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Tips to Avoid General Solicitation for VCs

What is General Solicitation and How Can You Avoid It When Fundraising? Read Our Simple Guide for Venture Capital Fund Managers

One of the essential tools in the arsenal of aspiring fund managers looking to launch an enduring VC firm is networking. When launching a fund, it is vital to activate your network correctly. A common mistake made by new fund managers is ‘general solicitation,’ such as that described in Regulation D of the Securities Act of 1933 in the US. Regulations against general solicitation are prominent in most jurisdictions, and fund managers should seek to understand their local decrees. 

Fund managers can activate their networks without general solicitation and advertising in private offerings and attract Limited Partners to invest in their funds. This article can serve as a guide to help you avoid breaking regulations within your jurisdiction and run an efficient fundraising campaign. 

What is general solicitation?

The Securities Act of 1933 in the US requires all offerings or sales of securities to be registered with the SEC unless the issuer of the securities can claim an exemption from registration. US venture capital funds either rely on Rule 506(b) or Rule 506(c) under Regulation D as an exemption from registration.

Rule 506(b)

A fund relying on Rule 506(b) can sell its securities to accredited investors, as defined by Rule 501 of Regulation D. However, they cannot engage in general solicitation or general advertising of the fund offering. In practice, this means fund managers of 506(b) funds can only solicit investments from investors with whom they have a pre-existing relationship.

Rule 506(c)

Suppose a fund manager engages in activities deemed as general solicitation. In that case, the fund may rely on 506(c). However, the fund can consist of only accredited investors, and the issuer must take reasonable steps to verify the accreditation status of those solicited to invest in the fund. The SEC did not explicitly state what constitutes “reasonable steps” in Rule 506(c); however, the SEC subsequently published guidance on verification here.   

Regulation D does not define what constitutes general solicitation however, in Rule 502(c), the SEC did specify that general solicitation includes “any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio” or “any seminar or meeting whose attendees have been invited by general solicitation.” The SEC later expanded this definition to include activities undertaken on the internet. 

Summary:

Simply put, this means that publicly announcing your fundraising status while your fund offering is ongoing constitutes general solicitation, and you should take “reasonable steps” to verify your investors’ accredited investor status as per your local regulators guidance regarding general solicitation rules. This introduces an additional barrier when fundraising, and typically fund managers want to avoid obstacles that can hinder fundraising efforts.

How to avoid general solicitation?

Typically, you cannot make public references in most jurisdictions and solicit investments when fundraising. Posting statements such as “We are fundraising for fund” is a big red flag and should be avoided since it may be deemed as ‘general advertisement‘ by regulators such as the SEC. Therefore, try to be careful of your activities concerning your fundraising status on publicly available domains such as the web. This includes tweets, publications, and other forms of communication available to the general public. Though a fund adviser may use publications to discuss its advisory business, said publications should not mention the fund or indicate they are seeking investors for a fund.

It would be best to approach public forums such as conferences with a similar provident strategy. Fund managers should act with care to not offer or sell securities when appearing on a panel, presenting, or distributing printed material within events that the general public can access.

Guidelines

In instances where you have sensitive information regarding your fundraising campaign, for example, within your website, it is advised that you take measures to safeguard this information. This may be accomplished by password protecting such areas and meticulously controlling access to said information and data. Furthermore, fund managers should act with care when publicizing their theses and take necessary steps to ensure that publicly available statements cannot be construed as an advertisement.
Statements regarding your venture firm should avoid mentioning fund activities. For example, you may make remarks on what sectors and technologies you focus on and invest in without citing broader information about the fund’s activities.

How can I engage LPs? 

When engaging with LPs, you should aim for targeted communication with individuals in your personal network rather than general contact with the masses. It would be best if you refrained from openly discussing fundraising activities with individuals or groups with whom you have negligible prior relationships. An easy way to avoid this is to develop meaningful relationships with potential limited partners prior to soliciting investment for your funds. 

Instead of unsolicited emails to a large group of individuals, utilize other proven means to run a successful fundraising campaign. Targeted communications directed by a fund adviser to persons with a substantive pre-existing relationship will not be deemed as general solicitation or general advertisement. Fund managers may discuss a prospective investment in fund securities without violating Regulation 506(b). Refer to VC Lab’s “Utilizing Connectors” guide to master the art of getting warm introductions to limited partners without general solicitation.

This content is provided by VC Lab, the venture capital accelerator. 

The free 16 week VC Lab program provides guidance, structure and a network to complete a fund closing in 6 months or less. Since mid 2020, VC Lab has helped launch over 100 venture capital firms around the world.

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