In countries around the world, there are rules and regulations that govern pitching limited partners (LPs), the investors in venture capital funds. Publicly pitching for investment, called General Solicitation, is commonly regulated, and it is important for new managers to understand the local rules and regulations.
This is a practical overview of general solicitation for venture capital fund managers. This overview is not legal advice, and fund managers are encouraged to read the Legal Disclaimer.
What is General Solicitation?
“General solicitation” refers to raising capital by making public statements and soliciting interest from strangers. While general solicitation can be applied to various forms of fundraising, this overview focuses on venture capital.
The general solicitation regulations are in place to protect average citizens from having their savings lost by savvy fund managers promising large returns from high-risk and often illiquid investments. Most governments believe that wealthy and sophisticated investors, referred to as “accredited investors” in the U.S., can take risks with their capital on speculative opportunities.
General solicitation is regulated by the Securities and Exchange Commission (SEC) in the U.S. and by AIFMD in Europe under “pre-marketing” rules. The regulations vary widely around the world by country, including how they are applied. The regulations of some countries apply to citizens anywhere in the world. As an example, a U.S. fund raising from European limited partners will need to comply with both the U.S. and the European rules, which can get complicated.
How do you avoid General Solicitation?
VC Lab has compiled some best practices for pitching limited partners as a series of Dos and Don’ts.
The Dos
- Do have a pre-existing relationship with a potential limited partner before pitching them by, for example, waiting 30 days between a first meeting and the pitch
- Do have a substantive relationship with a potential limited partner before sharing fund materials by, for example, understanding their investment experience and sophistication
- Do pitch limited partners that you reasonably believe are wealthy with the means to lose the investment
- Do personalize messages to each potential limited partner versus sending mass emails
The Don’ts
- Don’t make public statements, share fund information on social or issue press releases while fundraising
- Don’t have a public fund website with your investment thesis or with a contact link while fundraising
- Don’t speak at events, seminars, webinars or meetings where strangers are invited and where you talk about the fund Thesis or investments while fundraising
- Don’t reach out beyond your social, personal or professional network of close friends and colleagues
These best practices are meant to compliment advice from local lawyers familiar with the general solicitation regulations.
TIP
When asking advice from lawyers, don’t ask if you can do something, but, rather, ask how to do something.
How do you raise money without General Solicitation?
Here is an ideal situation to meet and close a limited partner.
- First, you meet a prospective limited partner, ideally through a qualified introduction.
- Next, you get to know them (i.e., the preexisting relationship), and you come to understand that they are wealthy and that they are suitable for illiquid investments (i.e, the substantive relationship).
- Then, after some time, you discuss that you are launching a fund and review your fund strategy without revealing all of the details on the planned fund.
- Lastly, the limited partner prospect requests more information on your fund, and you share the materials, which inspires an investment.
This ideal situation does not always happen in practice. Some important things to encourage in every situation are that (1) you establish a relationship first and that (2) you believe that they are wealthy and sophisticated.
What happens if you break General Solicitation laws?
Depending on the jurisdiction, anyone can report you for a violation, and the local authorities can initiate an investigation at any time. The investigation is relatively easy, since there is often public evidence of the violation.
The result can be complex legal proceedings and ultimately the unwinding of the investment plus fines and penalties. In the U.S., penalties include being barred from raising money for a period of 5-10 years. This varies by jurisdiction.
Common Question on General Solicitation
When can I speak publicly about the fund?
After the fund is fully raised and closed and after you finish selling any interests in your fund, then you can engage in publicity, do social media, speak about the Thesis and discuss investments.
Can I speak at an event?
Yes. But, you can’t say that you are raising a fund or selling securities, let alone or discuss the fund Thesis. You can put your title and fund name as your role, and you can discuss strategic insights that you are seeing.
Can I tell my close friends and family about the fund?
Yes. However, do not ask them to invest or participate in the fund unless they are wealthy and meet local accreditation standards and other regulatory requirements.
What happens if someone unqualified asks me about my fund?
Tell them that you are not able to disclose details of what you are working on due to general solicitation rules. If they press the matter, tell them that they are being inappropriate and potentially hurtful to your activities.
Can I share anything about my fund on Social Media?
No. Don’t share that you are thinking to raise or actually are raising a fund. Don’t share the fund name. Don’t share that you are looking for limited partners. Don’t share that you are doing any deals.
Why do people share about their funds on social media?
There are two reasons. First, they are violating general solicitation rules. Second, they are complying with special regulations that allow general solicitation, such as rule 506(c) in the U.S.
Should I try to comply with special general solicitation rules to market the fund?
VC Lab does not recommend this strategy at the moment. Most firms that use legal versions of general solicitation appear unprofessional, and general solicitation traditionally attracts smaller or unsophisticated limited partners.
Can I email or call people that I don’t know and ask them to invest?
No. You need to have a pre-existing and substantive business relationship before discussing your fund strategy with someone. You can meet anyone and build a relationship without mentioning the fund. You can discussing strategies and past investment experience without revealing key information about your fund Thesis, such as fund size. Then, ideally, the person asks you for information on the fund.
References
https://www.linklaters.com/en-us/insights/publications/aifm/marketing-and-third-country-provisions
If you have other questions, please ask them in a reply below.
LEGAL DISCLAIMER
This information is for general information purposes. It does not, is not intended to, and you should not consider it to constitute legal advice. Because laws, rules and regulations frequently change, or may have been overruled or superseded, such information may not be up to date.
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