SEC makes solicitation easier for VC and private equity
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Illustration: Brendan Lynch/Axios
The SEC has issued new general solicitation guidance that makes the process much less onerous for private equity and venture capital.
The big picture: We may not see Times Square billboards advertising new funds, but it's at least theoretically possible.
- Firms also would be able to discuss fundraising efforts with reporters.
Catch up quick: The Obama administration had tried to open the floodgates to general solicitation in 2012, via the JOBS Act, but it never really caught on.
- A major impediment was how fund managers were required to verify that their investors were accredited. The SEC provided several examples, but didn't say if the list was inclusive or exclusive — so the process became layered (i.e., lengthy and expensive) out of an abundance of legal caution.
- Some firms also worried that prospective investors would balk at the intrusive questions, and an unvirtuous cycle was created whereby general solicitation became synonymous with desperation.
Fast forward: SEC commissioner Hester Peirce last fall gave a speech in which she lamented the underutilization of 506(c) offerings, which are the type that allow general solicitation.
- Attorneys at Latham & Watkins took notice. They'd long felt that the original SEC guidance might have been misinterpreted, in that investor verification should be satisfied by little more than a minimum investment commitment. And now a new, more biz-friendly administration was about to take charge.
- The law firm's discussions with SEC officials resulted in a March 12 letter that read, in part: "We agree that a high minimum investment amount is a relevant factor in verifying accredited investor status."
State of play: Firms now have much more flexibility in using 506(c) for fund offerings, or even transitioning existing efforts from the traditional 506(b) process. If they do so, they can publicly discuss the offerings with reporters or even advertise them.
- One caveat is for firms raising from investors outside the U.S., since other countries have their own securities rules. In some cases, there could be additional restrictions.
