No-Action Letter Guidance Under Rule 506(b) of Regulation D.
On August 6, the Staff of the Division of Corporation Finance of the Securities and Exchange Commission issued a no-action letter to Citizen VC, Inc. (“Citizen VC”), the manager of a venture capital investment platform through which it aggregates investments of prospective investors in special purpose vehicles (“SPVs”) that invest in seed, early-stage, emerging growth and late-stage private companies. The private placement offerings of the SPVs are made in reliance on Rule 506(b) of Regulation D which requires, among other things, that the issuer not “engage in any form of general solicitation or general advertising.”
Citizen VC requested no-action letter confirmation that the policies and procedures described in its letter “will create a substantive, pre-existing relationship between Citizen VC and prospective investors such that the offering and sale on the [website] of Interests in the SPVs… will not constitute general solicitation or general advertising within the meaning of Rule 506(c) of Regulation D.”
The request letter also stated the understanding that “issuers and/or their agents relying on Rule 506(b) will have to take additional steps beyond the circulation of a brief accreditation questionnaire in order to create a substantive relationship with their prospective investors.”
The Staff agreed that the “quality of the relationship between an issuer (or its agent) and an investor is the most important factor in determining whether a ‘substantive’ relationship exists.” The Staff also stated that it agrees 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.”
This Citizen VC no-action letter emphasizes the need for issuers relying on Rule 506(b) to perform a substantive evaluation of the status of prospective investors as “accredited investors” and their financial sophistication. Guidance.