposal--one that comes with its own 60-day comment
This is not an insignificant point. 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
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
have they 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
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 today's 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 issuer's control, and use of social media (which
is often limited and incapable of including disclosure
While I do not think it is necessary or even
prudent to request the SEC provide an exclusive definition of
general solicitation (as communication platforms will continue
to evolve quickly), a detailed, non-exclusive definition is
required 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.
Consistent with last year's rule proposal, firms
will have a choice about participating in general solicitation.
Without more understanding and guidance on the tactical rules
of engagement, firms will certainly be hesitant to step forward
for fear they have too much to lose. No one is going to risk
non-compliance because of a tweet.
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 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, and won't be
able to compete.
The irony of such an outcome would be
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. During this sixty-day comment period, I recommend
to those firms that believe they will do more than simply pay
for advertising to join the discussion and provide commentary.
Like the SEC's 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.
Puccio is principal of Crowded Hour, a communications
firm in New Jersey.