What are the Rules Regarding 506(b) Solicitation and Mass Communication?

A reader writes:
“I am a member of a group of several hundred people who are interested in investing in commercial real estate. Many of them are not Accredited so I want to do a Regulation D, Rule 506(b) Offering. Can I email my deal to the group or invite them to attend a webinar where we discuss the deal as a means of finding potential investors?”

If you want to use mass communications for your offerings, you need to do rule 506(c) Offerings that allow advertising and general solicitation, but then you will be restricted to only having verified, Accredited investors. The Rule 506(c) exemption was designed for internet communications. Rule 506(b) — the original Rule 506 — has been around since before the internet existed. The Rule 506(b) exemption is reserved for one-on-one, word-of-mouth offerings to people the issuer already knows and not for mass communication to people they don’t know.

Here are the rules for soliciting for a Regulation D, Rule 506(b) Offering, as I see them:

1) You must have a substantive, pre-existing relationship before you make offers.
2) The pre-existing relationship is defined as already knowing an investor’s financial qualifications before making an offer.
3) You can’t create new relationships and invite them to invest in a current or contemplated offering.
4) A Letter of Intent would not be current or contemplated, and a purchase agreement might still not be. But the offering is surely current or contemplated at the time you hire securities counsel to draft your offering documents and have completed substantive due diligence.
5)  You shouldn’t email-blast offering documents or details to groups of investors if you have a Rule 506(b) exemption. The SEC has stated that email blasts to several hundred people, even if you have a pre-existing relationship, is a general solicitation.
6) The safest (and most effective) way to solicit investors is to communicate individually with each potential investor, starting with a phone call to the prospect who meets the requirements of steps 1 and 2 above, followed by an email with the offering documents, and then a subsequent followup by phone to see if they have questions.