Many comment letters relating to the SEC’s proposed rules relaxing the ban on general solicitation suggest that the JOBS Act mandate was not well thought through and that relaxing the ban on general solicitation requires careful thought. While it is true that any change that would affect investor protections should require careful thought, it seems like writers of these comment letters have neglected their history. Discussion related to relaxing the ban on general solicitation has been ongoing since the early 1990s. Various speeches and statements by SEC Staff members over the years have commented on, and acknowledged, the need to revisit private placement exemptions in light of changes in communications patterns. The legal community also has given close consideration to these questions going as far back as the late 1990s and early 2000s. In 2001, the American Bar Association’s Committee on the Federal Regulation of Securities submitted a comment letter to the SEC that suggested relaxation of the ban on general solicitation. At around the same time, the ABA Task Force for the Review of the Federal Securities Laws also proposed that a private offering would qualify for an exemption from registration based on the eligibility of the purchasers of the securities and the restrictions on resales, and not on the number of offerees. The Advisory Committee on Smaller Public Companies, formed in 2004, advocated a relaxation of the ban on general solicitation. Is it possible that over a decade of consideration, and discussion of proposals, would not be considered careful consideration?
The SEC’s Investment Advisory Committee has recommended that the SEC should require issuers relying on the exemption from the ban on general solicitation and advertising to file a form as a precondition for claiming the exemption, and also file with the SEC general solicitation and general advertising material they use in private offerings that rely on the exemption.
The committee published its recommendations on October 15, 2012 in its report, “Recommendations of the Investment Advisory Committee Regarding SEC Rulemaking to Lift the Ban on General Solicitation and Advertising in Rule 506 Offerings: Efficiency Balancing Investor Protection, Capital Formation and Market Integrity.”
The committee’s recommendations follow the SEC’s action on August 29, 2012 to propose rules implementing the JOBS Act mandate to eliminate the ban on general solicitation and general advertising in Rule 506 private placements. Lifting the ban, the committee said, can and should be done “in a manner that simultaneously promotes investor protection, facilitates efficient capital formation, and provides regulators with the tools they need to police the market effectively.”
The committee suggested that the SEC “give strong consideration” to its recommendations, including:
- Require issuers intending to rely on the new JOBS Act general solicitation exemption to file either a new “Form GS” or a revised version of Form D as a precondition for claiming the exemption.
- Require that issuers file with the SEC all solicitation material prepared or disseminated on its behalf in a general solicitation or advertising campaign in reliance on the exemption through an online electronic “drop box.”
- Adopt a safe harbor that “provides clear and enforceable standards” for verification, as opposed to reasonable belief, of accredited investor standards to promote reliance on reliable third parties, including broker-dealers, banks and licensed accountants.
- Make the filing of Form D a condition for relying on the Regulation D exemption (currently, the filing is not a condition for relying on the Regulation D exemption).
- The SEC should take steps to ensure that performance claims in general solicitation materials “are based on appropriate performance reporting standards.”
- Amend the definition of “accredited investor” to better reflect the financial sophistication of “natural persons.”
- The SEC should promptly adopt a “bad actors” rule to disqualify felons, as required by Section 926 of the Dodd-Frank Act.
Section 911 of the Dodd-Frank Act established the Investment Advisory Committee to advise the SEC on regulatory priorities, the regulation of securities products, trading strategies, fee structures, and the effectiveness of disclosure and the integrity of the securities marketplace. The Dodd-Frank Act authorizes the committee to submit its findings and recommendations for review and consideration by the SEC.
Senator Carl Levin of Michigan also weighed in on the SEC’s proposed rule. In a letter dated October 5, 2012 to the SEC, he cited two “significant flaws.” The first is that the proposed rule fails to adequately outline “reasonable steps” necessary to be taken by the issuer to ensure that all investors are accredited. The second is that the proposed rule fails to meaningfully regulate permissible solicitation and advertising so as to protect investors from deceptive advertising, inappropriate or unfair sales tactics and investment fraud.
Today, the Staff of the SEC published another study required by the JOBS Act–this one assessing whether the SEC has sufficient tools to enforce the anti-evasion provisions of Section 12g5-1(b)(3). Given that many more companies are choosing to stay private longer and defer pursuing IPOs, questions have arisen in recent years as to whether there have been more abusive practices employed to avoid triggering the Exchange Act reporting threshold, such as through the use of special vehicles to pool individual investments in private companies in order to obfuscate the number of holders of record. The JOBS Act raised the threshold triggering Exchange Act reporting, which may lead to unanticipated results in this regard, as noted in the Staff’s study. The study concludes that the statutes, rules and procedures as currently formulated provide the Division of Enforcement with sufficient tools to investigate and bring a case for Section 12(g) violations based on Section 12g5-1(b)(3).
On October 25, from 2:00-3:00pm ET, CFO Magazine will present a webcast entitled “JOBS Act: Benefits, Best Practices and Opportunities.” The JOBS Act changes many capital raising regulatory requirements with the goal of facilitating public and private offerings for small businesses. This webcast seeks to examine how the various provisions of the JOBS Act will affect CFOs’ abilities to raise capital for startups, as well as provide a general overview of the main components of the Act. Speakers include Vincent Ryan, Deputy Editor with CFO.com, Timothy J. Keating, Founder and President of Keating Investments LLC, and David Lynn, Partner at Morrison & Foerster.
The speakers will discuss:
- How to benefit from the slower phase-in of Sarbanes Oxley and Dodd-Frank rules for emerging growth companies;
- Best practices in confidentially submitting a draft S-1 to the SEC;
- How to use the “test-the-waters” provision to gauge institutional investor interest in a company’s shares prior to an IPO;
- Whether it is more likely that underwriters will publish research on emerging growth companies, or that they will stick to current practice on quiet periods;
- Whether existing public firms that listed in 2012 ought to elect emerging growth company status;
- The keys to staying private longer under the new, higher threshold for Securities Act registration; and
- New opportunities for small-business capital raising under revisions to Rule 506, Regulation A, and Section 3(b)(2).
For more information and to register, please visit CFO Magazine’s website.
FINRA has filed with the SEC a proposed rule change to amend FINRA’s rules relating to research in order to bring them in line with the JOBS Act and the SEC Staff’s FAQs addressing research. The proposed FINRA rule change would modify NASD Rule 2711 and NYSE Rule 472.
Arranging and Participating in Communications: The proposed rule creates an exception to Rule 2711(c)(4) that permits research analysts to attend meetings with issuer management that are also attended by investment banking personnel, including pitch meetings, provided that the research analysts do not engage in any prohibited conduct, such as soliciting investment banking business. Rule 472 also would contain a similar exception.
Quiet Periods: The proposed rule amends NASD 2711 to eliminate the following quiet periods with respect to an IPO of an EGC: NASD Rule 2711(f)(1)(A) which imposes a 40-day quiet period after an IPO on a member that acts as a manager or co-manager of the IPO; NASD Rule 2711(f)(2) which imposes a 25-day quiet period after an IPO on a member that participates as an underwriter or dealer (other than manager or co-manager) of the IPO; and NASD Rule 2711(f)(4) with respect to the 15-day quiet period applicable to IPO managers and co-managers prior to the expiration, waiver or termination of a lock-up agreement.
FINRA also proposes to adopt changes to NASD Rule 2711(f)(4) to eliminate the 10-day quiet period on managers and co-managers following a secondary offering and the quiet periods after the expiration, waiver or termination of a lock-up agreement for such an offering.
The Staff of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (the “SEC”) recently updated its Frequently Asked Questions on Title I of the Jumpstart Our Business Startups Act (“JOBS Act”) to address a number of issues regarding the applicability of the provisions in Title I to exchange offer, merger and spin-off transactions, as well as considerations for determining whether a company qualifies as an emerging growth company (an “EGC”) and the financial information that an EGC includes in certain filings. The SEC also recently implemented a process whereby an EGC can submit its draft registration statement for confidential review via the EDGAR system. In this regard, the Staff has provided additional guidance as to how EGCs with pending submissions can transition to the new EDGAR filing process. To read our client alert, click here.
In connection with the recent migration of draft registration statement submissions to EDGAR, the SEC Staff sent letters to companies with draft registration statements subject to an ongoing review process, advising those companies how to submit a draft registration statement through EDGAR.
The letter notes that companies with pending draft registration statements already have a Central Index Key, or CIK number, assigned to them. In order to initiate the EDGAR submission process, it is necessary to:
1. Submit a request to the SEC asking that the company’s EDGAR status be converted to an electronic filer;
2. Request the access codes and passwords necessary to submit the registration statement on the EDGAR system; and
3. Make any necessary changes to the company’s contact information and business and mailing addresses in EDGAR prior to making an initial filing, including the secure email address that the Staff will use to send comment letters.
The Staff notes that the first EDGAR draft submission should be made as a new draft registration statement, even if it is an amendment to a previously submitted version. The first EDGAR submission should also include each previously submitted draft registration statement (including exhibits) as a separate Exhibit 99 document. No marked submissions should be provided. Each item of correspondence also must be provided with the initial EDGAR submission as a separate “COVER” document within the submission.
The Staff also reminds companies to properly mark confidential information if they intend to use Rule 83 to request confidential treatment in the correspondence submitted via EDGAR.
The SEC announced this year’s “SEC Government-Business Forum on Small Business Capital Formation.” The all-day Forum will take place on Thursday, November 15th at the SEC Headquarters in Washington, D.C.
As with the prior year’s event, the event will consist of several panel discussions followed by breakout groups in the afternoon. The two morning panels are tentative, and will likely deal with implementation of the JOBS Act and with small business capital formation issues not addressed by the JOBS Act. If you are unable to attend in person, the SEC will be providing webcasts of the morning panels, and teleconferences of the afternoon breakout sessions. The SEC has also solicited suggestions of topics and recommendations, to be discussed at the Forum, relating to facilitating small business capital formation. Each year, the Forum has generated a useful list of recommendations for regulators to consider, and many of these ultimately have found their way into regulation.
For more information about the forum, please visit the Forum web page at: http://www.sec.gov/info/smallbus/sbforum.shtml.
David Weild, Head of Capital Markets at Grant Thornton will be speaking during a Grant Thornton webcast about that same topic. The webcast, “The JOBS Act & tick sizes: Decimalization, public policy & the impact on banks,” will take place on October 25 from 3:00pm-4:30pm ET. The other panelists include Kendra Decker, Partner, SEC-Regulatory Matters at Grant Thornton and Thomas Killian, Principal of Capital Markets at Sandler O’Neill + Partners, L.P.
The webcast proposes that, while several steps have been taken to revive the U.S. IPO market, one key step remains. That step would be to allow higher tick sizes. The objectives of the webcast include the following:
- Recognizing how the JOBS Act will alter Wall Street “best practices” for going public;
- Implications of going public vs. staying private and the analysis of cost and impact on banks for specific strategies;
- Emerging growth company regulations; and
- The importance of tick sizes to market structure and its impact on banks.
For more information, and to register, please visit the event page.
On September 28, 2012, the SEC Staff updated its FAQs on Title I of the JOBS Act to address the application of Title I to mergers and exchange offers. The updated FAQs are available here: http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm.
The FAQs confirm that an EGC may use the test-the-waters approach to communicate with QIBs and institutional accredited investors in connection with an exchange offer or merger; however, an EGC must still make all filings required under Exchange Act Rules 13e-4(c), 14a-12(b), and 14d-2(b) for pre-commencement tender offer communications and proxy soliciting materials in connection with a business combination transaction.
As EGC may use the confidential submission process to submit a draft registration statement for an exchange offer or merger that constitutes its initial public offering of common equity securities. The FAQs also address the timing for required public filing of the registration statement with respect to commencement of the exchange offer. Given that calculating the 21-day period may not be intuitive in the case of an exchange offer, the FAQs offer helpful insight.
The FAQs also address reduced disclosure requirements for EGCs, expressly permitting the presentation of only two years of financial statements for EGCs in registration statements for exchange offers or mergers. The FAQs also address the financial statement requirements for an EGC that has acquired a business in a forward acquisition.
Turning to Exchange Act registration, the FAQs explain that if an EGC has crossed the shareholder threshold for reporting and has not yet conducted an initial public offering of its common equity securities but is filing a Form 10 or 20-F, it must, unless it is a smaller reporting company, present three years of financial statements in its registration statement on Form 10 or Form 20-F. This seems an incongruous result.
The FAQs also address various spin-off scenarios. For example, the FAQs make clear that one tests the spin-off entity (not its corporate parent) for qualification as an EGC. The Staff notes that it may raise questions depending on the particular facts and circumstances presented, especially if it appears that the issuer is engaging in a transaction for the purpose of converting a non-emerging growth company into an EGC, or for the purpose of obtaining the benefits of EGC indirectly when it is not entitled to do so directly.