On September 20, 2017, the staff of the SEC’s Division of Corporation Finance issued revised compliance and disclosure interpretations (“C&DIs”) for purposes reflecting updates for prior amendments to Securities Act Rules 147 and 504, the repeal of Securities Act Rule 505 and non-substantive changes throughout the Rule 147 and Regulation D C&DIs based on the SEC’s current rules.  Highlights of the C&DIs (Questions 257.08, 258.03, 258.05, 258.06 and 541.03) include, among other things, the following guidance:

  • A Securities Act Rule 506 offering will not lose “covered security” status under Securities Act Section 18 if an issuer fails to file a Form D with the SEC.
  • Rule 504 is available to a private fund excluded from the definition of “investment company” by Section 3(c)(1) or 3(c)(7) of the Investment Company Act so long as the offering under Rule 504 is not a “public offering.”
  • The example of the calculation of the aggregate offering price provided in the instruction to paragraph (b)(2) of Rule 504 does not contemplate integration of two or more offerings.
  • Rule 504 is not available to any issuer that is subject to disqualification under Rule 506(d) on or after January 20, 2017. On or after this date, issuers must determine if they are subject to bad actor disqualification any time they are offering or selling securities in reliance on Rule 504.
  • If a family trust that is not deemed to be a separate legal entity has two trustees, only one of which resides in a state where a Rule 147 offering is being made, the issuer may still offer and sell securities to the family trust in the Rule 147 offering.

Questions 258.04, 260.02 and 541.02 and Section 259 were removed.

The revised C&DIs are available here.

The SEC’s Division of Economic and Risk Analysis (DERA) recently produced a Report to Congress regarding the impacts of the Dodd-Frank Act on access to capital for consumers, investors, and businesses, and market liquidity.  Although the Report is principally focused on liquidity, it does provide some interesting statistics regarding the primary issuance of equity securities.

The Report notes that total capital formation from 2010 when the Dodd-Frank Act was enacted through year-end 2016 was approximately $20.2 trillion, of which $8.8 trillion was raised through registered offerings, and $11.38 trillion was raised in exempt offerings.  The report notes the substantial increase in reliance on exempt offerings.  Regulation D offerings have more than doubled since 2009.  However, the report notes that the amount sold in reliance on Rule 506(c) represented only 3% of the amount sold in reliance on Rule 506.  The average amounts raised in initial Rule 506(c) offerings is much smaller than the average amount reported sold in  Rule 506(b) offerings.  Rule 144A issuances remain stable.

The Report also provides data regarding Regulation A and crowdfunded offerings, and may be accessed here:  https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-dera-2017.pdf.

MoFo is rolling out the classics—MoFo Classics Series, that is. These two CLE sessions will focus on developments in the private placement market. Mark your calendar for these in-person only sessions, held at our New York office from 8:30 a.m. to 9:30 a.m.

Private Placement Market Developments – Thursday, September 14, 2017
Morrison & Foerster LLP
250 West 55th Street
New York, NY 10019

During this session, we will discuss developments affecting private placements, including:

  • Increased reliance on Section 4(a)(2) instead of the Rule 506 safe harbor;
  • Addressing no registration opinions;
  • Bad actor diligence for issuers and placement agents;
  • Diligence and the use of “big boy” letters;
  • FINRA Rule 5123 updates;
  • FINRA and SEC enforcement developments affecting private placements; and
  • Nasdaq’s 20% rule.

Late Stage Private Placements – Tuesday, September 19, 2017
Morrison & Foerster LLP
250 West 55th Street
New York, NY 10019

Successful privately held companies considering their liquidity opportunities or eyeing an IPO often turn to late stage private placements. Late stage private placements with institutional investors, cross-over investors and strategic investors raise a number of considerations distinct from those arising in earlier stage and venture financing transactions. During this session, we will discuss:

  • Timing and process for late stage private placements;
  • Terms of late stage private placements;
  • Principal concerns for cross-over funds;
  • Diligence, projections and information sharing;
  • IPO and acquisition ratchets;
  • Governance issues;
  • The placement agent’s role; and
  • Planning for a sale or an IPO.

NY and CA CLE credit is pending for both sessions.

To register, please click here.

On November 17, 2016, the staff of the SEC’s Division of Corporation Finance (the “Staff”) issued four new compliance and disclosure interpretations (“C&DIs”) addressing aspects of offerings under Regulation A and Regulation D.  Highlights of the C&DIs include, among other things, the following guidance:

  • An issuer that seeks to qualify an additional class of securities by a post-qualification amendment to a previously qualified offering statement under Regulation A must satisfy the requirements of Item 4 to Part I of Form 1-A by providing responses that relate only to the additional class of securities.
  • A change of 20% or less in the aggregate offering price, which is permitted under the Note to Rule 253(b) of Regulation A without a post-qualification amendment, may be measured from either the high end (in the case of an increase in the offering price) or the low end (in the case of a decrease in the offering price) of that range.  However, a change of 20% or less is not permitted where the maximum aggregate offering price would result in the offering exceeding the relevant offering limit ($20 million for Tier 1 offerings and $50 million for Tier 2 offerings) or if the change would result in a Tier 1 offering becoming a Tier 2 offering.
  • Consistent with the treatment of EGCs under Section 71003 of the FAST Act, a company filing or confidentially submitting an offering statement under Regulation A may omit financial information for historical periods otherwise required by Part F/S of the Form 1-A, including financial information of other entities required to be included in Part F/S.  However, the company must reasonably believe that the omitted information will not be required to be included in the offering statement at the time of qualification.
  • Offers and sales of securities made in reliance on Rule 506(b) prior to the use of general solicitation in a subsequent Rule 506(c) offering will not be integrated with the offers and sales of securities made in reliance on Rule 506(c).

A copy of the C&DIs is available at: https://media2.mofo.com/documents/161118-question-182-12.pdf

Chair White spoke at the Annual Securities Regulation Institute in San Diego last week and participated in a Q&A session.  We have highlighted below commentary on topics of interest to our readers.

  • Disclosure effectiveness:  Chair White noted that this initiative is one of the Commission’s important priorities.  She noted the requests for comment that had been issued in late 2015 regarding certain Regulation S-X requirements, and indicated that the next milestone is likely to be a concept release on S-K.  Chair White also mentioned technical amendments that are intended to eliminate repetition or overlap in disclosures related to financial statements.  Chair White also noted that the Staff intends to review Industry Guide 3 for banks and other financial institutions, and Guide 7 on mining.
  • Rule 506(c):  Chair White commented on Rule 506 offerings.  She noted that there are some open investigations related to these types of offerings, including one relating to the reasonable efforts that issuers have to make to determine that sales are made only to accredited investors.  She noted that use of the new exemption remains limited—“[f]rom 2013, when 506(c) became effective, through 2015, you had about $2.8 trillion sized market for 506(b) and about a $71 billion market for 506(c).”
  • Accredited investor definition:  Chair White reiterated that the Commission seeks comment on the recently published report regarding the definition and noted that, in her opinion, the rule needs to be revised.
  • Late stage private placements, and private secondary markets:  Chair White noted that the Commission and various of the advisory committees are paying close attention to market developments, and are focused on secondary liquidity for investors in private placements.  Commenting on late-stage private placements, Chair White noted, “the kind of the late stage private investments, pre-IPO that have gotten so much attention in the press, that’s something we look at closely there. One take away just at a high level is you’ve got pretty sophisticated institutional investors who ought to know the right questions to ask and have the leverage to be able to get the information that they need. They ought to have the resources to be able to do the due diligence they need to do, the leverage to basically negotiate favorable terms.”

The full transcript is available here:  https://www.sec.gov/news/speech/securities-regulation-institute-keynote-white.html.

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.

On Thursday, March 10, Friday, March 11, and Saturday, March 12, 2016, Morrison & Foerster Partner Marty Dunn will speak at the American Law Institute’s “Regulation D Offerings and Private Placements…Plus New Options for Exempt Offerings” conference in Scottsdale, Arizona. Mr. Dunn will participate in several panels, including:

  • “Conceptual, Statutory, and Regulatory Background and Structure;”
  • “Regulation D: Update on Continuing Concerns: Manner of Sale (506(b) v. 506(c)); Defining and Verifying Accredited Investors; Bad Person Disqualifications; Section 12(g) Mechanics; Finders;”
  • “Regulatory Menu: Regulation A+;” and
  • “Resales of Restricted Securities: Rules 144 and 144A; Secondary Trading; Resales and Markets for Crowdfunded and Regulation A+ Securities; Section 4(1½).”

ALI CLE will provide CLE credit.

For more information, please click here.

The Division of Economic Research released an updated study regarding capital raised in the United States through unregistered offerings.

The study notes that in 2014 more than $2 trillion in proceeds were raised through exempt offerings, largely through offerings made in reliance on Regulation D.  The information was collected principally from Form D filings.  Although in reporting data, the study looks at amounts raised in offerings made in reliance on Regulation D, Rule 144A, Regulation S, Regulation A and Section 4(a)(2).  By contrast, in 2014, $1.35 trillion was raised in SEC-registered offerings.

In 2014, based on these filings, there were 33,429 Regulation D offerings.  Foreign issuers accounted for 20% of the total amount raised during 2014 and came principally from Canada, Cayman Islands and Israel.  This information is, in our experience, quite incomplete.  Most non-U.S.-domiciled issuers access the U.S. institutional investor market through cross-border debt placements and these are made in reliance on Section 4(a)(2).  These transactions, which are often referred to as “insurance private placements” or “cross-border privates” are substantial.

The study notes that since September 2013 (effectiveness date), the amounts raised in reliance on 506(c) offerings through 2014 was only 2% of the total amount cited above, or $33 billion

The study contains many useful charts segmenting data and findings.  It can be accessed here: https://www.sec.gov/dera/staff-papers/white-papers/unregistered-offering10-2015.pdf.

On November 16, 2015 at 12:00 p.m. EST, Morrison & Foerster Partners David Lynn and Anna Pinedo will lead a teleconference on exempt offering choices available to issuers. Now that the final Regulation Crowdfunding has been released, all of the new offering formats contemplated by the JOBS Act will be available to issuers. Of course, issuers also may choose to rely on traditional private placements conducted under Section 4(a)(2) and Rule 506(b). We will discuss some of the motivations for using one approach over another, in addition to the following:

  •  An overview of Regulation Crowdfunding;
  • Choosing between Regulation A, crowdfunding, and a Rule 506(c) offering;
  • Tier 2 of Regulation A compared to an IPO;
  • Life after the offering and ongoing reporting;
  • Good-old 4(a)(2) and Rule 506(b); and,
  • Offerings in close proximity to one another.

CLE credit is pending.

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