Regulation D rule 506b and 506c involves us identifying investors. When it comes to finding investors, either we’re pulling them from our own internal network, or we’re finding them outside. One of the ways we can do that is to make sure that those people within our network and those outside hear our message. We do that through a solicitation. But what is a general solicitation? And what does that mean in this modern day and age? That’s what we’re going to go through today.
My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. We’re talking about general solicitation today, and we’re actually going to narrow it down a little bit more, because we have one question that comes up in my office all the time: How could social media possibly fit into this context?
To put this into its proper frame, I think it’s important for us to look at the rule itself, of what constitutes a general solicitation. In the code, it’s under Reg D Rule 502, where they actually describe it. They don’t call it general solicitation there; they call it the limitation on the manner of offering. That limitation applies directly to Rule 506b. Remember, under 506c, we can make a general solicitation – we can put a billboard up on Main Street, we can do whatever. But 506b has a limitation on offerings.
So what exactly does the SEC tell us this means? What is a general solicitation? Well, here’s what you can’t do. First, we can’t have a seminar where the whole purpose is just to market the offer. That’s 502c(2). But Rule 502c(1) actually describes it a little bit better and starts to get on what we’re talking about today. It says, “Any advertisement, article, notice or communication published in any newspaper, magazine, or similar media or broadcast over television or radio.”
Oh my goodness, do these people live under a bridge? Because that needs to be severely upgraded. Newspapers? What are those? Magazines? I’ve heard of them. Do they mean digital magazines? What about social media? And that’s a question that I get all the time.
The argument could be made, and I think not correctly, that when I post something on Facebook, I’m posting just to my network itself. So those people who already know me, they can know that I’m doing it, and it’s not a general solicitation. However, the difference is the substantiveness of that relationship with those people you have on Facebook. My Facebook account has many followers. And the reality is, I probably know 100 of them. There’s probably 400, 500, 600 people who have liked my page, and I’ve accepted their friend requests, and I don’t actually know them. On LinkedIn, that’s also very common.
These are friends of friends, friends of friends of friends, or people who just sent me advertising and we’re in similar industries. So I add them. That is the case and the SEC knows it, and the courts know it. So when it comes to actually making a solicitation, if I were to post about my Rule 506b offering, “Hey, come look at this that I’m offering. Come invest with me now,” I’m making a general solicitation because it’s going out to people who really aren’t part of my internal network. So it is taking advantage of that similar media broadcast. I’m broadcasting it out over a wide spectrum. So social media itself needs to be very carefully used when you’ve got a 506b offering.
Certainly, I could probably say something like, “Hey, I’m going to be investing in XYZ” and not make anything about investors or “come invest with me.” Or, “Hey, I’ve been doing a lot of work in real estate or securities or private equity or crypto mining or whatever it is that you’re doing. I’d love to talk to all of you about it.” And then as part of those conversations, not pitch them immediately unless it happens to be somebody you actually already have that substantive relationship with. But then you can take that conversation offline, have a conversation in general about those topics, wait a period of time and reintroduce it. We have other videos that talk about exactly that process, and you can find them on my channel.
The key takeaway here is this: when you’re selling securities, which involves the sale of stocks, bonds, mutual funds, real estate, and the sort of interest where somebody has a passive role, you as a syndicator must comply with the securities law, obviously. Now, syndicators can choose to register with the SEC, or you can find an exemption, or you can risk being considered an illegal activity. Exemptions like Reg D Rule 506b and 506c are very popular and useful. It’s what my law firm specializes in. They provide certainty and save time and money.
But here’s the main key takeaway: Social media advertising is a major concern for you. It can impact the exemption’s use, and it can require enormous penalties, which you don’t want to incur if it’s been used. So treat social media as if it is really media, the emphasis in that term, as it would be looked at by the SEC or court, is media which means general solicitation almost always. So use it with caution. If you’ve got a 506b offering, do not talk about your offering in any sort of specific terms or that there’s even a possibility of investing with you, because that will be eventually used against you, either in this offering or in some offering that you make down the road.
My name is Tilden Moschetti. I am a real estate syndication attorney with Moschetti Syndication Law Group. And if we can help you do your own syndication by providing you the documents and the assistance you need to make yourself successful, we would be happy to help you.