Since the SEC Prohibits General Solicitation -Who CAN I Ask To Invest?

Getting an exemption from registration (by doing a private placement) can save you tons of time and money spent with auditors, attorneys and accountants on registration filings. However, private placements are not without their own strict limitations and requirements. One of these regulations is the prohibition of "general solicitation" for investors.  This regulation applies to the most common forms of private placement but does not apply to the newer Rule 506(c), Reg A and Reg A+.

First, everyone's situation is different and I recommend that you consult your securities attorney early in the process about the SEC regs.

What exactly is a "general solicitation"? If you are blasting an email, sending invites to potential investors for a presentation or mentioning current or prior investments on your website you are potentially engaging in general solicitation.

The only advice the SEC gives to stay clear of general solicitation is to have a "pre-existing substantive relationship" with everyone to which you send your marketing materials (ie. anything that says you are offering investments). This does NOT prohibit you from talking to your neighbor or anyone that you meet about offering investments. As long as you are not harassing people with your investment you are probably OK (again, best to consult an attorney). However, you WILL get into trouble if you are sending solicitations to those with whom you don't have a "substantive relationship".

What exactly is a "substantive relationship"? That is not defined in the regs but generally, you should have met this individual in person (or via phone call), have a reasonable belief that they are accredited or otherwise suitable for investing in your deal(s) and they have indicated their interest in investing with you. This means that once you tell your neighbor or a stranger what you do and how you have a great "deal" for them to invest in, you should not just send them the investment information without knowing if they are accredited (yes, that is a tough question to ask) and/or suitably sophisticated with real estate investing and that they are interested in investing. 

There MAY be other actions you should take that will allow you to feel 100% confident that you have a pre-existing substantive relationship with these potential investors and thus, can send solicitations or other means of access to your deals (like unlocking a password-protected section of your website for example). 

I have seen some purported "rules of thumb" for substantive pre-existing relationships in the BiggerPockets forums. Such as, you need to have three meetings or "touches" (includes calls) with an investor before the relationship is substantive. Or, it takes 30 days from initial contact before the relationship is substantive. There may be some basis in SEC case law for these "rules of thumb", so I would not completely discount these without researching it further or speaking to your attorney.

Why do you need to have high confidence that you have met the SEC regulations since you "know" the potential investors or they found you on your website, etc?

Ideally, it will never matter. The SEC does not have the resources to "sample" investors or even ask for a self-compliance questionnaire from syndicators. However, in real estate investing there is always risk that a deal will not go as planned (hopefully small but there nonetheless). Sometimes when a deal does not perform as projected an investor may feel compelled to take legal action against the syndicator either directly via a lawsuit for his loses or by informing the SEC of any perceived "violations" by the syndicator. The disgruntled investor is usually not a close friend or family member and may have been contacted via a general solicitation. If that is the case the syndicator may be held responsible for damages, fines, etc for violating SEC regulations.

Even though it makes it more difficult and time-consuming to completely fill that placement with investors with which you have a substantive prior-relationship, I highly recommend you don't take shortcuts. It will help you sleep better at night. 

I wish you Pleasant Placements!

Brian