No general solicitation: Overview, definition, and example
What is no general solicitation?
No general solicitation refers to a restriction in contracts or legal agreements that prohibits the broad or public advertising of an offering, investment, or opportunity to a wide audience. It is commonly applied in the context of securities offerings, private placements, and certain types of sales or fundraising efforts, where the offering can only be made to a select group of investors or participants, typically those with whom the company or issuer has a pre-existing relationship. The purpose is to avoid violating securities laws, which restrict public offerings without proper registration or exemption.
For example, in a private equity offering, the issuer may be prohibited from broadly advertising the investment opportunity to the public and can only offer it to accredited investors or those with whom they have a prior business relationship.
Why is no general solicitation important?
The "no general solicitation" rule is important because it helps prevent the unlawful offering of securities or investments to the general public without following proper regulatory procedures. In the U.S., the Securities and Exchange Commission (SEC) enforces rules that limit general solicitation to protect investors and ensure that only qualified individuals or institutions are involved in certain types of investments.
For businesses, complying with this rule is crucial to avoid fines, penalties, or the invalidation of private offerings or sales. It also helps businesses maintain control over the individuals they engage with regarding their offerings or investments.
Understanding no general solicitation through an example
Imagine a startup company that wishes to raise funds through a private offering. The company can only offer the investment opportunity to a small group of accredited investors who are known to the founders. The company cannot advertise this investment publicly or send out mass invitations to the general public to invest. The "no general solicitation" rule ensures the company complies with the legal restrictions surrounding private placements.
In another example, a real estate investment company may want to raise capital for a new development project. The company can only solicit investments from a select group of people they have a prior relationship with (e.g., existing investors or business partners), rather than posting the opportunity online or in public spaces.
An example of a no general solicitation clause
Here’s how a no general solicitation clause might look in a contract:
“The Issuer agrees that no general solicitation or advertisement will be made in connection with the offering of securities under this Agreement. The securities will be offered solely to a select group of investors who have an existing relationship with the Issuer and are deemed to be accredited investors under applicable securities laws.”
Conclusion
The "no general solicitation" rule is an important legal principle that helps ensure compliance with securities laws and limits public access to investment opportunities to a select, qualified group. It provides a mechanism to prevent unlawful public offerings and ensures that only suitable investors participate in certain types of investments.
By including a "no general solicitation" clause in agreements, businesses can protect themselves from legal risks while maintaining control over who they engage with in terms of investment opportunities.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.