by Greg Brown, Head of Real Estate
General Solicitation has created a new and exciting avenue to raising capital. Issuers can now, under the provisions of SEC Rule 506(c), offer private investment opportunities directly to investors without the prerequisite of the issuer having an existing relationship with that investor. This has enabled issuers and third-party platforms to create portals and websites to attract new, untapped capital. So, “Build it and they will come,” right?
Wrong. General solicitation is not magic. And it cannot make a marginal deal better.
Here are some of the limitations of General Solicitation:
Accredited investors are not likely to surf the web to find your offering. So the premise that building a website and uploading deal documents will alone source the capital you need for your next deal is largely false. Exposure and ultimately access to investors takes time and money dedicated to education and outreach to investors. Please remember that this access to investments is very new to most. Most accredited investors have not had the opportunity to invest in private alternative securities like real estate by way of General Solicitation, or at all.
General solicitation is not magic. And it cannot make a marginal deal better.
General Solicitation still has plenty of compliance requirements for offerings, regardless if the issuer is using the Issuer Exemption or a broker-dealer. Communications need to be archived, document version controls need to be in place, and a number of compliance deficits can put both issuers and investors at risk. Make no mistake, when raising capital using General Solicitation you are selling securities. And selling securities is a highly regulated activity.
General Solicitation also does not make a marginal deal better. It is true that expanding your base of investors as an issuer is often a good thing: that generally drives the cost of capital down. However, what issuers cannot do is hope the internet is full of unsophisticated investors who will invest in a deal that experienced investors would not consider (not to mention the issue of suitability that such an assumption implies). This attitude tends to be more typical of Issuer Exemption securities rather than those offered through a broker-dealer.
Looking to better understand General Solicitation? Download this free ebook.
An Intro to General Solicitation: Best practices for marketing private securities compliantly under the 506(c) exemption.