The Ban on General Solicitation and Advertising

Bill Sjostrom —  25 January 2006

I blogged last week about the recommendations concerning Sarbanes-Oxley 404 adopted by the SEC Advisory Committee on Smaller Public Companies at a meeting on 12/14/05 (see here).  The transcript of the meeting is now available on the SEC’s website (click here).  Today I want to talk about a different recommendation adopted by the committee that has not received much if any attention but is arguably more important for small companies (at least small emerging companies) than the proposed S404 exemption.  I’m referring to the recommendation to “[a]dopt a new private offering exemption that does not prohibit general solicitation and advertising for transactions with certain purchasers.�  This is something I’ve argued for in the past (see my article, Relaxing the Ban:  It’s Time to Allow General Solicitation and Advertising in Exempt Offerings).  Basically, studies have indicated that there is a funding gap for emerging companies seeking start-up and early-stage private equity.  The funding gap persists notwithstanding large inflows into venture capital funds because as funds have gotten bigger they have by necessity shifted to later-stage and larger deals (see here).  Angle investors could fill this gap but the ban on general solicitation/advertising greatly impedes this.  Hence, my proposal to “relax the ban.�

The argument may be even more compelling today.  As this W$J article points out, the IPO bar is much higher:  “To stage a successful IPO today, . . . companies need close to $100 million in annual revenue and a potential stock-market value of at least $250 million—and preferably much more.�  As pointed out in the article and as discussed by Larry Ribstein in this post, this is due, at least in part, to Sarbanes-Oxely.  This means that emerging companies are going to have to rely on private equity funding for a longer period of time.

The SEC recommendation does differ from my proposal in at least one respect.  It suggests that the new exemption be adopted under Section 4(2) of the ’33 Act which exempts “transactions by an issuer not involving any public offering.â€?  I’m not sure if this works given past statements by the SEC such as “we have long construed general solicitation or advertising to impart a public character to an offeringâ€? and “[t]he prohibition on general solicitation and advertising is what keeps the offering ‘private.”‘  Hence, I suggested what I view as a cleaner route.  If you’re curious as to what it is, read my article linked above.

2 responses to The Ban on General Solicitation and Advertising


    Fair enough. It is a point I struggled with when writing the article. In the end I thought investor protection concerns outweighed opening a potentially large loophole which could be exploited by fraudsters.


    The problem I have with the proposal is that it subjects company personnel to state registration requirements. The likely net result is (in my opinion) at a minimum state requirements that nullify the benefits of the proposed law, as they do for other federal exemptions noted in your article, or at worst, inasmuch as broker-dealers have significant regulatory capture, state requirements that all such offerings would have to be completed through a broker-dealer (the cost of which cannot be afforded by a small offering).