The SEC proposed to require private funds making Rule 506(c) offerings to file written general solicitation materials with the SEC on a temporary basis. The filings would be required to apply for a period of two years, and would not be available to the public. The SEC also proposed to amend Rule 156 under the Securities Act of 1933, the anti-fraud rule that applies to sales literature of registered investment companies. The rule amendments would apply the guidance to sales literature of private funds making general solicitations under Rule 506.

Rule 156 prevents registered investment companies from using sales literature that is materially misleading in connection with the offer and sale of securities. The rule provides that sales literature is considered misleading if it (i) contains an untrue statement of a material fact; or (ii) it omits to state a material fact necessary in order to make a statement, in light of the circumstances of its use, not misleading.

Rule 156 provides specific examples of regarding the types of statements in sales literature that the SEC would consider to be misleading. Generally, whether a statement involving a material fact would be misleading depends on the context in which it is made, in light of all pertinent factors, including:

  • Other statements being made in connection with the offer or sale of the securities in question;
  • The absence of explanations, qualifications limitations or other statements necessary or appropriate to make the statement not misleading; or
  • General economic or financial conditions or circumstances.

Rule 156 provides a non-exclusive list of factors concerning representations of past or future investment performance that could be misleading. It also contains examples of when statements about possible benefits connected with or resulting from the services to be provided that do not give equal prominence to discussion of any associated risks.

Rule 156 broadly defines “sales literature,” which generally means any communication (whether in writing, by radio or by television) used to sell or induce the sale of securities of any investment company.  Communications between issuers, underwriters and dealers are included in this definition of sales literature if the communication (or the information it contains) can be “reasonably expected” to be communicated to prospective investors in the offer or sale of securities, or are designed to be employed either in written or oral form in the offer or sale of securities, such as in sales scripts.  The definition likely would apply to communications contained in social media.