Wednesday, October 19, 2016
12:00 p.m. – 1:00 p.m. EDT

Morrison & Foerster Partners Marty Dunn and David Lynn will host a teleconference entitled “Sending Your Message: Communications Rules for Offerings.” During this session, we will focus on the SEC’s communications rules applicable to public and private companies when they are engaged in securities offerings. We will discuss:

  • Materiality;
  • Press releases;
  • Research reports;
  • Non-deal roadshows;
  • Free Writing Prospectuses;
  • Regulation FD; and
  • General solicitation and general advertising, revisited.

CLE credit is pending for California and New York.

To register for this session, or for more information, please click here.

On June 24, 2016, FINRA proposed amendments to its communications rule, Rule 2210, to help clarify the application of Rule 2210 to debt research reports, in light of the new debt research rule, Rule 2242.  The implementation date for the proposed amendments is July 16, 2016, which is the current effective date for Rule 2242.

The proposed amendments help clarify Rule 2210 in four main respects.  First, the proposed amendments would (1) streamline the scope of approval permitted by supervisory analysts to specifically reference the definition of “debt research report” in Rule 2242(a)(3) and (2) add a specific reference to the exceptions to such definition under Rule 2242(a)(3)(A), thus making the references to debt research-related retail communications consistent with the references to equity research-related retail communications.  The proposed amendments also would maintain the ability for a supervisory analyst to approve other research communications (e.g., research on options), provided that the supervisory analyst has technical expertise in the product area and any other required registrations for such product.  Second, the proposed amendments would make the exception from pre-use approval requirements under Rule 2210(b)(1)(D)(i) consistent for debt and equity research communications.  Third, the proposed amendments would (1) except debt research reports from the disclosure requirements of Rule 2210(d)(7) (applicable to retail communications that include a recommendation of securities) and (2) except public appearances by debt research analysts from the disclosure requirements of Rule 2210(f)(2) (applicable to an associated person recommending a security) for consistency purposes.  Fourth, the proposed amendments would make technical changes to Rules 2210(d)(7) and (f)(5) to make the rule language more readable.

The text of the proposed amendments to Rule 2210 is available at:  http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2016-021.pdf

The SEC has not explicitly defined the terms “general solicitation” or “general advertising” in Regulation D under the Securities Act of 1933.  However, Rule 502(c) of Regulation D lists several examples of general solicitation and general advertising, including (1) any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio and (2) any seminar or meetings whose attendees have been invited by any general solicitation or general advertising.  These are communications that are not targeted or directed to a specific individual or to a particular audience, but rather broad-based communications that may reach potential investors not known to the issuer or its financial intermediary.  Over time, the SEC Staff has provided guidance, mainly through no-action letters and more recently through Compliance and Disclosure Interpretations, regarding the types of communications that would be viewed as a “general solicitation.”  In our “Practice Pointers on Navigating the Securities Act’s Prohibition on General Solicitation and General Advertising,” we summarize the SEC Staff’s guidance in this area for issuers, broker-dealers and other third-party participants.

The practice pointers are available at: http://www.mofo.com/~/media/Files/Articles/2016/06/160600PracticePointersGeneralSolicitation.pdf

On April 27, 2016, the House of Representatives passed the Helping Angels Lead Our Startups Act (H.R. 4498) (the “HALOS Act”), which was first introduced on April 16, 2015.  The HALOS Act directs the SEC to amend Regulation D under the Securities Act to make the prohibition against general solicitation or general advertising inapplicable to events with specified sponsors (including angel investor groups not connected to broker-dealers or investment advisers) where:

  • presentations or communications are made by or on behalf of an issuer;
  • the advertising does not refer to any specific offering of securities by the issuer;
  • the sponsor does not engage in certain activities (such as offering investment recommendations or advice to attendees); and
  • no specific information regarding a securities offering is communicated (other than that the issuer is in the process of offering or planning to offer securities, including the type and amount of securities being offered).

In addition, the HALOS Act (1) limits the types of fees ‘‘demo day’’ sponsors can collect (cannot receive any compensation for making introductions between investors attending the event and issuers, or for investment negotiations between such parties), (2) limits attendance at “demo days” to only individuals with financial sophistication (members of an angel investor group or accredited investors), and (3) requires that an issuer not be in bankruptcy or receivership, an investment company, or a blank check, blind pool or shell company.  H.R. 4498 is available at:  https://www.congress.gov/114/bills/hr4498/BILLS-114hr4498rh.pdf

The HALOS Act would incorporate into regulation issues as to which the SEC Staff already has provided guidance either in the form of no-action letter guidance (on demo days, for example) or in Compliance and Disclosure Interpretations.

On April 21, 2016, the Fair Access to Investment Research Act of 2016 (H.R. 5019) (the “Fair Access to Investment Research Act”) was introduced in the House of Representative.  The Fair Access to Investment Research Act directs the SEC to amend Rule 139 under the Securities Act to provide that a covered investment fund research report that is published or distributed by a broker-dealer will be deemed, for purposes of Sections 2(a)(10) and 5(c) of the Securities Act, not to constitute an offer for sale or an offer to sell a security that is the subject of an offering pursuant to a registration statement that is effective (even if the broker-dealer is participating or will participate in the registered offering of the covered investment fund’s securities).  H.R. 5019 is available at:  https://www.congress.gov/114/bills/hr5019/BILLS-114hr5019ih.pdf

Readers of this blog are familiar with the recent regulatory changes that have created new possibilities for non-registered capital raises in the U.S.: general solicitations in Regulation D offerings, Regulation A+, crowdfunding, and to a lesser extent, new Section 4(a)(7) under the 1933 Act.

Many applaud the additional flexibility provided by these changes.  At the same time, U.S. regulators are interested in determining whether these offerings will be properly offered and sold.

Each of FINRA’s and OCIE’s annual priorities letters notes that these regulators will be looking at private placements in the coming year.

FINRA’s letter states:

“FINRA’s focus on private placements in 2016 will address concerns with respect to suitability, disclosure and due diligence. [footnote omitted]  These concerns are relevant regardless of the underlying industry of the issuer or the type of investment (e.g., notes offerings, preinitial public offering investment funds, real estate programs, EB-5 investment funds or start-up companies). FINRA’s focus will reflect recent regulatory developments, including the ability to conduct general solicitations under SEC Rule 506(c) of Regulation D and the crowdfunding rules which will become effective in 2016. FINRA notes that some communications used by firms concerning private placements have not reflected the significant risks of loss of principal and lack of liquidity associated with these investments. Where a communication addresses a specific investment benefit associated with a private placement offering, a firm must ensure that the key risks associated with such benefit are disclosed. FINRA will continue to evaluate firms’ compliance with respect to their communications, including general solicitation advertisements and materials posted on the Internet.”

The OCIE letter notes:

“We will review private placements, including offerings involving Regulation D of the Securities Act of 1933 or the Immigrant Investor Program (“EB-5 Program”) [footnote omitted] to evaluate whether legal requirements are being met in the areas of due diligence, disclosure, and suitability.”

In a nutshell, in addition to conforming their documents and procedures to the “black letter law” of the new rules, broker-dealers will want to ensure that their practices are appropriate from a suitability perspective, as well as for purposes of FINRA’s communication rules.

FINRA’s sweeping overhaul of its rules governing communications with the public become effective today.  The new rules and guidance, which the SEC approved last year, are likely to keep compliance officers busy for quite some time.

The revisions simplify some rules, but also create new compliance challenges.  Most significant, FINRA reduced the number of categories of communications to three from six, and requires that member firm file certain communications previously not subject to a filing requirement.

While the JOBS Act eases restrictions on pre-offering and offering related communications, FINRA members must still consider the application of the communications rules.  For example, under the new rules, retail communications include any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar day window.  This means most communications made through a website that is not password-protected are subject to a filing requirement.