With General Solicitations Soon To Be Permitted, It’s Time To Recall The Commissioner’s Advertising Rules

Over a year ago, Congress directed the Securities and Exchange Commission to amend its rules to permit general solicitations in Rule 506 and Rule 144A offerings.  The SEC failed to meet Congress’ deadline by over a year. See The Most Important Thing You Need To Know Now About The Lifting Of The General Solicitation Ban.  When general solicitations are at long last permitted, issuers and broker-dealers should not lose sight of California’s securities advertising rules.

Many may be surprised to learn that the California Corporate Securities Law prohibits any person from publishing of any advertisement in California concerning any security sold or offered for sale in California unless the advertisement is filed with the Department of Business Oversight (fka Department of Corporations) three business days before publication.  Cal. Corp. Code Section 25300(a).  While the Commissioner does not issue letters of approval or “nondisapproval”, the Commissioner may order the stopping of publication of any advertisement that she finds to be false or misleading.  Cal. Corp. Code Section 25302.

The good news is that there are many exceptions to filing requirement.  In the case of Rule 506, offerings, Section 25300(b)(5) should be helpful.  That statute exempts, among other things, any advertisement with respect to a transaction that is subject to Section 25102.1 and the advertisement is required or permitted under the Securities Act of 1933.  Section 25102.1(d) provides that qualification is not required with respect to the offer and sale of a security pursuant to Section 18(b)(4)(D) of the Securities Act.  The JOBS Act renumbered the clauses of Section 18(b)(4), but the reference was formerly to transactions pursuant to SEC rules or regulations issued under Section 4(2) of the Securities Act (i.e., Rule 506).  The reference is now completely obscure because Section 25102.1 hasn’t been amended to reflect the amendments to Section 18(b) effected by the JOBS Act and Congress’ duplicated some clauses of Section 18(b).  See How Many Errors Can You Make In 9,000 Words, More Or Less?

Note that Section 25300(b) contains exemptions from the pre-filing requirement only.  I’ll discuss other advertising requirements in future posts.