Our firm is often asked whether a social media post constitutes “general solicitation” as prohibited by Rule 506(b) of Regulation D. General solicitation is defined by the SEC to include “advertisements published in newspapers and magazines, public websites, communications broadcasted over television and radio, and seminars where attendees have been invited by general solicitation or general advertising. In addition, the use of an unrestricted, and therefore publicly available, website constitutes general solicitation.”
A two-prong test.
A two-prong test exists to help a sponsor determine whether a social media post falls under this definition of “general solicitation”:
1. Is the communication general (i.e., to a widespread and anonymous audience)?
2. Does it constitute an offer or sale of a security?
Under the first prong of this test, the SEC clarified that the “use of an unrestricted website to offer and sell securities is general solicitation.” See Citizen VC Letter. If a social media platform offers unrestricted access, then a post on such website would clearly be general solicitation.
However, some social media websites allow you to create closed groups or restrict public access. This area becomes gray in determining whether a post constitutes general solicitation. The SEC has not released specific instructions regarding these situations, but recommends that “an issuer that solicits new investors through a website accessible to the general public, through a widely disseminated email or social media solicitation . . . will likely be obligated to take greater measures to verify accredited investor status than an issuer that solicits new investors from a database of pre-screened accredited investors created and maintained by a reasonably reliable third party” (Emphasis added).
Taking greater measures.
In order to take these “greater measures”, we recommend that a sponsor create a record-keeping system to track their relationship with potential investors. The system should include information about when a sponsor came in contact with an investor, under what circumstances and the financial situation of the investor. Although a specific time period is not required between meeting a potential investor and making an offer, a sponsor’s records should be able to indicate a clear distinction between these two events.
Our firm can provide a pre-qualification form.
If a sponsor chooses to post something on their social media platform, they must be able to establish that they had this substantive preexisting relationship with each follower. We recommend that a sponsor screen investors prior to allowing access to investment and offering specifics. Our firm can provide a pre-qualification form. Further, a sponsor must be able to prevent a social media follower from re-sharing or making a social media post visible to a wider audience. Additional security measures could be implemented by creating a security wall to prevent the appearance of general solicitation.
Pursuant to prong two, we recommend that a sponsor provide only factual, generic information about their business on social media platforms. If the sponsor does not make an offer, the language cannot be considered a solicitation.
We have seen that many sponsors do not comply with these rules regarding general solicitation, failure to do so will jeopardize a sponsor’s 506(b)-exemption status and open them up to liability. A good rule of thumb to determine whether a social media post is general solicitation is to assume that every follower is a securities regulator. Our firm can help guide you through the appropriate forms of social media posts.