Communications and General Solicitation

Rule 2210: the three categories

FINRA Rule 2210 sorts every written communication — including electronic ones — into three categories, and the boundaries are numerical.

CORRESPONDENCE is a written communication distributed or made available to 25 or fewer RETAIL INVESTORS within any 30 calendar-day period.

A RETAIL COMMUNICATION is one distributed or made available to MORE THAN 25 retail investors within any 30 calendar-day period.

An INSTITUTIONAL COMMUNICATION is one distributed or made available only to institutional investors.

A retail investor is any person other than an institutional investor. The definition of institutional investor tracks Rule 4512(c) — banks, insurance companies, registered investment companies and advisers, and any other person with total assets of at least fifty million dollars — plus government entities, employee benefit plans with at least 100 participants, members and registered persons.

The count is per 30-day rolling window and per retail investor. The same email to 20 clients is correspondence; to 30 it is a retail communication, and the approval and filing consequences change.

On approval: a retail communication generally requires approval by an appropriately qualified registered principal BEFORE use or filing, with limited exceptions. Correspondence is not pre-approved but is subject to supervision and review under Rule 3110(b). Institutional communications need written procedures ensuring principal review, which may be post-use where the procedures include training and surveillance.

On filing: certain retail communications must be filed with FINRA's Advertising Regulation Department. A new member in its first year of membership must file retail communications used in public media at least 10 business days BEFORE first use. Retail communications concerning registered investment companies, public direct participation programs, collateralized mortgage obligations and certain structured products must be filed within 10 business days AFTER first use.

Here is the part that matters most to a Series 82 representative, and it is easy to miss: private placement materials are generally NOT among the categories requiring an Advertising Regulation filing under Rule 2210(c). They are filed instead under Rule 5123, with a different department and a different deadline, which lesson 3.4 covers. Two different filing regimes, and a communication can be caught by one and not the other.

What may be said

Rule 2210(d) sets content standards that apply to all three categories, and they are the ones enforcement actions are built on.

The general standard: communications must be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts. No member may make any false, exaggerated, unwarranted, promissory or misleading statement or claim.

Material information may not be omitted where the omission would make the communication misleading. Risks must be disclosed alongside benefits — a communication that lists the upside of an investment and puts the risk factors in the PPM is not fair and balanced.

Performance: communications may not predict or project performance, imply that past performance will recur, or make any exaggerated or unwarranted claim, opinion or forecast. The exceptions are narrow — a hypothetical illustration of mathematical principles that does not predict investment results, an investment analysis tool meeting the rule's conditions, and a price target in a research report with a reasonable basis and disclosed risks.

This is the standard most often broken in private placements, because the material a start-up gives a placement agent is written to raise money. Projected returns, target IRRs, "expected" exit multiples and pro forma revenue models are the normal furniture of a pitch deck, and most of it cannot go into a communication distributed by a member firm in the form the issuer wrote it.

Two further requirements: the member's name must be stated, and the communication must reflect any relationship between the member and any issuer mentioned. Comparisons must disclose material differences. Tax implications must not be misleadingly stated.

And everything is a record. Rule 2210(b)(4) requires members to keep copies with the dates of first and last use, the name of the approving principal and the date of approval, and the source of any statistical table or chart, retained under SEC Rule 17a-4(b).

General solicitation, and the relationship that answers it

Rule 502(c) prohibits the issuer and anyone acting on its behalf from offering or selling "by any form of general solicitation or general advertising," and gives two examples: any advertisement, article, notice or other communication published in a newspaper, magazine or similar media or broadcast on television or radio; and any seminar or meeting whose attendees were invited by general solicitation or general advertising.

In a Rule 506(b) offering, a placement agent is a person acting on the issuer's behalf. Its marketing is the issuer's marketing.

The practical question is therefore how anyone ever finds an investor. The answer, developed through SEC staff no-action positions rather than through the text of the rule, is the PRE-EXISTING SUBSTANTIVE RELATIONSHIP.

It has two halves and both are load-bearing. PRE-EXISTING means the relationship was formed before the offering commenced — not during, and not by the very contact that introduced the deal. SUBSTANTIVE means the firm has enough information about the prospect's financial circumstances and sophistication to evaluate whether they are a suitable candidate for private offerings, rather than merely holding their business card.

The compliance consequence is a shape you will see in every private placement firm: a questionnaire completed when a prospect is onboarded, a cooling period before that prospect is shown a deal, and a record of both. It looks like bureaucracy and it is the entire basis on which the firm is permitted to sell.

Rule 152, from lesson 2.2, matters here too. Where an issuer wants to run an exempt offering that prohibits general solicitation, the issuer must have a reasonable belief for each purchaser that it did not solicit them through general solicitation, or that it established a substantive relationship with them before that offering commenced.

Things that are expressly NOT general solicitation: filing a Form D, provided the issuer made a good faith and reasonable attempt to comply with the form; and a notice published in accordance with Rule 135c.

When general solicitation does occur in a 506(b) offering, Rule 508 forecloses the usual argument. It is deemed significant to the offering as a whole, so the deviation cannot be excused. The exemption is gone for the offering, and Section 12(a)(1) rescission follows.

What changes under Rule 506(c)

Rule 506(c) removes the solicitation restriction and substitutes a verification duty, and the operational difference is larger than the rule text suggests.

Under 506(c), an offering may be advertised. Websites, conferences, mass email, social media and public demo days all become available, and Rule 502(c) does not apply because 506(c) requires compliance only with Rule 501 and Rule 502(a) and (d).

What you gain in reach you pay for in eligibility and evidence. Every purchaser must be an accredited investor — there is no 35-purchaser allowance for non-accredited buyers — and the issuer must take reasonable steps to verify each one, by the methods in lesson 2.3.

Three traps.

First, an offering cannot change its mind. General solicitation in what was intended as a 506(b) offering does not convert it into a 506(c) offering; it destroys the 506(b) exemption, and 506(c) is unavailable retroactively for the non-accredited investors already sold to. The branch is chosen at the outset and it governs everything.

Second, Rule 2210 does not relax. A 506(c) communication distributed to more than 25 retail investors in 30 days is a retail communication needing principal pre-approval, and the content standards apply in full. The securities laws permit the advertisement; the FINRA rules govern what it may say. Public advertising of a speculative private placement is the highest-risk communication a member firm can produce.

Third, Rule 506(d) bad-actor diligence becomes more visible when the offering is public, not less. The disqualification applies either way.

A representative's first question about any offering should therefore be which branch it is being sold under, because everything else follows from the answer.

The safe harbours

The content outline names a set of rules that define when a communication is NOT an offer or a prospectus. They belong to the registered offering world, and a Series 82 candidate needs to recognise what each one does rather than know it in depth.

Rule 134 — the "tombstone" rule. A communication limited to the identifying information the rule permits is not a prospectus, provided a registration statement has been filed. It is how the familiar bare-bones offering announcement is published lawfully.

Rule 135 — a notice of a PROPOSED registered offering. An issuer or selling securityholder publishing a notice of a proposed offering is not deemed to be offering securities, provided the notice states that it does not constitute an offer and contains no more than the limited information the rule lists.

Rule 135a — generic advertising. A communication that does not refer by name to a particular investment company or its securities, and is limited to explanatory information about investment companies generally or the services offered with them, is not an offer.

Rules 137, 138 and 139 are the research report safe harbours, and the distinction between them is the tested point. Rule 137 covers a broker-dealer that is NOT participating in the distribution. Rule 138 covers a participating broker-dealer publishing research about a DIFFERENT class of the issuer's securities from the one being distributed — research on the common stock while distributing non-convertible debt, for example. Rule 139 covers a participating broker-dealer publishing research about the issuer or its securities where the issuer meets the rule's eligibility conditions and the research is issued in the regular course of business.

Not a participant, different security, or regular-course research on an eligible issuer. That triplet is enough.

One genuinely private-market rule belongs alongside these. Rule 241 permits a generic solicitation of interest before the issuer has determined which exemption it will use — the private-market cousin of Regulation A's Rule 255 testing the waters. Rule 152(c) treats the date of that generic offer as the date the offering commenced, which is exactly the point at which the pre-existing relationship test stops being satisfiable.