Legal Update

General Solicitation under Rule 506(b) after Citizen VC: Part 1

May 2016

By: Richard M. Leisner

Clearer Guiding Principles Analyzed and Possible Future Best Practices Considered


Note: The article is scheduled for publication in Securities Regulation Law Journal, Summer 2016 Edition, a Thomson Reuters Publication. For more information about this publication please visit

On August 6, 2015, without fanfare, the SEC Division of Corporation Finance issued an interpretative letter to Citizen VC1 and posted several updates to the Division’s Compliance and Disclosure Interpretations (the “Companion C&DIs”2), all concerning the nuts and bolts of exempt private offerings, principally under Rule 506(b).3 The first wave of professional commentary was uniformly positive, applauding the SEC for providing helpful guidance.

Citizen VC Overview

Some commentators have reported that the Citizen VC guidance significantly changed the overall compliance landscape for a key requirement of Rule 506(b) private offerings – that under the requirements of Rule 502(c) offers and sales must be made without the use of “general solicitation or general advertising.”4 They see Citizen VC and the Companion C&DIs as a compliance roadmap for any issuer to contact an unlimited number of prospective investors via impersonal non-selective means (e.g., the internet) without jeopardizing Rule 506(b) compliance. When undertaken in accordance with the guidance in Citizen VC, such activities, they assert, will be deemed not to involve “general solicitation or general advertising” within the meaning of Rule 502(c).5

Others have a less expansive view about the general applicability of the Citizen VC and Companion C&DIs’ guidance to conventional issuers and companies other than registered broker-dealers or similar third-party financial intermediaries.

It is too soon to know the long-term compliance effects of Citizen VC and the Companion C&DIs. Today is a good time, however, for careful analysis of these recent SEC pronouncements and their underlying rationale and regulatory provenance.

With this analytical foundation, this article suggests how best practices for conventional issuers might evolve for permissible general solicitation activities in future Rule 506(b) private offerings that will not violate the prohibitions of Rule 502(c).6

Citizen VC and Companion C&DIs in Detail

Citizen VC’s counsel asked the Division of Corporation Finance to concur with counsel’s conclusion that certain planned policies and procedures in Rule 506(b) private offerings, conducted through a password-protected internet site were not impermissible general solicitation prohibited under Rule 502(c).7 Counsel explained the policies and procedures were aimed at establishing substantive, pre-existing relationships with prospective investors.

The Division’s staff8 did not respond directly to counsel’s request for concurrence. Instead, the staff’s response letter reviewed and commented favorably on certain of the statements and analyses in Citizen VC’s incoming letter. Reading the incoming request letter, and the staff’s response and the Companion C&DIs in pari materia tell Citizen VC’s plans and also reveal the staff’s views about several of the most important issues:

  1. The quality of the relationship between an issuer (or its agent) and an investor is the most important factor in determining if a “substantive” relationship exists;

  2. A "substantive relationship," in the context of determining accredited investor status, is one in which the issuer (or its agent) has sufficient information to evaluate, and does evaluate, a prospective offeree’s financial circumstances and investment sophistication;9

  3. A "pre-existing substantive relationship" is one that is established before the commencement of the offering of securities;10

  4. Citizen VC's proposed policies and procedures described in the incoming letter are designed to evaluate prospective investors’ investment sophistication, financial circumstances and ability to understand the nature and risks of the securities to be offered (but noting that whether such an evaluation has in fact occurred depends on the particular facts and circumstances);

  5. There is no specific minimum amount of time required before a substantive relationship may be established;11

  6. A single question self-accreditation document cannot be relied upon as the sole basis for establishing a substantive relationship;12

  7. No investment opportunity would be presented to a prospective investor from the time of initial contact though the process of establishing a substantive relationship (becoming a "Citizen VC Member"; and

  8. Any investment opportunity would only be presented after the prospective investor becomes a Citizen VC Member and any such investment would be in a particular company and not as an investment in a blind pool for a later-determined investment opportunity.

The simultaneous release of the Companion C&DIs reinforced several of the key Citizen VC principles and, in addition, addressed important general solicitation issues not specifically addressed in the facts of the Citizen VC request letter.13

Each of the important principles and concepts in Citizen VC and the Companion C&DIs had been expressed to some degree in prior no-action and interpretative letters or SEC releases, most of which had been issued decades before Citizen VC (collectively, as noted below, the “Legacy Interpretative Advice”).14 Nevertheless, Citizen VC and the Companion C&DIs may be seen as a watershed in SEC staff interpretative advice regarding private offerings. In Citizen VC and the Companion C&DIs the staff provided helpful guidance in several important areas:

First, the staff confirmed the continuing vitality of certain key positions previously announced in the Legacy Interpretative Advice;

Second, the staff collected and re-introduced the most important of the principles from the Legacy Interpretative Advice in a single letter (along with the Companion C&DIs);

Third, the staff updated its views in the Legacy Interpretative Advice regarding impersonal, non-selective solicitations conducted via mass mailing and telephone cold calling, and applied such views to impersonal, non-selective solicitations conducted via the internet;

Fourth, the staff stated that, although it was difficult, it was possible that an entity other than a registered broker-dealer or similar third-party financial intermediary (i.e. a conventional issuer) could establish pre-existing substantive relationships with prospective investors without engaging in general solicitation in violation of Rule 502(c)15;

Fifth, the staff confirmed that there was no minimum waiting period between the time that a pre-existing substantive relationship was successfully established and when an offer of securities could be made without violating the prohibition against general solicitation of Rule 502(c);16

Sixth, the staff reaffirmed its long-standing position that the ultimate determination about pre-existing substantive relationships and the existence (or non-existence) of general solicitation were both dependent on “all the facts and circumstances”; and

Seventh, the staff provided definitions of the elements comprising a “pre-existing substantive relationship”: When, before any offer17 to sell securities is made, there is sufficient information to evaluate a prospective investor’s financial circumstances and investment sophistication (and such evaluation actually occurs); but, such a relationship may not be established solely by a prospective investor’s self-certification (i.e., just “checking a box”).18

Pre-Existing Relationships – Before Citizen VC

From the dawn of the federal securities laws, the relationship between the issuer and prospective investors has been seen as an important element – among all the facts and circumstances to be considered – in establishing compliance with the private offering exemption.19 The issuer-investor relationship concept was further developed in the Legacy Interpretative Advice. It provides the regulatory provenance for the prior business or substantive relationship concept and its “no general solicitation” consequences discussed in Citizen VC and the Companion C&DIs.

It not clear how and when one of several important concepts in establishing an exempt private offering (the relationship between the issuer and prospective investors) was transformed to provide the basis for the staff’s current positions that: (1) impermissible general solicitation cannot occur if the appropriate substantive pre-existing relationship between the issuer and the prospective investor has been achieved and (2) impersonal general solicitation activities could be used to establish such relationships so long as no “offer” were made before establishing the relationship.

Neither the language of Regulation D nor its explanatory provisions that provide examples of improper general solicitation refers to the concepts of (1) “pre-existing substantive or business relationships” or (2) the “no general solicitation” conditional consequences once such relationships exist. There is no mention of any of these concepts in the 1982 Release adopting Regulation D or in the 1981 Proposing Release. To the knowledge of the author, published references to the concepts by the staff first occurred in 1982 in Woodtrails-Seattle, Ltd. (as a “pre-existing business relationship”) and were cited with approval in subsequently issued no-action letters and releases comprising the Legacy Interpretative Advice.

Regulation D was adopted in the spring of 1982. In 1983, the staff issued a detailed series of Q&A interpretations.20 The staff stated that (1) general solicitation activities without any offer of an investment opportunity will not violate the restrictions of Rule 502(c) and (2) offers to sell securities to substantial numbers of persons with whom the issuer had a “pre-existing business relationship” also will not violate the restrictions of Rule 502(c). In the introduction to questions and answers about Rule 502(c), the staff put it this way:

The analysis of facts under Rule 502(c) can be divided into two separate inquiries. First, is the communication in question a general solicitation or general advertisement? Second, if it is, is it being used by the issuer or by someone on the issuer’s behalf to offer or sell the securities? If either question can be answered in the negative, then the issuer will not be in violation of Rule 502(c).

* * * *

In analyzing what constitutes a general solicitation [in Seattle-Woodtrails], the staff . . . underscored the existence and substance of the pre-existing business relationship between the general partner and those being solicited. The general partner represented that it believed each of the solicitees (sic) had such knowledge and experience in financial and business matters that he or she was capable of evaluating the merits and risks of the prospective investment. (Citation to Seattle-Woodtrails omitted).21

In the several decades following the Reg D 1983 Q&A Release, the SEC addressed general solicitation issues episodically in no-action and interpretative letters, formal releases and informal staff pronouncements (including materials identified as Legacy Interpretative Advice22). The 2000 Electronic Media Release provided a measure of clarity by collecting and summarizing the staff’s views on past releases and no-action letters. In this release, the staff announced the position that “general solicitation is not present” when the appropriate pre-existing business or substantive relationships exist between issuer and prospective investors.23

The collected components of the Legacy Interpretative Advice, while helpful, were still subject to a number of compliance uncertainties. In carefully reviewing the language in the staff’s periodic considerations of general solicitation issues that span more than 20 years, it is hardly surprising to find some inconsistencies. Word-search reviews of the documents comprising the Legacy Interpretative Advice reveal a variety of similar (but not identical) terms used to identify the appropriate relationships between issuers and prospective investors. A variety of adjectives are used, including, “existing, prior or pre-existing.” The adjectives modify nouns including “business relationship, business or personal relationship, substantive relationship, substantive business relationship and pre-existing substantive relationship.”

The author has found nothing in the Legacy Interpretative Advice to suggest that the varying terms were intended to have materially different meanings from the more clearly identified language – “pre-existing substantive relationship” – used in Citizen VC and the Companion C&DIs. However, the author found no consistent staff exposition in any of the Legacy Interpretative Advice documents of the criteria now detailed in Citizen VC and the Companion C&DIs as comprising the behavioral building blocks of “pre-existing substantive relationships.”

As noted above, in some instances in the Legacy Interpretative Advice, the appropriate relationship is identified as a “business relationship” (sometimes appearing along with the adjective “substantive”). However, neither Citizen VC nor any of the Companion C&DIs use the term “business” in conjunction with “relationship.”

Historically, the use in the Legacy Interpretative Advice of the term “business” in conjunction with the pre-existing relationship concept led many practitioners to be concerned that non-business relationships (e.g., churches, service or civic organizations or country clubs) might not provide a basis for establishing the appropriate relationships.

There is no pronouncement in either Citizen VC or the Companion C&DIs disavowing the requirement for the substantive relationships to be rooted in business relationships.24 However, the total absence of the word “business” in conjunction with the definition of substantive relationship in these most recent pronouncements appears to have put the “business relationship” issue to rest. Accordingly, it should be safe for practitioners to advise that social, civic, religious and other “non-business” dealings are acceptable bases for establishing the appropriate substantive relationship with prospective investors.

Finally, it bears noting that financial wherewithal and investment sophistication of prospective investors – important elements in the current formulation of a pre-existing substantive relationship – were not consistently identified by the staff in the Legacy Interpretative Advice as important issues to establish the required relationships.

Some commentators have opined that Citizen VC and the Companion C&DIs are “nothing new” – not much more than modest (but welcomed) clarifications of well-established concepts and staff positions.

In the author’s opinion, such sanguine observations fail to consider, as discussed above, the important differences between the language and logic of the Legacy Interpretative Advice and Citizen VC and the Companion C&DIs. These most recent pronouncements use greater precision in both their terminology and substantive elements than are present in the Legacy Interpretative Advice. In addition, the absence of the need for the relationship to be a “business relationship” and the addition of the need to determine appropriate financial wherewithal and investment sophistication is each a significant change. Finally, and possibly of greatest importance, the staff has issued a favorable interpretative letter to an entity other than a registered broker-dealer or investment adviser.

Pre-existing Substantive Relationships – Today

Citizen VC and the Companion C&DIs cleared away several of the past uncertainties and inconsistencies in the Legacy Interpretative Advice. To start with, the staff consistently used the term “pre-existing substantive relationship.” In addition, as noted above, the term “business” had been removed from the formulation.

More significantly, the staff provided specific definitions for the key terms “substantive” and “pre-existing,” each as used to modify the term “relationship”:

A substantive” relationship is one in which the issuer (or a person acting on its behalf) has sufficient information to evaluate, and does, in fact, evaluate, a prospective offeree’s financial circumstances and sophistication, in determining his or her status as an accredited or sophisticated investor. Self-certification alone (by checking a box) without any other knowledge of a person’s financial circumstances or sophistication is not sufficient to form a “substantive” relationship.25

A “pre-existing” relationship is one that the issuer has formed with an offeree prior to the commencement of the securities offering or, alternatively, that was established through either a registered broker-dealer or investment adviser prior to the registered broker-dealer or investment adviser participation in the offering. See, e.g., the E.F. Hutton & Co. letter (Dec. 3, 1985). (emphasis added)26

Today’s formulation of the “pre-existing substantive relationship” concept is the linchpin for the future application of the concepts and principles in Citizen VC and the Companion C&DIs. Conduct inside such a relationship benefits from an interpretative vaccination against being treated as impermissible general solicitation.

Activities undertaken to properly establish these relationships that are free from any “offer” to sell securities may use impersonal communications (e.g., open internet solicitations, mass mailings or cold calling campaigns). Indeed, such communications may be directed to an unlimited number of prospective investors who are total strangers to the issuer without running afoul of the general solicitation prohibition of Rule 502(c).

As noted above, this regulatory vaccination against the presence of impermissible general solicitation is subject to two important provisos – First, the relationship cannot be established by self-certification alone (checking the box).27 Second, the conduct establishing the relationship cannot involve an “offer” to sell securities. Neither of these provisos, as noted above, was viewed as a significant impediment by counsel to Citizen VC and experienced practitioners are likely to have similar views.

In any event, after the establishment of the appropriate pre-existing substantive relationship, Rule 502(c) places no limit on the number of properly qualified prospective investors that may be contacted or the means by which communications are had with them. In these circumstances, the conduct in question is “not general solicitation” prohibited by Rule 502(c).

Questions have been raised about the requirement that the substantive relationship has to be established “prior to the commencement of the offering,” and in the case of broker-dealers, before “participating” in the offering.28 There is no reference in Citizen VC regarding the timing of the establishment the substantive relationship with prospective investors and the “commencement” of a particular offering. There is no guidance in the Companion C&DIs about the operation of the phrases “commencement of the offering” and  “prior to participating” in the offering vis-à-vis the establishment of substantive relationships. To date, there has been no formal staff guidance regarding these phrases. The concept of what particular conduct constitutes “commencement” is important in several securities law contexts, such as in IPOs, secondary offerings, rights offerings and tender offers (the consideration of which are beyond the scope of this article).

In the context of Rule 506(b) offerings, has an offering “commenced” if no prospective investor is offered an opportunity to invest but the contours of the offering have been determined and exist on the password-protected pages of a secure website? If this inquiry is answered affirmatively, compliance would have the effect of lengthening the offering process. The investor qualification process would have to be completed as to all prospective investors before establishing the terms of the subject offering and beginning to communicate with qualified prospective investors about investing in the offering. This interpretation would make the mechanics of Rule 506(b) offerings akin to a merry-go-round ride at the county fair: riders were allowed to get on the ride before the music started and the ride began to spin; once the ride began to spin, no additional riders were permitted.

Alternatively, the concept of “commencement” could be considered on a one-at-a-time basis for each prospective investor and be determined co-extensively with whether an “offer” has been made. Applying this interpretation, an offering would be seen as “commencing” for each prospective investor only when the elements of an offer are present.29

Current uncertainties concerning the operation of “commencement of the offering” and “participation in the offering” await further development.

Numbers, Numbers, Numbers

Neither Citizen VC nor any of the Companion C&DIs focused on “actual numbers.” There is no discussion of how many prospective investors might be contacted to begin with, how many might begin the qualification process or the actual number that might ultimately be presented with investment opportunities. The same is generally true for the Legacy Interpretative Advice no-action letters. The reason for this lack of concern with “numbers” is simple: In each situation, the conduct in question was believed not to involve impermissible general solicitation, allowing solicitation of an unlimited number of prospective investors.

Particularly before Citizen VC, most conventional issuers and their advisers seeking to raise capital in Rule 506(b) all accredited investor private transactions found themselves in a regulatory environment that did not allow them to take advantage of the general solicitation relief afforded in the Legacy Interpretative Advice to registered broker-dealers. As a result, conventional issuers had to be concerned with “actual numbers.”30

Before the adoption of Regulation D, private offering exemption compliance applied investor qualification criteria to offerees as well as investors. This requirement necessitated keeping track of each individual offeree to confirm satisfaction of the applicable qualifications (e.g., wealth and investment sophistication). Regulation D removed all offeree qualification criteria and allowed contact to be made with an unlimited number of offerees, subject to one “small” caveat – that no form of general solicitation be used in connection with the offer or sale of securities.

Despite the fact that offerees do not “count” under Regulation D generally, and in particular, in an all accredited investor offering under Rule 506(b), the prohibition against general solicitation compels conventional issuers to have a continuing concern with “numbers.”

Offerees “count” in determining if there has been impermissible general solicitation, assuming that each offeree has been solicited to consider purchasing the securities that are the subject of the offering. Even if offerees no longer had to be qualified as to financial wherewithal or investment sophistication, contacting “too many” offerees risked being found to constitute impermissible general solicitation under Rule 502(c). Concerns with “numbers” among practitioners did not abate even if offerees were contacted one-at-a-time or even if there was relative certainty that every member of a large group of offerees was an accredited investor (such as an annual meeting of the partners of a national accounting firm).31 How many would be too many, of course, would depend on the particular facts and circumstances. Careful practitioners advise that the number would almost certainly be smaller if the prospective investors were not personally known to the issuer or if impersonal means of solicitation were used (i.e., mass mailings, cold calls or internet emails).

From the earliest days of using Regulation D in 1982, experienced counsel had little difficulty reminding clients to avoid the activities well understood to involve impermissible general solicitation, such as open meetings attended by large numbers of unqualified prospective investors or advertisements in newspapers, on TV or in other mass media and, of course, after the mid-1990s, impersonal internet-based solicitations.32

From the prospective issuer’s point of view, advising against conduct certain to violate Rule 502(c) often leaves unanswered issuer clients’ typical “numbers” questions:

In specific numbers, many prospective investors may be contacted without engaging in general solicitation prohibited by Rule 502(c)? If 10 personal friends are OK, but 300 acquaintances are too many, how about 30 relatively close friends? How about 50 slightly less close friends?

Careful practitioners answer “Once you have more than 10 personal friends, it depends on all the facts and circumstances.”

Consider several typical “numbers” scenarios clients may ask about and think what your responses might be if you were this issuer’s counsel:

Two dozen golfing buddies. How about the wealthy client who suggests one-on-one contacts with two dozen long-time golfing buddies who all belong to the same exclusive country club?

For a variety of reasons, most practitioners would be comfortable with the "numbers" in this golfing buddy hypothetical. The absolute number is not great; there is a relationship that pre-dates any securities offering; the prospective investors are likely to be as wealthy as the client and, based on what your client knows from years of informal discussions in the locker room, reasonably likely to be sophisticated when it comes to investments. A short conversation with the client about other "facts and circumstances" can be expected to increase counsel's comfort level.

When clients modify fact scenarios, counsel is pushed toward “it depends on all the facts and circumstances” answers.

400 Country Club Members. What if the two dozen golfing buddies are expanded a bit to include all 400 members of the exclusive country club, most of whom the client says he knows "fairly well" either socially or through business dealings?

1,000 Congregants. How about the 1,000+ members of the church or synagogue attended by the issuer's CFO? Would it make any difference if the CFO was only a sometimes attendee, but the CFO's non-employee brother-in-law is a very active congregant and offers to take the client’s senior officers to meet all the most important opinion leading congregants?

1,000 Best Customers. What about the 1,000 best customers of the client's chain of 150 women's high-end retail clothing stores? Would it make any difference if the client’s business was manufacturing and directly selling large bulldozers and other earth-moving devices, each costing several hundred thousand dollars?

This is not an offer. Would it make any difference if, in each of the foregoing scenarios, the client made sure that all face-to-face discussions with prospective investors omitted specifics about price and terms for the securities and simply asked if prospective investors were interested in finding out more about the client's business? What if all written communications (internet emails) omitted any reference to the nature of the securities, size of the offering, price, etc. and included a bold legend to the effect that the communications were not an offer to sell securities and offers could only be made after the prospective investor met certain criteria?

Many businesspeople believe none of the examples noted above involve “real” general solicitation. The author has been told by more than one client, “It’s not as if I am taking out an ad in The Wall Street Journal offering to sell common stock in my company for $10 per share.”

Careful counsel, for Rule 502(c) purposes, might find “issues” with each of the hypothetical scenarios outlined above that dealt with more “numbers” than the initial two dozen golfing buddies hypothetical. In responding, counsel would want to develop more facts and circumstances. In this regard, careful attorneys are ever mindful that violation of the Rule 502(c) prohibition on general solicitation destroys the exemption for all investors in the affected offering, not just the investors who were improperly solicited. When in doubt, most securities attorneys advise against conduct in the “gray areas” of general solicitation.


1 Citizen VC (August 6, 2015). The SEC’s response letter is available at (last visited May 2, 2016); the incoming letter from the Boston office of Mintz Levin is available at (last visited May 2, 2016).

2 Securities Act Rules, Questions of General Applicability (Last Update August 6, 2015), Section 256 Rule 502(c) General Conditions to be Met et seq. (available at (last visited May 2, 2016), for convenience, the “Companion C&DIs.”

3 Rule 506(b) has been the most popular Regulation D securities registration exemption, particularly Rule 506(b) offerings in which all investors are required to be accredited investors. Such Rule 506(b) offerings have several attractive features: they may be made without the need to comply with the mandated disclosure requirements of Rule 502(b), there is no limit on the number of accredited investor purchasers and such accredited investor purchasers are not required to meet any investor sophistication requirement. In addition, securities issued in transactions satisfying the requirements of Rule 506(b) are “covered securities” under Section 18(b)(4) of the Securities Act of 1933, effectively preempting all substantive state securities registration requirements (but not form filing and fee payment requirements).

4 Rule 502(c) of Regulation D governs Rule 506(b) offerings and provides in pertinent part:

Except as provided in [Rule 504 and Rule 506(c)], neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:

(1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and

(2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising . . . (carve-outs for Rule 135, Form D filings and certain activities conducted outside of the United States omitted).


5 For convenience, in this article “general solicitation” means “general solicitation and/or general advertising” as used in Rule 502(c).

6 This article does not address compliance procedures in transactions intending to satisfy the requirements of Rule 506(c) which permits the use of general solicitation, provided other conditions of the exemption are satisfied. In addition, this article does not address the application of state securities registration exemption laws and rules regarding the issues discussed herein. There is no assurance that state regulators and courts will follow the SEC’s interpretative positions announced in Citizen VC and the Companion C&DIs.

Unlike many request letters sent to the SEC staff, counsel to Citizen VC did not ask for a “no-action” response. Instead, counsel asked only to be advised that the staff “concurred” with counsel’s views about the planned activities. If Citizen VC had asked for a “no-action” response, any response other than a clear statement of “no-action” might have been seen as an unsuccessful encounter with the SEC. In Citizen VC, despite the fact that the staff declined to concur with counsel’s views, the tenor and content of the staff’s responses have been uniformly characterized as “favorable.” The attorneys who authored the incoming letter have since described the SEC staff response as a “no-action letter.”

8 Unless noted to the contrary, references to the “staff” mean the staff of the SEC Division of Corporation Finance.

9 Companion C&DIs, Question 256.31.

10 Companion C&DIs, Question 256.29.

11 Companion C&DI Question 256.30.

12 Companion C&DI Question 256.31.

13 For example, Companion C&DI Question 256.28 commented favorably on the ability of registered investment advisers to establish pre-existing substantive relationships without engaging in impermissible general solicitation and Question 256.33 noted that venture fairs and demo days did not necessarily involve impermissible general solicitation because, in each instance, the ultimate determination about general solicitation was dependent on “all the facts and circumstances.”

14 See Woodtrails-Seattle, Ltd.(July 8, 1982) 1982 SEC No-Act. LEXIS 3288; SEC Release No. 33-6455, Interpretative Release on Regulation D (March 3, 1983) 48 FR 10045, 1983 SEC LEXIS 2288, III. Operating Conditions, C. Manner of Offering and Question 60, Lexis p. 16-17; E.F. Hutton & Co.(December 3, 1985) 1985 SEC No-Act. LEXIS 2917; Bateman Eichler, Hill Richards, Inc. (December 3, 1985) 1985 SEC No-Act. LEXIS 2918; H.B. Shaine &Co., Inc. (May 1, 1987) 1987 SEC No-Act. LEXIS 2004; SEC Release No. 33-7223, Use of Electronic Media for Delivery Purposes (October 6, 1995) 1995 SEC LEXIS 2662, Questions 20 and 21, Lexis p. 12; IPONET (July 26, 1996) 1996 SEC No-Act. 642; SEC Release No. 33-7516, Statement of the Commission Regarding Use of Internet Web Sites to Offer Securities, Solicit Securities Transactions or Advertise Investment Services Offshore (March 23, 1998) 1998 SEC LEXIS 488; SEC Release No. 33-7856, Use of Electronic Media (April 28, 2000) 2000 SEC LEXIS 847, Lexis p. 17-18.

15 Companion C&DIs, Question 256.27 and Question 256.32. At the 2015 American Bar Association Business Law Section Fall Meeting, Dialogue with the Director (November 6, 2015), David Fredrickson, Chief Counsel of the SEC Division of Corporation Finance, the official who signed the Citizen VC response letter, after noting the staff’s continuing support for the answer to Question 256.32, succinctly summed up his personal views about the ability of persons other than broker-dealers, investment advisers or other similar financial intermediaries (i.e., conventional issuers) to successfully engage in the required conduct: “It’s hard.” Mr. Fredrickson was reported to have expressed similar views in January 2016 at the Northwestern University Securities Regulation Institute (Mike Gettelman, “The Citizen VC No-Action Letter – ‘Pre-existing’ ?,” The Corporate Counsel Blog Post February 15, 2016, (available at, last visited April 25, 2016), for convenience “Gettelman February 15, 2016 Blog”)

16 Companion C&DIs, Question 256.30.

17 Section 2(a)(3) of the Securities Act of 1933 defines the term “offer” broadly and the staff has found “offers” to exist in situations where facts would seem to be insufficient to establish an offer for contract law purposes. See note 44, infra.

18 Companion C&DIs, Question 256.29 and Question 256.31. In practice, many subscription documents solicit far more personal information about prospective investors than “check-this-box-if you are an-accredited-investor.” Such information may include dollar amounts of actual net worth, past, current and anticipated annual income, liquidity (and illiquidity) of and other information about invested assets, value and lien status of principal residence, education, employment and investment experience and, in addition, could provide or lead to responsible third-party verification of key financial and investment information.

19 Letter of SEC General Counsel dated January 24, 1935, 11 FR 10952, 1935 LEXIS 955, cited favorably at note 12 to SEC v. Ralston Purina, 346 U.S. 119, 1953 U.S. LEXIS 2688.

20 Interpretive Release on Regulation D, Rel. No. 33-6455 (March 3, 1983) 48 FR 10045, 1983 SEC LEXIS 2288 (for convenience, the "Reg D 1983 Q&A"). 

21 Reg D 1983 Q&A, p.16 in Lexis. Neither the Reg D 1983 Q&A nor Seattle-Woodtrails referred to the financial wherewithal of prospective investors as significant to Rule 502(c) determinations..

22 Note 8, supra.

23 Use of Electronic Media, SEC Release No. 33-7856, April 28, 2000, 2000 SEC LEXIS 847, *58, LEXIS 17 (for convenience, the “2000 Electronic Media Release”), available at (last visited May 2, 2016), citing to Woodtrails-Seattle, Ltd., supra, E.F. Hutton Co., supra, H.B. Shaine & Co. Inc., supra, and Bateman Eichler, Hill Richards, Inc., supra. See Note 8, supra.

24 In contrast, Companion C&DI Question 256.30 specifically disavows the requirement for any minimum time period to elapse before a pre-existing substantive relationship may be established.

25 Companion C&DI Question 256.31.

26 Companion C&DI Question 256.29.

27 See note 11, supra.

28 Companion C&DI Question 256.29 and Question 256.30.

29 For discussion of this issue, see Gettelman February 15, 2016 Blog, note 15, supra.

30 Of course, there are “numbers” in Regulation D: both Rule 505 and Rule 506(b) provide there may be no more than 35 non-accredited investors; however, both exemptions are still subject to the prohibition against general solicitation in Rule 502(c). Accordingly, these “numbers” limits are not conclusive in addressing the “numbers” issue to avoid impermissible general solicitation in all accredited investor Rule 506(b) transactions. Depending on the facts, solicitations to 35 prospective investors could violate the proscriptions of Rule 502(c).

31 The 1981 Release proposing Regulation D reflected a then current concern with the absence of any limit on the number of accredited investors that might participate in an exempt offering under Regulation D: [P]ursuant to the accredited investor concept in Regulation D, offerings could theoretically be made to an unlimited number of accredited investors. The Commission cautions issuers, however, that depending on the actual circumstances, offerings made to such large numbers of purchasers may involve a violation of the prohibitions against general solicitation and general advertising. Release No. 33-6339, August 18, 1981, Lexis 46 FR 41791, n. 30 *13.

32 This conduct was specifically identified in the explanatory text of Regulation D as being impermissible general solicitation. Rule 502(c)(1) and (2).


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