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I would like to email an invitation for investment to 10 potential investors. Is it legal for the owner of a private C-corporation to recruit potential investors via email?

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  • You tagged SEC, is this a publicly traded company?
    – Ron Beyer
    Jan 30, 2022 at 3:02
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    Please clarify your specific problem or provide additional details to highlight exactly what you need. As it's currently written, it's hard to tell exactly what you're asking.
    – Community Bot
    Jan 30, 2022 at 9:09
  • Is there a reason you think it wouldn't be?
    – user40839
    Jan 30, 2022 at 10:48
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    This seems a perfectly clear question. What additional details does anyone think are needed? Jan 30, 2022 at 19:11
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    @DavidSiegel What type are the possible investors (private ciizens or a company)? Is there a previous connection? Are the emails gained by the owner of them giving them to them by themselves or bought/scraped in some way or another?
    – Trish
    Jan 31, 2022 at 13:37

2 Answers 2

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Is it legal for the owner of a private company to recruit potential investors via email?

Yes. This is no different from making your proposal in person, over the phone or by letter. Depending on the nature or details of the matter, email might be more efficient than other methods for making the proposal.

Sending that email does not create, let alone formalize, legal relations between the addressee(s) and you. Nor does it preclude the subsequent formation of a contract or an agreement. In the case of one-sided contracts, the contract is formed when an addressee meets prior to expiration of his power of acceptance (see Restatement (Second) of Contracts at §§35-36) the conditions you formulate in your email. In all other cases, the formation of the contract happens when you two agree on the terms & conditions of the investment.

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    Marketing an unregistered security can violate securities law even in the absence of contract formation.
    – ohwilleke
    Jan 31, 2022 at 0:26
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    This answer does not address SEC regulations, although the question specifically asked about them. Under what SEC rule would this be permitted, or why would SEC rules not apply? Jan 31, 2022 at 2:47
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    "making your proposal in person, over the phone or by letter." may also be unlawful under SEC rules. Jan 31, 2022 at 2:49
  • @DavidSiegel "SEC regulations, although the question specifically asked about them." Of course not. The OP asks about the lawfulness of sending invites/proposals "via email", not about SEC regulations (let alone "specifically"). Even if you are referring to the OP's comment, it came after I posted my answer, was not posted to my answer, and it was in response to someone else (i.e., I was not tagged in it). An answerer cannot be expected to monitor subsequent activity that takes place elsewhere in the post. Jan 31, 2022 at 12:38
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    The question was tagged "SEC". I admit that I failed to notice that the comment came after this answer, you should known that any US sale of securities must comply with SEC regulations, and how these define a "public offering". Jan 31, 2022 at 15:00
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Generally not.

A security that is not registered may not be sold or offered in a "public offering." Basically, it can't be advertised for sale to the general public.

Simply sending emails to potential investors without some kind of pre-existing relationship between the party sending the email and the party receiving, is pretty much, by definition, a public offering.

For example, sending an email seeking investors to ten people selected at random from a mailing list that doesn't tell you anything about them would be a securities law violation even if no investments were secured as a result. If you did that, the SEC could issue a "cease and desist order", seek an injunction against you, or seek civil or criminal penalties.

If you did obtain an investor, the investor would have a private cause of action against you even if the only thing wrong with the investments is that they were unregistered and did not fall within any specific exemption authorized by the SEC.

It isn't the use of email itself that is the problem. It is the lack of any reason to send it to these particular investors stated in the question that falls within an SEC approved private placement exception that is the problem. This is due to the Securities Act of 1933, as amended, and the regulations issued by the Securities and Exchange Commission to enforce and implement the Act.

For an offer to sell securities (stock in a C-corporation is the prototypical type of security), to not constitute a public offering and instead constitute a private placement of securities, one must comply with one or more of the exemptions from registration of securities promulgated by the Securities and Exchange Commission (mostly under Regulation D) and also under any parallel state securities regulations (which sometimes apply even when federal securities laws do not).

Most of these exemptions either limit the amount of investment that may be sought in the offering as a whole, limit the offering to people who are known to be "accredited investors" (basically affluent people or institutional investors), limit the number of unaccredited investors (and require that they either be sophisticated or have a professional advisor assisting them), or require that the investor be actively involved in the business. Some exemptions are available as a matter of course, but only if expressly registered with the SEC. But, the full set of exemptions that are available is a complicated and technical matter. The SEC summarizes some of the main exemptions and provides numerous additional references here.

It is possible that the course of action proposed may fall within, for example, Rule 504, Rule 505, or Rule 506 of Regulation D that permits private offerings. But on the face of the information in the question it is not possible to determine that.

For example, if you sought to secure $6,000,000 of investments over twelve months, with some of the investments sought from non-accredited investors, that would not fall within the scope of any of the Regulation D exemptions and would violate federal securities laws.

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    Totally not convinced that sending emails is public offering. Only the selected recipients get the chance to invest, not anyone from the street.
    – Greendrake
    Jan 31, 2022 at 1:56
  • The answer makes sense for a generic scenario (as you begin, with "Generally not"), but the few details the OP provides warrant a conclusion in the opposite direction. The OP's pre-defined limit to 10 addressees suggests that he would be judicious on specifically who to send an invite. It is also a stretch to treat an invite message as a full-on, take-it-or-leave-it offering. More likely than not the addressees would have the opportunity to gather "information as would be found in a registration statement" (Henderson v. Hayden, Stone Inc., 461 F.2d 1069, 1072 (5th Cir. 1972)). Jan 31, 2022 at 12:24
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    @IñakiViggers exactly opposite: without the details that they have the consent or connections, you have to - under the relevant law - assume their absence.
    – Trish
    Jan 31, 2022 at 13:39

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