A real estate sponsor closes a successful multifamily acquisition. Distributions are running ahead of projections. Three investors send unsolicited emails praising the sponsor’s communication, execution, and transparency. The sponsor, reasonably proud of the outcome, posts the most favorable of those emails on the company website under a “What Our Investors Say” header, adds two of the quotes to the next pitch deck, and shares a screenshot of a glowing investor message on LinkedIn.
Now the sponsor is raising capital for the next offering under Rule 506(b). None of the three investors whose quotes appear on the website, the deck, or LinkedIn had a documented pre-existing substantive relationship with the investors who saw those materials. Several investors in the new offering found the sponsor through the LinkedIn post before any other contact with the platform.
Two legal problems have materialized simultaneously. First, the publicly accessible testimonials may constitute general solicitation in connection with the new Rule 506(b) offering, which is being raised at the same time the testimonials are live. Second, if any person who provided or shared those testimonials received compensation of any kind for doing so, even indirectly, Section 17(b) of the Securities Act requires that compensation to have been disclosed in the testimonial communication itself. Neither problem was on the sponsor’s radar when the satisfied investor emails arrived.
Testimonials, endorsements, and social proof are among the most powerful tools in consumer marketing, which is precisely why real estate sponsors want to use them. They are also among the most legally regulated marketing activities in private securities offerings, carrying general solicitation risk under Rule 506(b), antifraud risk under Section 17(a), compensation disclosure risk under Section 17(b), and, for registered investment advisers, specific marketing rule obligations under Rule 206(4)-1. This post addresses what each of those frameworks requires, where the risk begins for sponsors who are not registered advisers, and what practices make testimonial and endorsement use defensible.
The Three Legal Frameworks That Govern Testimonials in Private Offerings
Most sponsors who think about testimonial compliance think about the FTC’s endorsement guidelines, which require disclosure of material connections between an endorser and a brand. Those guidelines apply to consumer advertising and are enforced by the FTC as a consumer protection matter. They are not the primary legal framework for testimonials used in connection with private securities offerings. Three frameworks govern testimonials in that context, each with its own scope and its own set of obligations.
The Antifraud Framework: Section 17(a) and Rule 10b-5
Every material statement made in connection with the offer or sale of a security is subject to the antifraud provisions of Section 17(a) of the Securities Act and Rule 10b-5 under the Exchange Act. A testimonial published on a sponsor’s website, included in a pitch deck, or shared on social media in connection with an active or contemplated offering is a material statement made in connection with the offer of a security. The antifraud standard applies to it with the same force it applies to the PPM.
The antifraud framework requires that the testimonial not be materially misleading in its context. A testimonial that is accurate standing alone but that creates a misleading impression in context, because it describes an investment outcome that is not typical, because it omits material limitations on comparability, or because it attributes success to the sponsor’s capabilities without disclosing the market or timing factors that contributed to the result, may be materially misleading under the total-mix-of-information standard even if every word in the testimonial is literally true. The investor who reads the testimonial is forming an impression of the sponsor’s capabilities and the likelihood of achieving similar results. If that impression is more favorable than the complete factual picture supports, the antifraud standard has been implicated.
Section 17(b) of the Securities Act: The Anti-Touting Provision
Section 17(b) of the Securities Act, commonly called the anti-touting provision, makes it unlawful for any person to publish, give publicity to, or circulate any communication that describes a security for consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt and the amount of that consideration. The provision applies to every medium: a written testimonial, a social media post, a podcast endorsement, a video review, or any other communication that describes the offering or the sponsor in connection with a securities offering and was made for compensation.
The obligation Section 17(b) imposes is mandatory and cannot be waived by the issuer or by the person giving the endorsement. It applies regardless of whether the compensation was paid in cash, in co-investment rights, in reduced fees, in other economic benefits, or in any indirect form. A testimonial from an investor who received a fee credit for referring other investors, who received co-investment access as a result of their participation in the offering, or who received any economic benefit from the sponsor in connection with the testimonial is a compensated testimonial that requires disclosure of that compensation in the communication itself, not merely in the subscription agreement or in a separate disclosure document.
The Section 17(b) analysis is independent of and in addition to any FTC disclosure requirements. A social media post that meets FTC endorsement guidelines by disclosing a sponsored relationship in the caption does not automatically satisfy Section 17(b)’s securities law disclosure requirement, which has its own scope and its own enforcement framework. Real estate sponsors who use social media endorsements, podcast appearances by compensated advocates, or any other form of paid promotion for their securities offerings must address both disclosure frameworks independently.
The General Solicitation Framework: Rule 506(b) Implications
A testimonial that is publicly accessible, either on the sponsor’s website, on social media, in a press release, or through any other channel that reaches the general public, is a communication that could constitute general solicitation in connection with a Rule 506(b) offering if it arouses investor interest in the sponsor’s current or contemplated offering. A testimonial that describes how much money an investor made with the sponsor, how smoothly the investment process was handled, or how confident the investor is in recommending the sponsor to others is precisely the kind of communication that conditions the market for a securities offering by generating investor interest in the sponsor’s offerings generally.
As addressed in the prior post in this series on soft circling investors before launch, the general solicitation analysis focuses on whether a communication arouses investor interest in a contemplated offering rather than on whether it explicitly invites investment. A testimonial published while a Rule 506(b) offering is active or contemplated, visible to persons without documented pre-existing substantive relationships, and describing the sponsor’s investment performance in terms that would interest prospective investors, is a strong candidate for a general solicitation finding regardless of whether it explicitly names the current offering or invites inquiries about participation.
The SEC Marketing Rule: What It Requires for Registered Advisers
For real estate sponsors who are registered investment advisers under the Investment Advisers Act, the use of testimonials and endorsements in marketing materials is governed by the SEC’s marketing rule, Rule 206(4)-1, which was adopted on December 22, 2020, with a compliance date of November 4, 2022. The marketing rule defines testimonials and endorsements as distinct categories with specific disclosure requirements, and its framework is the most detailed regulation of testimonial and endorsement use in the private fund context.
Testimonials Versus Endorsements Under the Marketing Rule
The marketing rule distinguishes between a testimonial, which is a statement made by a current client or investor about their experience with the adviser, and an endorsement, which is a statement made by someone other than a current client or investor about the adviser’s merits. Both categories include statements made on social media, in video content, in written form, and in any other medium. The distinction matters because different disclosure requirements apply depending on whether the statement is made by a current investor or by a third party.
A current investor who posts on social media about a positive experience with the sponsor’s fund is giving a testimonial under the marketing rule. A real estate education influencer who endorses the sponsor’s platform on a podcast is giving an endorsement. Both are regulated under the marketing rule if the registered adviser uses or causes the use of those communications in connection with its marketing activities. A registered adviser who reposts an investor’s social media testimonial on the adviser’s own official account has caused the use of that testimonial and has triggered the marketing rule’s disclosure requirements for the reposted content.
Required Disclosures Under the Marketing Rule
The marketing rule requires three disclosures for any testimonial or endorsement used in marketing: a disclosure that the statement is a testimonial or endorsement; a disclosure of whether compensation was paid for the testimonial or endorsement, and if so, a brief statement of any material conflicts of interest; and a disclosure of whether the person giving the testimonial or endorsement is a current client or investor of the adviser. Those disclosures must be clear and prominent, must appear in close proximity to the testimonial or endorsement itself, and must be understandable to the intended audience.
The compensation disclosure requirement under the marketing rule extends to any compensation paid in exchange for the testimonial or endorsement, including cash, fee reductions, co-investment rights, and any other economic benefit. A current investor who receives a reduced management fee as a result of referring other investors, and who then provides a written testimonial about the sponsor, has given a compensated testimonial that requires disclosure of the compensation and any resulting conflict of interest.
The marketing rule also requires that the adviser have a reasonable basis for believing that any testimonial or endorsement does not contain an untrue statement of material fact or is otherwise misleading. That requirement obligates the registered adviser to review testimonials before using them, not simply to collect them and post them without evaluation. A testimonial that describes investment returns higher than those the endorsing investor actually received, that attributes outcomes to the adviser’s skill without acknowledging market factors, or that implies typicality of results that are actually exceptional, must not be used without appropriate qualifying disclosure.
| 📌 The Marketing Rule’s Reach: When “Liking” or “Reposting” a Testimonial Creates Compliance Obligations One of the most consequential and most surprising aspects of the SEC’s marketing rule is its treatment of a registered adviser’s interaction with third-party social media content. The rule provides that a registered adviser “uses” a testimonial or endorsement when it reshares, reposts, likes, or otherwise promotes third-party content about the adviser in a way that is reasonably likely to cause that content to be seen by prospective clients. That means a registered adviser who clicks the LinkedIn “like” button on an investor’s post praising the adviser’s fund performance, or who reposts an investor’s positive tweet about the fund, has caused the use of a testimonial and has triggered the marketing rule’s disclosure requirements. The required disclosures do not appear automatically when the like or repost is made, and there is currently no standard mechanism for adding the required compensation and conflict disclosures to a like or a repost. The practical implication for registered advisers with active social media presences is that a formal social media policy must address how the firm interacts with third-party content about the adviser, specifying which types of interactions are permissible without triggering marketing rule obligations and which require prior compliance review. Unrestricted liking and reposting of positive investor content is not a compliant social media practice for a registered adviser. For sponsors who are not registered investment advisers, the marketing rule’s specific requirements do not apply. But the general antifraud framework and the Section 17(b) compensation disclosure obligation do apply, and the marketing rule’s approach to what constitutes “use” of a testimonial provides useful analytical guidance for how unregistered sponsors should think about their own interaction with investor-generated content. |
For Unregistered Sponsors: The Antifraud and Section 17(b) Framework in Practice
Most early-stage and emerging real estate sponsors are not registered investment advisers and are not directly subject to the SEC’s marketing rule. They are subject to the antifraud provisions of Section 17(a) and Rule 10b-5, the compensation disclosure requirements of Section 17(b), and the general solicitation restrictions of their chosen Regulation D exemption. Those three frameworks collectively govern how unregistered sponsors may use testimonials and endorsements in connection with private securities offerings.
The Section 17(b) Analysis for Unregistered Sponsors
Section 17(b) applies to any person who publishes, gives publicity to, or circulates any communication describing a security for consideration received from an issuer, underwriter, or dealer. That scope captures every form of paid testimonial or endorsement used in connection with a securities offering: a paid social media post by an investor, a compensated podcast appearance by someone who promotes the offering to their audience, a compensated blog post by a real estate influencer who discusses the sponsor’s fund, and any referral arrangement in which a person receives economic consideration for promoting the offering or the sponsor to prospective investors.
The consideration that triggers Section 17(b)’s disclosure requirement is not limited to cash payment. The provision covers consideration received directly or indirectly, which extends to co-investment rights, fee reductions, partnership profit interests, reduced management fees for the endorser’s own investment, and any other economic benefit the endorser receives in connection with their promotion of the offering or the sponsor. A real estate podcast host who receives co-investment access in the sponsor’s current fund in exchange for featuring the sponsor on their show, without disclosing that arrangement in the episode, has violated Section 17(b) regardless of whether the podcast episode would otherwise be considered accurate and not misleading.
The disclosure that Section 17(b) requires must appear in the communication itself, not in a separate document, not in the subscription agreement that investors later receive, and not in a disclosure that is accessible only to those who click through to a separate page. An investor who reads a promotional testimonial must be able to see in the testimonial itself that the person providing it was compensated and what the nature of that compensation was. A testimonial whose disclosure appears only in fine print that the reasonably attentive reader would not connect to the testimonial does not satisfy Section 17(b)’s requirements.
Organic and Uncompensated Testimonials
Not all investor testimonials are compensated. An investor who spontaneously sends the sponsor an email praising the fund’s performance and the sponsor’s communication, receives no economic benefit for doing so, and who is simply expressing genuine satisfaction, is giving an uncompensated testimonial. Section 17(b)’s disclosure requirement does not apply to uncompensated testimonials, because there is no consideration to disclose.
The antifraud framework still applies to uncompensated testimonials when the sponsor uses them in marketing materials. A sponsor who selects investor testimonials for the website based on which are most favorable, presents those testimonials without disclosure that they are not typical of all investor experiences, and uses them to create an impression of uniformly positive investor outcomes is presenting selective information that may create a misleadingly favorable impression of the sponsor’s track record. The antifraud standard does not require that compensation be paid to make a testimonial misleading. It requires only that the testimonial, in context, create a materially misleading impression of the sponsor’s capabilities or typical investor experience.
The Typicality Problem: Why Accurate Testimonials Can Still Be Misleading
The most common antifraud problem in testimonial use is not inaccuracy. It is selective accuracy: using testimonials that are genuinely accurate as descriptions of some investors’ experiences while omitting the full range of investor experience that would give a prospective investor a balanced picture. An investor who achieved a 15% net return in a prior offering, and whose testimonial accurately describes that outcome, is providing information that is literally true but potentially misleading if the sponsor’s complete investor population achieved widely varying results, if the 15% return was achieved under market conditions that no longer exist, or if the offering that produced the 15% return was materially different in risk profile from the current offering being marketed.
The SEC’s marketing rule’s requirement that registered advisers have a reasonable basis for believing a testimonial is not misleading reflects this concern. For unregistered sponsors, the same analytical framework applies through the antifraud standard: a testimonial should not be used in marketing if the impression it creates about the likelihood of similar outcomes is more favorable than the complete evidence supports. A testimonial from the fund’s single best-performing investor, used without any disclosure that the result is exceptional or that other investors in the same fund had materially different experiences, is presenting a selective picture that may mislead prospective investors about the risk and return characteristics of the sponsor’s offerings.
The typicality problem is closely related to the track record disclosure issues addressed in the prior post in this series on documenting sponsor track record without creating securities risk. The same principle that requires a complete and balanced track record disclosure applies to testimonials: the investor’s understanding of the sponsor’s capabilities should be based on the full body of evidence, not on the most favorable subset of it. A testimonial that highlights an exceptional outcome should either be disclosed as exceptional or be placed in a context that provides the prospective investor with a balanced picture of the range of investor experiences.
General Solicitation Risk: When Testimonials Destroy the 506(b) Exemption
The general solicitation risk from testimonials is the most immediate and most irreversible of the three risk categories, because a general solicitation that has already been made in connection with a Rule 506(b) offering cannot be undone by removing the testimonial or retracting the communication. The contamination runs forward from the date of the solicitation, affecting every investor admitted after that date who did not already have a documented pre-existing substantive relationship with the sponsor.
When a Testimonial Constitutes General Solicitation
A testimonial that is published on a publicly accessible platform while a Rule 506(b) offering is active or in contemplation, that describes the sponsor’s investment performance or capabilities in terms that would interest a prospective investor, and that is visible to persons without documented pre-existing substantive relationships with the sponsor, is general solicitation in the same way that a public deals page or a LinkedIn post about a current offering is general solicitation. The testimonial does not need to explicitly reference the current offering, name the relevant fund, or include investment terms to constitute general solicitation. It only needs to arouse investor interest in the sponsor’s offerings generally, at a time when a specific offering is being actively marketed.
The timing element is what makes testimonials particularly dangerous for Rule 506(b) sponsors. A testimonial published between offerings, when no specific offering is in contemplation, may be permissible public content that does not constitute general solicitation. The same testimonial published or left in place when a specific offering is being raised may constitute general solicitation for that offering, particularly if the testimonial describes investment returns or outcomes in terms that would interest prospective investors in the current offering. A sponsor who published testimonials between their first and second offerings must evaluate, before the second offering launches, whether those testimonials are consistent with Rule 506(b)’s requirements during the capital-raising period.
Third-Party Platform Testimonials and Ratings
Sponsors who are listed on Yelp, Google Reviews, Trustpilot, or any other publicly accessible third-party review platform may accumulate investor reviews that function as testimonials in connection with their securities offerings. A review that says a sponsor “communicates clearly, pays distributions on time, and has produced strong returns” is, in the context of a sponsor who raises capital in private securities offerings, a testimonial about the sponsor’s investment performance that could be general solicitation if visible to the general public during an active Rule 506(b) offering period.
The sponsor’s ability to control third-party platform testimonials is limited, which creates a specific compliance challenge: the sponsor may not have solicited the reviews, may not have the ability to remove them, and may not have received any compensation for them, but they are publicly visible and may be viewed by persons who are not pre-existing contacts of the sponsor. The appropriate response to this risk depends on the offering’s exemption: a Rule 506(c) sponsor can simply ensure the review platform content satisfies the antifraud standard, while a Rule 506(b) sponsor must evaluate whether third-party review visibility during the offering period creates general solicitation risk that requires addressing through exemption conversion or other structural changes.
| 📌 Section 17(b) and the Broker-Dealer Risk: Why Compensated Endorsements Create Two Separate Problems When a sponsor pays a person to promote their offering or platform, two distinct legal problems arise simultaneously, each requiring independent analysis and independent disclosure. The first is the Section 17(b) compensation disclosure obligation. The compensated endorser must disclose in the promotional communication itself the nature and amount of the consideration received from the issuer. That disclosure must be clear, must appear in the communication where prospective investors will see it, and must be specific enough to give investors a meaningful understanding of the relationship between the endorser and the issuer. The second is the broker-dealer registration risk. A person who receives transaction-based compensation, meaning compensation tied to the amount of capital raised or the number of investors who subscribe, in connection with a securities offering may be required to register as a broker-dealer or associate with a registered broker-dealer under Section 15(a) of the Securities Exchange Act. An influencer who receives a flat appearance fee to mention the sponsor on a podcast is in a different position from an influencer who receives a percentage of every dollar invested by their followers. The latter arrangement is transaction-based compensation that is most likely to trigger the broker-dealer registration requirement. Both problems require legal analysis before a paid endorsement arrangement is implemented, not after. The Section 17(b) disclosure obligation can be satisfied through appropriate disclosure language in the communication. The broker-dealer registration risk may require restructuring the compensation arrangement, engaging a registered broker-dealer to intermediate the relationship, or concluding that the arrangement cannot be implemented as contemplated. Neither problem becomes less serious because the endorsement is effective or because the sponsor did not understand the legal framework before implementing the arrangement. |
What Sponsors Can and Cannot Do: A Practical Framework
The legal frameworks governing testimonials and endorsements in private securities offerings do not prohibit all use of investor quotes, social proof, or third-party references. They impose specific requirements depending on the nature of the testimony, the source of the testimonial, the compensation arrangement, and the exemption governing the offering. The following framework addresses the specific practices sponsors most frequently want to use.
Organic Investor Testimonials on the Website
An uncompensated testimonial from a current investor, selected for use on the sponsor’s website, can be used without triggering Section 17(b)’s compensation disclosure requirement, because there is no consideration to disclose. The antifraud standard still applies: the testimonial must not create a materially misleading impression of the sponsor’s capabilities or typical investor outcomes. For a Rule 506(b) offering in progress, the testimonial on the public website is general solicitation risk regardless of whether it is compensated; the website must be gated as described in the prior post in this series on website compliance.
For a Rule 506(c) offering, organic investor testimonials can appear on the public website subject to antifraud content review: the testimonial should be clearly labeled as a testimonial from a current investor, should not describe results that are materially more favorable than the typical investor experience without disclosure of that context, and should be consistent with the PPM’s disclosures about investment risks and return potential. The marketing rule’s requirements apply if the sponsor is a registered investment adviser.
Referral Arrangements and Finder Compensation
A referral arrangement in which an existing investor receives economic consideration, whether a cash referral fee, a fee credit, co-investment access, or any other benefit, in exchange for introducing new investors to the sponsor’s offerings creates both a Section 17(b) compensation disclosure obligation and a potential broker-dealer registration issue. The referral arrangement must be disclosed in any communication the referring investor makes about the sponsor that reaches prospective investors, and the compensation arrangement itself must be reviewed by securities counsel to evaluate whether it constitutes unregistered broker-dealer activity.
A referral arrangement in which an existing investor simply makes introductions without any compensation, as a genuine expression of satisfaction with their own investment experience, does not trigger Section 17(b)’s disclosure requirement and does not create a broker-dealer registration issue. The uncompensated introduction is the legally safe version of the referral channel, and most sponsors are better served by cultivating it through excellent investor relations than by implementing formal compensated referral arrangements that create compliance complexity.
Podcast Appearances and Media Endorsements
A sponsor who appears on a real estate podcast or investment media platform to discuss their investment approach, track record, and platform capabilities is giving an investor communication subject to the antifraud standard. The appearance is permissible and is a legitimate investor development tool for both Rule 506(b) and Rule 506(c) sponsors, provided the content of the appearance is accurate, consistent with the PPM, and does not describe a specific current offering in a way that constitutes general solicitation for a Rule 506(b) offering.
If the sponsor compensates the podcast host or media platform for the appearance, for favorable coverage, or for the host’s independent promotion of the sponsor’s offerings to their audience, both the sponsor and the host may have independent disclosure obligations under Section 17(b). If the host’s compensation is tied to the amount of capital their audience invests with the sponsor, the arrangement may also constitute unregistered broker-dealer activity. As addressed in the prior post on website compliance, these arrangements should be reviewed by securities counsel before they are implemented.
LinkedIn and Social Media Endorsements
An investor who writes an unsolicited LinkedIn post praising the sponsor’s fund, without receiving any compensation and without being prompted by the sponsor, is providing an organic endorsement that the sponsor has not solicited and is not directly responsible for. The sponsor’s interaction with that post, however, through likes, comments, reposts, or sharing on official company channels, may cause the use of the endorsement in a way that triggers both antifraud and marketing rule obligations.
A sponsor who reposts an investor’s LinkedIn testimonial on the company’s official LinkedIn page during an active Rule 506(b) offering period has used that testimonial in connection with the offering. If the repost reaches persons without documented pre-existing substantive relationships, it may constitute general solicitation. If the repost does not include disclosure that the statement reflects an individual investor’s experience rather than a typical outcome, it may present a misleading picture of investor experience. A social media policy that addresses what types of investor content can be reshared on official company channels, and what review process applies before resharing, is a necessary compliance document for any sponsor with an active social media presence.
Permissible Alternatives to Testimonials: Building Credibility Without the Risk
Sponsors who understand the compliance framework for testimonials often ask what they can use instead to build credibility with prospective investors who have not yet experienced the sponsor’s execution firsthand. Several alternatives accomplish the same investor confidence-building function without the specific risks that direct testimonials and endorsements create.
Third-party coverage by credible media, industry publications, or professional organizations that features the sponsor’s transactions, team, or perspective is not a testimonial and is not an endorsement: it is editorial coverage that the sponsor did not pay for and that is attributed to an independent source. Sharing earned media coverage, distinguishing clearly that it is editorial and not paid content, builds credibility through independent validation without Section 17(b) or antifraud risk from the coverage itself, though the antifraud standard still applies to any factual claims the sponsor makes in their own communications about the coverage.
Detailed case studies of specific transactions, presented with complete financial detail including actual returns achieved, the assumptions that were made at underwriting, how actual performance compared to those assumptions, and what factors contributed to or complicated the outcome, are more persuasive to sophisticated investors than testimonials while simultaneously being more honest about the investment process. A case study that presents a successful acquisition and a more challenging one in the same portfolio, with equal detail and candor, demonstrates the quality of the sponsor’s execution and disclosure practices more effectively than a page of favorable investor quotes.
Reference conversations, in which prospective investors are connected directly with prior investors who are willing to speak about their experience, accomplish the social proof function of testimonials in a private, undocumented channel that does not constitute general solicitation. The reference conversation is not a public communication and does not create the general solicitation problem that a public testimonial creates. A sponsor who builds a reference list of willing prior investors and makes those investors available for direct conversations with qualified prospective investors is providing the most credible form of investor validation in the most legally defensible format.
| ⚠️ The Six Testimonial and Endorsement Practices That Most Frequently Create Securities Law Exposure 1. Publishing investor testimonials on a publicly accessible website during an active Rule 506(b) offering period. A publicly accessible testimonial that describes the sponsor’s investment performance or capabilities in favorable terms is general solicitation in connection with any Rule 506(b) offering that is active or in contemplation at the time the testimonial is visible. 2. Using a compensated testimonial or endorsement without disclosing the compensation in the communication itself. Section 17(b) of the Securities Act requires that any person who promotes a security for consideration must disclose that consideration in the promotional communication. The disclosure must appear in the communication, not in a separate document or a later subscription agreement. 3. Using investor testimonials that describe exceptional outcomes without disclosing that the results are not typical. An accurate testimonial from the fund’s best-performing investor, presented without context about the range of investor outcomes, may create a materially misleading impression of the likelihood of similar results for prospective investors. 4. Implementing a compensated referral or influencer arrangement without evaluating whether it constitutes unregistered broker-dealer activity under Section 15(a). Transaction-based compensation tied to the amount of capital raised or the number of investors who subscribe is the highest-risk compensation structure and is most likely to require broker-dealer registration by the recipient. 5. Reposting, liking, or otherwise promoting investor testimonials on official social media channels without a compliance review of whether the interaction constitutes “use” of a testimonial subject to the marketing rule (for registered advisers) or creates antifraud risk (for all sponsors) from the selective social proof the promotion creates. 6. Failing to distinguish between compensated and uncompensated testimonials in the compliance analysis. An uncompensated organic testimonial creates antifraud and general solicitation risk but not Section 17(b) risk. A compensated testimonial creates all three. The analysis must identify the compensation status of each testimonial before determining which compliance framework applies. |
The Compliance Question to Ask Before Any Testimonial Goes Live
The opening scenario in this post describes a sponsor who made three reasonable-sounding marketing decisions, posting a satisfied investor’s email, adding investor quotes to the pitch deck, and sharing a positive message on LinkedIn, without understanding that each decision had a legal dimension specific to the securities offering context in which the sponsor was operating. The investor emails were genuine. The satisfaction was real. The compliance problems were also real, and they were entirely independent of the sponsor’s intent.
The compliance question to ask before any testimonial, endorsement, or social proof communication goes live is not whether the investor is happy. It is whether the communication, in the context where it will be seen, satisfies three independent requirements: the antifraud standard, which requires that the communication not create a materially misleading impression of the sponsor’s capabilities or typical investor outcomes; the Section 17(b) requirement, which requires that any compensation for the communication be disclosed in the communication itself; and the general solicitation analysis, which requires that a publicly accessible communication not arouse investor interest in a Rule 506(b) offering in a way that reaches persons without documented pre-existing relationships.
A testimonial or endorsement that satisfies all three of those requirements can be used in connection with a private securities offering. A testimonial or endorsement that does not satisfy one or more of them should not be used until the deficiency is addressed, because the marketing value of any testimonial is far exceeded by the legal exposure a non-compliant one creates.
If you are building a testimonial or social proof program for a current or upcoming offering, or if you want to evaluate whether your existing testimonial practices are consistent with the framework described in this post, a legal review of those practices should precede their next use, not follow an investor complaint or regulatory inquiry about them.
Frequently Asked Questions
Can a real estate sponsor use investor testimonials on their website?
Yes, subject to specific conditions. Uncompensated testimonials that do not create a misleading impression of typical investor outcomes can be used on the website, provided the antifraud standard is satisfied. For Rule 506(b) offerings, the website containing the testimonials must be gated for pre-existing contacts and not publicly accessible. For Rule 506(c) offerings, testimonials may appear on a public website subject to antifraud content review and, for registered investment advisers, the marketing rule’s specific disclosure requirements.
Does Section 17(b) apply to every testimonial used in connection with a private offering?
Section 17(b) applies to testimonials and endorsements given for consideration received from the issuer, directly or indirectly. It does not apply to genuinely uncompensated testimonials where the investor received no economic benefit, direct or indirect, in exchange for their statement. Consideration is broadly defined and includes cash, fee reductions, co-investment rights, referral credits, and any other economic benefit. The sponsor must identify whether any benefit was received by the endorser before determining whether Section 17(b)’s disclosure requirements apply.
What must a Section 17(b) disclosure include?
A Section 17(b) disclosure must appear in the communication itself, must disclose that consideration was received for the endorsement, and must describe the nature of that consideration with enough specificity that a prospective investor can understand the relationship between the endorser and the issuer. A generic disclaimer that the endorser “may have a material interest” in the offering is not sufficient. The disclosure should identify the type of compensation received (cash, fee credit, co-investment access, or other benefit) so that investors can evaluate the endorser’s independence.
Is there a difference between how the marketing rule treats testimonials and how the antifraud standard treats them?
Yes. The marketing rule, which applies only to registered investment advisers, imposes specific categorical requirements: labeling testimonials as such, disclosing compensation, identifying whether the endorser is a current client, and having a reasonable basis for believing the testimonial is not misleading. The antifraud standard applies to all sponsors, registered or not, and evaluates testimonials based on whether they create materially misleading impressions in context. An unregistered sponsor is not subject to the marketing rule’s categorical requirements but is still subject to the antifraud standard’s materiality analysis.
Can a sponsor safely use a paid influencer to promote their real estate fund?
Only if the arrangement is carefully structured and reviewed by securities counsel before implementation. A paid influencer arrangement creates a Section 17(b) compensation disclosure obligation requiring disclosure in every promotional communication the influencer makes about the offering. If the influencer’s compensation is transaction-based, meaning tied to the amount of capital raised or investors who subscribe, the arrangement may also require the influencer to register as a broker-dealer. The promotion itself, if publicly accessible during a Rule 506(b) offering period, may constitute general solicitation.
What is the safest way to use social proof without creating compliance risk?
The safest alternatives to testimonials are third-party earned media coverage (editorial content by independent publications that the sponsor did not pay for), detailed case studies that present complete and balanced transaction histories including challenges alongside successes, and private reference conversations between willing prior investors and qualified prospective investors. None of those approaches creates general solicitation risk in the way a publicly accessible testimonial does, and none creates Section 17(b) disclosure obligations in the way a compensated endorsement does.