On Wednesday, October 26, 2016, beginning at 10:00 a.m., the Securities and Exchange Commission will hold an open meeting at which the Commission will consider the adoption of final rule amendments relating to Securities Act Rule 147 and Rule 505, which would facilitate intrastate and regional securities offerings. The proposed amendments were well-received by market participants and generated only modest comments. The open meeting notice also states that the Commission will consider whether to repeal Rule 505. Rule 505 provides an exemption for sales of up to $5 million of securities in a 12-month period, without the use of general solicitation, to accredited investors and, subject to information requirements, to non-accredited investors. Presumably, the amendments to Rule 504 would render Rule 505 superfluous.
“Direct-to-consumer” offerings enable companies to raise capital directly from their customers, with or without the use of underwriters or other financial intermediaries. Direct-to-consumer offerings have garnered attention recently given the ability to conduct offerings using a “crowdfunded” approach; however, companies have conducted direct-to-consumer offerings for years. With the amendments to Regulation A (commonly referred to as “Regulation A+”) and the adoption of Regulation Crowdfunding by the Securities and Exchange Commission (the “SEC”), companies have now become more acutely focused on broadening their investor base by soliciting interest in offerings of their securities from their customers. In this alert, we discuss the history of direct-to-consumer offerings, current approaches, the applicable SEC requirements, and considerations for companies undertaking such offerings.
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2015 saw the transformation of marketplace lending from a FinTech fad to a bona fide change in the way consumers and small businesses access credit. As the industry continues to mature and evolve, more changes are on the horizon, including new business practices and regulatory challenges. Crowdfinance has also developed and diversified.
At this year’s PLI Marketplace Lending and Crowdfunding seminar on September 9, 2016, Partner James R. Tanenbaum will speak on a panel entitled “Legal Issues for Equity Crowdfunding Platforms.” Topics will include:
- Crowdfunding under Title II – Solicitation vs. Non-Solicitation;
- “Reasonable Steps to Verify”;
- The preexisting relationship and CitizenVC: Myth vs. Facts;
- Working with broker-dealers and other intermediaries; and
- Liquidity and secondary markets including the new FAST Act and Section 4(a)(7).
To register for this conference, or for more information, please click here.
PLI’s Private Placements and Hybrid Securities Offerings 2016 conference on August 1-2, 2016, presents an expert faculty of leading practitioners and regulators as they discuss and analyze the changing regulatory framework and market for private offerings. The faculty will address the changes to private and exempt offerings brought about by the JOBS Act, including matchmaking platforms, “accredited investor” crowdfunding, offerings using general solicitation, Rule 144A offerings, and the practical implications of these changes for issuers, broker-dealers and investment advisers. In addition, they will address the basics of private placements, sales of restricted securities, Rule 144 and Section 4(a)(1-1/2) transactions and block trades. The panelists will discuss the considerations that have led many companies to remain private longer and defer IPOs, while creating liquidity opportunities for holders through private secondary trading markets. Panelists will address the basics of traditional private placements, PIPE transactions, and Rule 144A transactions, as well as recent developments affecting each of these capital raising alternatives.
Morrison & Foerster Partner Anna Pinedo will serve as chairperson for this event and will speak on the “Welcome and Introduction to Private Placements and Hybrid Financings” panel on Day One of the conference and on the “Welcome and Introduction to Conducting Hybrid Offerings” panel on Day Two. Morrison & Foerster Partner James Tanenbaum will speak on a panel entitled “Regulation A+” on Day One. The conference will be held at the PLI New York Center in New York, NY and is scheduled to begin at 9:00 a.m. EDT.
To register for this conference, or for more information, please click here.
On July 21-22, 2016, Practising Law Institute will host its “Understanding the Securities Laws 2016” seminar. This program will provide an overview and discussion of the basic aspects of the U.S. federal securities laws by leading in-house and law firm practitioners as well as SEC staff. Emphasis will be placed on the interplay among the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act, the Dodd-Frank Act, the JOBS Act, the securities related provisions of the FAST Act and related SEC regulations, and on how securities lawyers can solve practical problems that arise in the context of public and private offerings, SEC reporting, mergers and acquisitions and other common corporate transactions.
Morrison & Foerster Partner Anna T. Pinedo will lead a session entitled “Securities Act Exemptions” on Day One of the program. Topics will include:
- Exempt securities versus exempt transactions;
- Private placements;
- Regulation D offerings;
- Regulation A+ offerings;
- Intrastate offerings;
- Employee equity awards;
- Rule 144A high yield and other offerings;
- Regulation S offerings to “non-U.S. persons”; and
- Resales of restricted and controlled securities: Rule 144, Section 4(a)(7) and 4(a)(1½).
PLI will provide CLE credit.
For more information, or to register, please click here.
The House Financial Services Committee held a markup session on June 15, 2016 to discuss a number of bills, including many relating to capital formation and the lessening of regulatory burdens for smaller reporting companies. On June 16, the Committee reconvened and approved twelve bills, including:
- H.R. 4850, Micro Offering Safe Harbor Act. This bill amends the Securities Act of 1933 to exempt certain micro-offerings from the Act’s registration requirements. To qualify for the exemption (1) each purchaser has a substantive pre-existing relationship with an owner; (2) there are 35 or fewer purchasers; and (3) the amount does not exceed $500,000. H.R. 4850 passed the committee 34-25.
- H.R. 4852, Private Placement Improvement Act of 2016. This bill directs the SEC to revise the filing requirements of Regulation D (which provides exemptions from securities registration requirements) to require an issuer that offers or sells securities in reliance upon a certain exemption from registration to file, no earlier than the date of first sale of such securities, a single notice of sales containing the information required by Form D for each new offering of securities. H.R. 4852 passed the committee 33-26.
- H.R. 4854, Supporting America’s Innovators Act of 2016. The Investment Company Act limits the number of investors in an investment company fund to 100 for the fund to be exempt from registration with the SEC. This bill raises the limit on the number of individuals, from 100 to 250, who can invest in certain “qualified venture capital funds” before those funds must register as “investment companies” under the Investment Company Act of 1940. H.R. 4854 passed the committee 57-2.
- H.R. 4855, Fix Crowdfunding Act. This bill would allow small businesses to benefit from Title III of the JOBS Act, which allows for equity crowdfunding. It proposes to increase financial thresholds in the Federal securities laws so as not to dissuade small businesses from using crowdfunding as a way to raise capital, and allows single purpose funds to utilize crowdfunding. H.R. 4855 passed the committee 57-2.
In a statement, Financial Services Committee Chairman Jeb Hensarling asserted the committee “…will remove duplicative burdens, reduce costs and support smart regulation that protects investors and maintains orderly and efficient markets – because this is key to economic growth.”
On May 13, 2016, the SEC issued new Compliance and Disclosure Interpretations (“C&DIs”) on Rules 100 (Crowdfunding Exemption and Requirements), 201 (Disclosure Requirements), 204 (Advertising) and 205 (Promoter Compensation) of Regulation Crowdfunding. Highlights of the C&DIs include the following:
- Information not constituting an offer of securities may be disseminated by an issuer prior to the commencement of an offering.
- The investment limits under Rule 100(a)(2) apply to all investors, including non-natural persons.
- If an offering is conducted during the period from inception until 120 days after reaching the annual balance sheet date for the first time, the issuer must include a balance sheet as of a date in that period, which may be the inception date. For an offering conducted more than 120 days after the issuer’s first annual balance sheet date, the date of the most recent annual balance sheet determines the period for which statements of comprehensive income, cash flows and changes in stockholders’ equity must be provided.
- An issuer may advertise the “terms of the offering,” but any such advertising that is made other than through communication channels provided by the intermediary on the intermediary’s platform will be limited to notices that include no more than the information described in Rule 204(b). “Terms of the offering” is defined to include the amount of securities offered, the nature of the securities, the price of the securities and the closing date of the offering period.
- The limitation on advertisement under Rule 204(b) applies only when the advertisement includes any of the “terms of the offering.”
- When an issuer is compensating a third party to promote the issuer’s offering outside of the intermediary’s communication channels, third-party communications need to comply with the notice requirements of Rule 204(b).
The SEC also published its Small Entity Compliance Guide for Crowdfunding Intermediaries, Small Entity Compliance Guide for Issuers and Small Entity Compliance Guide for Funding Portals. In these guides, the SEC summarizes, among other things, the registration and disclosure requirements, prohibited activities and applicable safe harbors for crowdfunding intermediaries and the registration and disclosure requirements, limits on advertising and promoters, restrictions on resales, exemption from Exchange Act Section 12(g) and bad actor disqualification for issuers.
The C&DIs are available at: https://www.sec.gov/divisions/corpfin/guidance/reg-crowdfunding-interps.htm
The Small Entity Compliance Guide for Crowdfunding Intermediaries is available at: https://www.sec.gov/divisions/marketreg/tmcompliance/cfintermediaryguide.htm
The Small Entity Compliance Guide for Issuers is available at: https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm
The Small Entity Compliance Guide for Funding Portals is available at: https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm
On May 16, 2016, the North American Securities Administrators Association (NASAA) released for public comment its proposed model rule and uniform notice filing form for crowdfunded offerings. The proposed model rule would require the filing with the regulators of participating states a short form with basic information about the issuer and the crowdfunded offering, along with the payment of a filing fee and the filing of a consent to service of process. The uniform notice filing form permits the incorporation by reference of documents filed with the SEC on EDGAR and includes a consent for service of process within the form itself. Issuers would file the form in those participating states where the issuer holds its principal place of business or where 50% or greater of the aggregate amount of the crowdfunded offering has been purchased by residents of the participating state. Alternatively, issuers can opt to file all materials filed with the SEC in connection with the crowdfunded offering, together with a completed consent to service of process on Form U-2.
The NASAA’s notice of request for public comment on its proposed model rule is available at:
In time for the effective date of Regulation Crowdfunding, FINRA has issued an investor alert (see: http://www.finra.org/investors/alerts/crowdfunding-and-jobs-act-what-investors-should-know) and a press release (see: http://www.finra.org/newsroom/2016/finra-offers-what-investors-should-know-about-crowdfunding).
On May 3, 2016, the CATO Institute published a policy paper titled, “A Walk Through the JOBS Act of 2012: Deregulation in the Wake of Financial Crisis,” which assesses the JOBS Act and offers certain policy recommendations. In connection with Title I, or the IPO on-ramp provisions, the paper recommends that the SEC require, for all public issuers, only those disclosures that provide valuable information to investors. The CATO Institute suggests that the SEC review the current disclosure regime at least once, but ideally on a regular basis, and commit to repeal any requirements that are not shown to be effective.
With respect to the relaxation of the ban on general solicitation pursuant to Title II, the paper indicates that it remains unclear how effective Title II will be for private placements. To improve the effectiveness of Title II, the paper argues that the current definition of “accredited investor” is too limited and there should no longer be an accredited/non-accredited investor distinction. Alternatively, the paper suggests that the standard should be revised to ensure that it reflects an investor’s actual ability to evaluate an investment, based on industry knowledge.
With respect to the Title III crowdfunding exemption, the paper argues that the $1 million cap could discourage the use of the exemption. While a higher cap would attract more companies to rely on the exemption, raising the cap may make the exemption too similar to Regulation D and Regulation A and, therefore, unnecessary.
With respect to the changes to Regulation A pursuant to Title IV, the paper suggests that the SEC extend federal preemption to all Regulation A offerings, rather than just Tier 2 offerings, and provide explicit federal preemption of blue sky laws for registered broker-dealers trading in securities originally issued under Regulation A. Removing state law restrictions on broker-dealers would increase liquidity in the secondary market for securities issued under Regulation A.
Finally, the paper argues that the registration threshold changes under Titles V and VI of the JOBS Act will allow companies to remain privately held longer or potentially to remain private indefinitely. As a result, the paper recommends the repeal of the Section 12(g) Exchange Act threshold so that companies can decide for themselves whether to become reporting entities.
A copy of the paper is available at: http://www.cato.org/publications/policy-analysis/walk-through-jobs-act-2012-deregulation-wake-financial-crisis