An advertisement containing the following language was forwarded to me, with the question, “Is this ad legal?”
12+% AVERAGE CASHFLOW!!
82+% 5-YEAR
INVESTOR RETURN!!
The ad went on to show photos of a multifamily property, discussing the status of due diligence and loan approval, and included several references to a respected real estate trainer – including a quote from one of his trainings and a photo, as if he were a member of the team. Further, the ad contained a link to an “investor questionnaire,” which asks prospective investors to provide their financial qualifications.
This type of advertising could be legal for a Regulation D, Rule 506(c) Offering (that allows free solicitation but is limited to verified accredited investors). But it would NOT be legal for a Rule 506(b) Offering, as it is a general solicitation and that exemption does not allow general solicitation or advertising. For more information on what constitutes permissible solicitation for Rule 506(b) offering, please see our article entitled “Soliciting Investors for a Rule 506(b) Private Placement Offering.”
There are additional troubling aspects to this advertisement. For one, the ad, provides a link to an “investor questionnaire” which asks for an investor’s financial qualifications. One of the requirements for a Rule 506(b) Offering is that you already know the investor’s financial qualifications before making an offer, and this ad would likely be viewed by a securities regulator as being an offer. An ad that asks for investor qualifications with the offer puts the cart before the horse. For more information on when it’s permissible to solicit investors for a Rule 506(b) ad, please see our article entitled “Determining Investor Suitability for 506(b) Offerings.”
Further, the reference to the real estate trainer is a clear attempt to add credibility to this team by dropping the name of a well-known real estate trainer as if that person were a team member. Investors could misinterpret this to mean that the trainer is somehow involved in this deal, which doesn’t appear to be the case. Without the trainer’s permission (and even with it), this is inappropriate and a potential misrepresentation. Misrepresentations violate the anti-fraud provisions of securities laws regardless of whether the selected exemption allows advertising.
Bottom line: Make sure you have your securities counsel review all advertising you plan to send to investors before you send it and blow your exemption!
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