If General Solicitation Compromises the Private Placement Use of § 4(2): When “Cooling Off” is Not The Answer

In the application of the Securities Act of 1933 (the ‘33 Act) on private placements, counsel, issuers, investors, and agents are justifiably confused by the contradictions and inconsistencies currently fogging the rules that exempt so-called private offerings of securities in the United States from the necessity of registering the issuance under Section 5 of the ‘33 Act. The problem stems from the fact that the SEC’s attitudes toward private placements is in transition. The general expectation is that the Commission will formally amend Regulation D—the safe harbor that is the principal resource upon which issuers and their counsel rely for exempt treatment—so as to lighten up, at least for certain types of transactions, the ban on general solicitation. The Commission has not, however, seen fit to formally tackle the issue, and the “general solicitation” disqualification under Reg. D remains on the books. To be sure, the Commission has relaxed its enforcement machinery; for placements that enjoy an institutional flavor, the likelihood of Commission enforcement action on the basis of general solicitation is so remote that many issuers, promoters, and their associated professionals ignore that contingency. However, if a placement is infected with general solicitation, responsible counsel typically cannot bring itself to—nor should it—issue an unqualified opinion that the transaction is exempt under Reg. D. The rule is on the books; it cannot be ignored by opinion committees. If the placement is dependent on the issuer’s counsel tendering an opinion, particularly if the opinion is required to be unqualified, the deal can fail.