Congressman Garrett recently renewed discussions regarding additional individual legislative initiatives or other proposals relating to promoting capital formation that might well be grouped together into a single “JOBS Act 2.0” measure.  These matters had been scheduled (prior to the shutdown) to be considered at a hearing on October 9, 2013.

Commentators have noted that the IPO on-ramp alone cannot be expected to revitalize the U.S. IPO market, especially the market for offerings by smaller companies.  Various measures have been suggested, including addressing tick sizes, reviewing disclosure requirements for registration statements, leveling further the information playing field as between retail and institutional investors, and taking additional steps to encourage additional research coverage.

For smaller public companies that completed their IPOs prior to the JOBS Act enactment, additional disclosure and corporate governance accommodations may be appropriate.  Various groups also have urged the Securities & Exchange Commission to review the thresholds for the designation of entities as smaller reporting companies and accelerated filers.  Before the JOBS Act, the Commission had committed to reviewing existing communications safe harbors.  Given technological advancements, IPO communications restrictions (such as the quiet period), and offering related communications may benefit from revamping.  The 2005 Securities Offering Reform changes were principally focused on the largest, most sophisticated issuers, but many of those measures could be applied to a broader group of companies.  In addition, modernizing the regulations applicable to business development companies, along the lines contemplated by legislation already introduced in Congress, would facilitate capital formation for BDCs.

This week, the SEC approved long-awaited amendments relaxing the prohibition against general solicitation, as required under Title II of the JOBS Act.  These amendments will liberalize the ability of broker-dealers to advertise and market private placements by removing the prohibition against general solicitation in offerings conducted pursuant to new Rule 506(c).  However, following the effective date, broker-dealers looking to avail themselves of the new general solicitation rules should be mindful of existing FINRA rules that govern offering-related communications.

FINRA Rule 5123 establishes filing requirements for offering documents used in private placements. Under Rule 5123, FINRA members selling securities issued by non-members in a private placement must file the private placement memorandum, term sheet or other offering documents with FINRA within 15 days of the date of the first sale of securities, or indicate that no such offering documents were used. For more information on FINRA Rule 5123, see our related client alert.

FINRA Rule 2210 (FINRA’s communications rules) establishes pre-approval, filing, content and record retention requirements with respect to communications with retail investors, including certain accredited investors.  As such, materials relating to private placements that are distributed or made available to 25 or more retail investors in any 30 calendar-day period will be deemed retail communications that must comply with Rule 2210.  In particular:

  • Retail communications must be pre-approved by a registered principal.
  • The content of retail communications must be accurate, fair and balanced.  In FINRA’s view, robust risk factor disclosure is often required. (And, in addition, of course, these documents should meet a Rule 10b-5 standard.)

For more information on FINRA Rule 2210, see our related client alert.

Note that FINRA personnel will be able to obtain and review a variety of private placement marketing materials, both as a result of the filings described above, and through FINRA’s periodic inspection process.  Accordingly, FINRA will have the ability to comment on, and take any other actions within its powers, as to those offering materials which it finds are not “fair and balanced.”

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.