Later this month the Ohio Division of Securities is expected to conduct a hearing regarding the Division’s allegations that SoMoLend Holdings, LLC improperly sold securities using general solicitation and advertising (among other claims including securities fraud). SoMoLend is a peer-to-peer lending platform that allows businesses to borrow from other businesses or lenders in exchange for an interest-rate return on the loan amount.

The Division’s Notice of Intent to Issue Cease and Desist Order for SoMoLend alleges SoMoLend raised money for itself by improperly engaging in general solicitation of investors. Interestingly, as of September 23, 2013, general solicitation is now permitted by new SEC Rule 506(c), but additional SEC rules expected for compliance with Rule 506(c) have not yet been finalized, including advance filing requirements of Form D and written solicitation materials.

The Division’s SoMoLend Notice describes some activities that many entrepreneurs consider standard fare, such as participating in investor presentations and pitch events, and some activities that are more questionable, including publishing such presentations to the internet and press releases soliciting investment. The SEC has consistently stated that issuers relying on Rule 506 should have a preexisting relationship with the accredited investors solicited. There is no safe harbor list of what constitutes a preexisting relationship. Many of the allegations in the SoMoLend Notice, if true, go beyond what most counsel would consider appropriate for a 506(b) offering.

Ironically, now that general solicitations are permitted, the rules for what constitutes a general solicitation are more important than ever. Issuers that do not engage in general solicitations can continue to rely on representations from investors that they are accredited (Rule 506(b), aka the “old” rule). But issuers that engage in general solicitations must have an acceptable way of verifying that investors are accredited (Rule 506(c), aka the “new” rule). Whereas entrepreneurs might have been previously willing to stretch the definition of a “general solicitation” by engaging in certain pitch events or soliciting a “friend of a friend,” now such issuers worry that doing so will require proof of appropriate verification of accredited investor status. Failure to follow the rules could impact a subsequent institutional financing if the prospective investor’s due diligence uncovers a general solicitation problem without prior verification in a prior offering.