In our Practising Law Institute treatise Exempt and Hybrid Securities Offerings, we refer to the concept of “integration” under the securities law as a bogeyman of sorts for practitioners. In this day and age of tweets and posts, and where public and “private” offerings are hard to distinguish from one another, is the concept of integration antiquated? Or is it perhaps due for a comprehensive re-examination by the Securities and Exchange Commission? As we discuss below, many of the fundamental principles of integration of offerings, aggregation of offerings for purposes of securities exchange rules, and communications issues like “gun-jumping” and “quiet periods” may have been so eroded as to no longer be meaningful.

To view our article, click here.

This article has been published in The Current: The Journal of PLI Press, Vol. 1, No. 1, Summer 2017 (© 2017 Practising Law Institute).

May 22 – 23, 2017

PLI New York Center
1177 Avenue of the Americas
(2nd Floor)
New York, NY 10036

PLI’s Private Placements and Hybrid Securities Offerings 2017 conference is designed for corporate and securities attorneys, compliance professionals, control room personnel, bankers and allied professionals who deal with private placements and other exempt and hybrid 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, the faculty 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.

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. Senior Of Counsel Marty Dunn will speak on the “Overview of 4(a)(2) and Regulation D” panel on Day One.

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

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.

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.

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

At today’s House Financial Services Committee meeting, ten bills relating to facilitating access to capital and the reduction of regulatory burden on smaller reporting companies were approved.  Among the bills that passed the committee, the following relate to capital formation:

  • HR 4139, The Fostering Innovation Act, passed the committee 42-15.  The bills proposes to extend the Sarbanes-Oxley 404(b) exemption for EGCs until the earlier of ten years after the EGC’s IPO, the end of the fiscal year in which the EGC’s average gross revenues exceed $50 million, or when the EGC becomes an accelerated filer ($700 million in public float).
  • HR 4498, The Helping Angels Lead Our Startups (HALOS) Act, passed the committee 44-13.  The bill establishes a definition of an angel investor for securities law purposes, and clarifies the definition of “general solicitation.”
  • HR 4638, The Main Street Growth Act, passed the committee 32-25.  The bill would allow for the registration and creation of venture exchanges in order to facilitate a secondary market, including for companies that have undertaken Regulation A offerings.

In his opening remarks, Financial Services Committee Chairman Jeb Hensarling noted that both HR 4498 and HR 4638 would “…help ignite the entrepreneurial spirit by helping small businesses attract investments so they can open their doors even wider.”

At today’s meeting of the American Bar Association’s Federal Regulation of Securities Committee meeting in Washington, DC, various representatives from the Securities and Exchange Commission provided some comments and updates.

During his presentation, the Director of the Division of Corporation Finance, Keith Higgins, reviewed the Staff’s current priorities, which also had been identified by Chair White in her Congressional testimony earlier in the week.  Mr. Higgins noted that the Division continues its work with FASB regarding the types of information required by FASB in notes to financial statements included in registration statements and the requirements under Regulation S-K and Regulation S-X for certain accounting policy related disclosures in order to identify, among other things, possible areas of repetition that could be addressed in connection with the ongoing disclosure simplification review.  He noted that work continues in order to address the three remaining executive compensation related rulemakings under the Dodd-Frank Act.  Mr. Higgins noted that the accredited investor review is expected to be completed soon (within the next 90 to 120 days).  Also, it is anticipated that the Commission will complete the actions required by the JOBS Act relating to the Exchange Act Section 12(g) threshold.  Mr. Higgins also briefly reviewed the proposed amendments to Rule 147.  He noted that many questions had been received regarding the process or level of Staff review of Regulation A offering statements and noted that the process for review is substantially similar to the process for review of IPO registration statements.  Mr. Higgins noted that the Staff always takes into account in its review a sense of scale that is informed by the type of issuer, sophistication of the issuer, risks presented and other similar factors.

David Frederickson, Chief Counsel in the Division of Corporation Finance, reviewed the recent guidance on general solicitation and pre-existing substantive relationships.  In this context, he noted that most of the guidance was in the nature of a restatement or clarification of prior Staff guidance and positions.  Mr. Frederickson noted that, as a baseline, if an issuer is using the internet and providing information about an offering without password protection, such that the information is generally available, that would be viewed as a general solicitation.  However, as noted in the C&DIs (and prior Staff guidance), there are many types of communications, such as ordinary course business communications, that would not be viewed as constituting a “general solicitation.”  The guidance regarding pre-existing substantive relationships, he noted, refocuses the analysis on the nature of the relationship.  A relationship is substantive if the issuer or an agent acting on its behalf have enough information to evaluate and do in fact evaluate a  prospective investor’s financial situation and sophistication.  He noted that there is no “magic” period of time that would be viewed as necessary to establish that a relationship is pre-existing (other than a reference in the Lamp Technologies no-action letter).  The relationship must have been formed before the offering has commenced as to the individual (when the individual was contacted about the offering).  Mr. Frederickson also commented on the recent CitizensVC no-action letter, which extends to an investment adviser the ability to establish a pre-existing substantive relationship.  Mr. Frederickson noted that a new issue addressed in the recent C&DIs is a framework for thinking about contact with established networks, such as angel networks.  To this end, if the issuer can form a reasonable belief that members of an angel network have the appropriate level of sophistication, communications to the members would not constitute a general solicitation.  Of course, these matters are always based on the particular facts and circumstances and a determination as to whether a communication is a general solicitation would be influenced by various factors, including, among others, the number of people contacted, the financial sophistication of offerees, and the nature of the outreach (whether a communication is directed and bilateral or general, not targeted and impersonal).  Similarly, depending on the facts and circumstances, communications at demo days may be an offering of securities if such details are discussed.

As is customary for similar public appearances, the regulators reminded audience members that the views expressed reflected those of the individual participants, and not necessarily those of the Commission.

Earlier this week, FINRA published its annual priorities letter. Again, FINRA includes among the areas of concern private placements. FINRA cites particular issues relating to inadequate due diligence by broker-dealers in connection with private placements, inadequate suitability assessments, misleading offering documents, and deficiencies in procedures in offerings that use escrow accounts. The letter also raises heightened concerns in exempt offerings involving the use of general solicitation. See: http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p602239.pdf.

Today, September 23rd, is the one year anniversary of the effective date of the changes relaxing the prohibition against general solicitation in certain offerings made under Rule 506 and resales made pursuant to Rule 144A.

The SEC has not moved forward with the rules it proposed in 2013 that would make certain changes to Regulation D, Form D and Rule 156.  The proposed rules seem every bit as controversial now as they were when first published.  Today, Senators Levin, Reed, Markey, Warren published a letter that they sent to SEC Chair White (see here: http://www.levin.senate.gov/newsroom/press/release/levin-reed-markey-warren-urge-sec-to-protect-investors/?section=alltypes) urging adoption of “investor protections” in private offerings.  Specifically, the Senators urge that the SEC adopt rules requiring the filing of general solicitation materials and the inclusion of certain risk disclosures in any general solicitation materials.  The Senators also urge the SEC to require issuers to file a Form D prior to engaging in any general solicitation.  Just days ago, we reported (in a post re-published from a Milken Institute blog), on Commissioner Gallagher’s call (see Gallagher’s full remarks here:  http://www.sec.gov/News/Speech/Detail/Speech/1370542976550#.VCHw1aXD-nA) for the SEC to withdraw the Regulation D proposed rules.

If investor protection advocates are concerned about the lack of oversight that may accompany a generally solicited offering made pursuant to Rule 506(c), one would assume that they would support the proposed rules providing for Tier 2 Regulation A+ offerings.  Tier 2 Regulation A+ offerings would permit issuers to raise up to $50 million in offerings that can use general solicitation but provide for robust oversight given the need to produce and have the SEC review an offering statement.

Might all the concern be premature?  The market has not rushed to adopt general solicitation during this past year.  The number of Rule 506 offerings made in reliance on 506(c) remains low.  Even though matchmaking portals have begun to make a real impact in private financings, the majority of the offerings completed in reliance on funding portals rely on Rule 506(b) to offer to accredited investors.  Many have speculated that the fact that the CFTC had not provided clarity regarding the ability of certain funds to use general solicitation affected adoption of Rule 506(c).  Now that some limited guidance and no-action letter relief is available (as we blogged about earlier), perhaps we will see some change….