By Joanne Cursinella, J.D.
The Division of Corporation Finance, based on representations that sales of limited liability company interests though a website would be made available only to members with whom an online venture capital firm had a “substantial relationship,” granted no-action relief for such sales without Securities Act registration. The Division concluded that the procedures described would create a “substantive, pre-existing relationship” between the capital firm and prospective investors such that the offering and sales on the firm’s website would not constitute general solicitation or general advertising within the meaning of Rule 502(c) of Regulation D.
In a new, related Compliance and Disclosure Interpretations (CDI) (Question 256.23, August 6, 2015), the Commission has stated that while the use of an unrestricted, publicly available website to offer or sell securities still constitutes a prohibited general solicitation for purposes of Rule 502. Rule 506(c), which does not rely on Rule 502, may still be available to issuers when offering or selling securities through unrestricted, publicly available websites or other forms of general solicitation.
The plan. CitizenVC, Inc. and its affiliates (CVC) proposed to offer and sell, without registration, limited liability company interests (Interests) of special purpose vehicles (SPVs) established and managed by a wholly owned subsidiary of CVC in order to aggregate investments made by members of the CVC online venture capital investment platform (the "site”).
To do this, CVC said it would not rely on the exemption from registration provided under Rule 506(c) for the SVP sales nor, it claimed, would it engage in any general solicitation or general advertising. Rather, CVC plans to establish pre-existing, substantive relationships with prospective members of the site. While the site is hosted on the Internet and so publicly accessible, the firm said it would not attempt to sell any interests to prospective investors until a relationship has been established with them.
CVC qualification policies and procedures. Potential members must be accepted for membership. This involves a process whereby CVC would initiate a "relationship establishment period" when the firm would perform various actions to connect with the prospective investor and collect information it deems sufficient to evaluate the potential investor’s sophistication, financial circumstances, and ability to understand the nature and risks related to an investment in the Interest by generally fostering interactions both online and offline.
The relationship establishment period is a process based on specific written policies and procedures created by CVC to ensure that the offering of Interests is suitable for each prospective investor. Only when CVC has taken all reasonable steps necessary to create a “substantive relationship” with the prospective investor would it admit the prospective investor as a member of the site, providing a password so that the new member can investigate online investment opportunities and the related offering materials.
Facts and circumstances determine relationship. In its response, the Division noted CVC’s representation that its policies and procedures are designed to evaluate the prospective investor's sophistication, financial circumstances and ability to understand the nature and risks of the securities to be offered. The Division agreed that there is no specific duration of time or particular short form accreditation questionnaire that can be relied upon solely to create such a relationship. Whether an issuer has sufficient information to evaluate, and does in fact evaluate, a prospective offeree's financial circumstances and sophistication will depend on the facts and circumstances.