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Back to basics: General Solicitation: How about VC funds?

Paul Clark
Paul Clark
Last updated: June 4, 2024
Venture south fallback

Do these rules apply to people raising investment funds, like venture capital funds?

Yes, they absolutely do. The rules we have outlined in previous posts in this series apply to anyone selling securities. This is typically companies, but can also be investment funds (which are generally Limited Partnerships or Limited Liability Companies – basically companies). The SEC opinion letter we linked to in the last post was about a broker-dealer raising capital on behalf of a residential real estate fund. So anyone out there raising capital for a micro venture capital fund, SBIC fund, mezzanine debt fund, PE fund, or any other kind of fund has to follow these rules.

Most professional investors are acutely aware of these rules, for many reasons - not least because if we violate them we jeopardize our careers and reputations! Even if we happen to forget temporarily, the next set of deal documents we review will have representations from the company that they have not done any general soliciting, and we will have to self-certify that we are accredited investors.

No-one heard (publicly) about the VentureSouth Angel Fund III last year until it was fully raised and all the securities were sold, because it was raised while relying on the 506(b) exemption – so we could not discuss it publicly until the fundraising was over, and it was raised exclusively from VentureSouth members or people we knew. As probably the most successful venture capitalist around today noted, you can’t find out about his latest fund because “some laws from the 1930’s [mean] we won't be able to tell you about that until after the fact.” And it explains why this goal is amusingly perplexing.

Of course, not everyone is quite as focused on this though, and so your search results when you were looking for “first closes” very likely included investment funds being raised. For some of those, it was probably fine; perhaps they were based outside the US and not selling to US investors, or maybe they were deliberately using general solicitation under 506(c). But if you are considering investing with any fund, you need to do your research to make sure they are following the rules - because the penalties are no less unpleasant if a fund sells unregistered securities.