Today, FINRA announced that its Board of Governors had approved publication of a Regulatory Notice seeking comment on rule amendments that would remove certain impediments to capital formation that are unnecessary to protect investors. Specifically, the proposal would amend Rules 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) and 5131 (New Issue Allocations and Distributions) to exempt additional persons and types of transactions from the scope of the rules, modify current exemptions to enhance regulatory consistency, and address unintended operational issues. The statement does not refer to the proposed amendments to FINRA’s Corporate Financing Rule that were released earlier in the year however. See the notice here.
Practising Law Institute’s Exempt and Hybrid Securities Offerings is the first practical, accessible resource to provide you with comprehensive legal, regulatory, and procedural guidance regarding these increasingly popular offering methodologies.
Authored by Morrison & Foerster Partners Anna Pinedo and James Tanenbaum, the third edition of Exempt and Hybrid Securities Offerings gives you a useful understanding of the applicable regulations and legal framework for these transactions, as well as the implications of these regulations for structuring transactions.
The treatise provides a detailed analysis of the regulations and guidance affecting exempt and hybrid securities offerings, as well as offers market context and practical structuring advice. Packed with checklists, transactional timelines, SEC guidance, and a wealth of labor-saving sample documents, Exempt and Hybrid Securities Offerings offers the relative advantages and drawbacks of the most commonly used forms of exempt and hybrid offerings. It clearly explains:
- conducting venture private placements;
- traditional and structured PIPE transactions;
- institutional (debt) private placements;
- Rule 144A offerings;
- Regulation S offerings;
- Regulation A offerings and crowdfunding;
- shelf takedowns;
- registered direct and ATM offerings;
- confidentially marketed public offerings; and
- continuous issuance programs, including MTN and CP programs.
This comprehensive three-volume treatise, with useful forms, has been updated to reflect changes brought about by the Dodd-Frank Act, the JOBS Act, the FAST Act, and other recent regulatory changes.
For more information, please click here.
The growing use of social media has created challenges for federal securities regulators, who must enforce antifraud rules that were written at a time when the prevailing technology was the newspaper.
This Guide summarizes how regulation has evolved in the face of the growing use of social media. Our guide discusses the principal areas of focus for SEC-reporting companies, registered investment advisers, registered investment companies, and registered broker-dealers that use social media.
In addition, readers may also be interested in our FAQs about the FINRA Communication Rules and our FAQs about Liability of Public Companies and Companies in Registration for Website and Social Media Content.
On May 9, 2017, FINRA issued an interpretive letter stating that family offices may be considered investment advisers for purposes of meeting the limited exception of FINRA Rule 5131.02(b). FINRA Rule 5131 addresses abuses in the allocation and distribution of “new issue,” or IPO, shares and paragraph (b) of the rule prohibits the practice of “spinning.” Spinning occurs when an underwriter allocates new issue or IPO shares to executive officers and directors of a company as an inducement to award the underwriter with investment banking business, or as consideration for investment banking business previously awarded. FINRA Rule 5131.02(b) provides a limited exception to the spinning provision by permitting underwriters to rely upon a written representation obtained within the prior 12 months from a person authorized to represent an account that does not look through to the beneficial owners of any unaffiliated private fund invested in the account, except for beneficial owners that are control persons of the investment adviser to the private fund, if the unaffiliated private fund meets certain conditions. The unaffiliated private fund must: (1) be managed by an investment adviser; (2) have assets greater than $50 million; (3) own less than 25% of the account and not be a fund in which a single investor has a beneficial interest of 25% or more; and (4) not be formed for the specific purpose of investing in the account. In the interpretive letter, FINRA noted that despite their exclusion from the definition of “investment advisers” under the Investment Advisers Act of 1940, family offices may perform equivalent functions to regulated investment advisers. FINRA also emphasized that the remaining conditions of FINRA Rule 5131.02(b) must still be satisfied. The interpretive letter is significant because it makes it easier for family offices to purchase new issue or IPO shares.
A copy of the interpretive letter is available at: https://www.finra.org/industry/interpretive-letters/may-9-2017-1200am.
On April 21, 2017, FINRA announced updates to the Private Placement Filer Form (“Filer Form”) that FINRA members complete when submitting private placement filings under FINRA Rules 5122 (Private Placements of Securities Issued by Members) or 5123 (Private Placements of Securities). FINRA originally proposed the updates on March 17, 2017 for purposes of improving the information available to it about the nature of a private placement and a FINRA member’s role in the securities offering. The updated Filer Form will be available electronically on FINRA’s Firm Gateway beginning May 22, 2017.
The updated Filer Form adds, clarifies and removes certain questions or information in each of three sections as summarized below:
- Participating Member Information. This section includes additional questions regarding whether the member making the filing is the exclusive selling agent in the private placement and whether there is any affiliation between any member participating in the private placement offering and the issuer or sponsor of the offering. FINRA members will no longer be required to provide the title and email address for the contact persons of the FINRA member making the filing nor the contact name, title and telephone number for any other FINRA members identified in the filing.
- Issuer Information. This section includes an additional question asking whether the issuer is a reporting company and no longer requires the name, title or email address of the contact person at the issuer.
- Offering Information. This section includes additional questions regarding: (i) the type of security being offered; (ii) whether the issuer has raised capital in the preceding 12 months; (iii) the minimum investment amount and whether such minimum can be waived by the issuer; (iv) whether the FINRA member making the filing sold or will sell the offering to any non-accredited investors; (v) which Securities Act exemption the issuer is relying on; (vi) for contingency offerings, whether the contingency has been met as of the date of filing; and (vii) the date on which the FINRA member first offered or sold the private placement or whether sales have yet to commence. The Offering Information section also no longer requires the filer to provide: (a) the aggregate amount of non-commission compensation; (b) the offering’s conclusion date; (c) whether the FINRA member used a term sheet; (d) whether the issuer has any independently audited financial statements; or (e) whether the issuer’s directors are independent. In addition, the Offering Information section clarifies that the requirement to provide the stated or target rate of return is only relevant if the applicable offering documents state that the investment will provide an actual or target rate of return to investors, and clarifies that the question regarding the use of general solicitation is only asking whether either the FINRA member making the filing or the issuer has, in fact, engaged in general solicitation in connection with the private placement at or prior to the time of the filing.
Copies of the FINRA notice announcing the updates as well as the updated Filer Form are available at: http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-17.pdf.
On April 12, 2017, FINRA released three regulatory notices for comment that propose amendments to various FINRA rules affecting capital formation. In connection with its release of the notices, FINRA President and CEO Robert Cook noted FINRA’s continuing commitment to assessing its regulations and their role in facilitating capital formation. This initiative is part of the comprehensive self-evaluation and improvement initiative that FINRA announced several months ago called the FINRA 360 initiative. The initiative, FINRA’s recent request for comment on its engagement efforts, and these regulatory notices certainly reflect a new tone. In all three notices, as discussed further below, FINRA specifically requests that commenters address the economic impacts of the rules, including costs and benefits, and the specific effects on the capital formation process.
Read our client alert.
Today, FINRA issued three Regulatory Notices requesting comments on proposed changes to various rules relating to financing transactions.
Regulatory Notice 17-14 requests comment on all of FINRA’s existing rules, operations and administrative processes that address the capital-raising activities of its member firms, including recent additions regarding capital acquisition brokers and funding portals.
Regulatory Notice 17-15 requests comment on proposed amendments to modernize, simplify and clarify FINRA Rule 5110, the Corporate Financing Rule, which affects all public offerings.
Regulatory Notice 17-16 clarifies the application of FINRA’s research rules to desk commentary by sales and trading and principal trading personnel and solicits comments on a proposal to create a limited safe harbor for eligible desk commentary that may rise to the level of a research report.
Comments on the Notices are requested by May 30, 2017. See: http://www.finra.org/newsroom/2017/finra-requests-comment-rules-impacting-capital-formation
On March 17, 2017, FINRA filed with the SEC proposed changes to the Private Placement Filer Form (“Filer Form”) that FINRA members must complete when submitting private placement filings under FINRA Rules 5122 or 5123. The proposed changes will assist FINRA in evaluating the private placement activities of its members and assess whether members are conducting a reasonable investigation for private placements in which they participate. The proposed changes to the Filer Form will add, clarify and remove certain questions or information as summarized below:
- Participating Member Information. Additional questions would be included regarding whether the member making the filing is the exclusive selling agent in the private placement and whether there is any affiliation between any member participating in the private placement and the issuer or sponsor of the offering. FINRA members will no longer be required to provide the title and email address for the contact persons identified in the filing.
- Issuer Information. An additional question would be included asking whether the issuer is a reporting company. The name, title and email address of the contact person at the issuer will no longer be required.
- Offering Information. Additional questions would be included regarding: (i) the type of security being offered; (ii) whether the issuer has raised capital in the preceding 12 months; (iii) the minimum investment amount and whether such minimum can be waived by the issuer; (iv) whether the FINRA member making the filing sold or will sell the offering to any non-accredited investors; (v) which exemption under the Securities Act of 1933 the issuer is relying on; (vi) for contingency offerings, whether the contingency has been met as of the date of filing; and (vii) the date on which the FINRA member first offered or sold securities in the private placement or whether sales have yet to commence. The Offering Information section would no longer require the filer to provide: (a) the aggregate amount of non-commission compensation; (b) the private placement’s conclusion date; (c) whether the FINRA member used a term sheet; (d) whether the issuer has any independently audited financial statements; or (e) whether the issuer’s directors are independent. In addition, the Offering Information section would clarify that the requirement to provide the stated or target rate of return is relevant only if an offering document provides an actual or target rate of return to investors and that the question regarding general solicitation only seeks information regarding whether the filing member or the issuer has, in fact, engaged in general solicitation in connection with the private placement at or before the time of filing.
FINRA also clarified that filers would still have the option to respond “unknown” to any of the questions in the Filer Form.
The proposed changes are available at: https://www.finra.org/industry/rule-filings/sr-finra-2017-008.
On November 2, 2016, FINRA terminated the FINRA registration for UFP, LLC (“UFP”), making UFP the first crowdfunding portal to be expelled from FINRA. UFP ran an online funding portal, uFundingPortal.com, where it acted as an intermediary in debt and equity crowdfunding offerings conducted in reliance on SEC Regulation Crowdfunding rules. FINRA’s investigation into UFP alleged that from May through September 2016, UFP violated various SEC Regulation Crowdfunding rules and FINRA Funding Portal Rules. As a result of FINRA’s investigation, UFP pulled its website and submitted a Letter of Acceptance, Waiver and Consent (the “AWC”) in order to settle these alleged rule violations with FINRA. The AWC is available at: http://disciplinaryactions.finra.org/Search/ViewDocument/67004.
FINRA alleged that UFP violated Rule 301(a) and Rule 301(c)(2) under SEC Regulation Crowdfunding. Rule 301(a) requires funding-portal intermediaries like UFP to have a reasonable basis for believing that issuers using its crowdfunding portal comply with applicable regulatory requirements, and Rule 301(c)(2) requires that access to funding portals be denied to issuers that present the potential for fraud or otherwise raise investor protection concerns. FINRA found UFP to be in violation of Rule 301(a) because 16 of the issuers on UFP’s portal had failed to file certain requisite disclosures with the SEC and, in each case, UFP had reviewed these issuers’ SEC filings and therefore had reason to know that these filings were incomplete. In addition, FINRA found UFP to be in violation of Rule 301(c)(2) by failing to deny access to its portal when it had a reasonable basis to believe these issuers and/or their offerings presented the potential for fraud. For example, FINRA found that these 16 issuers all had impracticable business models and oversimplified and unrealistic financial forecasts; 13 of these issuers disclosed identical amounts for their funding targets, maximum funding requests, price per share of stock, number of shares to be sold, total number of shares and equity valuation; three of these issuers had identical language in the “Risk Factors” sections of their websites; and two issuers listed identical officers and directors even though they had vastly different business plans. Additionally, UFP had reason to know that four of these issuers either had officers or directors who owed back taxes or had not filed an annual tax return for 2015. FINRA also alleged that UFP violated Funding Portal Rule 200(c)(3), which prohibits funding portals from including any issuer communication on its website that it knows or has reason to know contains any untrue statement of material fact or is otherwise false or misleading.
New FINRA Rule 2241 covering equity research reports and analysts and new FINRA Rule 2242 covering debt research reports took effect less than a year ago in December 2015 and July 2016, respectively; and market practice with respect to compliance with the new research rules continues to evolve.
Our updated FAQs on the separation of research and investment banking are intended to help explain (1) the main requirements of new research rules, (2) how firms can comply with the new research rules and the related safe harbors, (3) recent FINRA guidance on the new research rules, and (4) related SEC rules and guidance and JOBS Act implications.
See our updated FAQs available at: https://media2.mofo.com/documents/frequently-asked-questions-about-separation-of-research-and-investment-banking.pdf.