In the two years since the adoption of the JOBS Act, fundamental changes have developed in the IPO market and perhaps even more significant changes have resulted in the private or exempt offering market.  During our session, which will take place at the Michelangelo Hotel in New York on May 8 from 8:30 – 10:00am,  we will review:

  • The status of JOBS Act implementation;
  • IPO practices;
  • Up-Cs, two share class deals, and other innovations;
  • General solicitation—what is it? And why isn’t there more of it?
  • Verifying investor status;
  • Ongoing reporting versus Exchange Act reporting; and
  • Proposed legislation.

Morrison & Foerster is offering participants 1.5 New York CLE credits for attendance.

To register for the event, please email Alexa Powers at

On March 13-15, 2014, Morrison & Foerster partner Marty Dunn will participate on the faculty of an ALI CLE course called “Regulation D Offerings and Private Placements.” The course will focus on private placements and the new regulatory environment as a result of the JOBS Act. The course will be held in Paradise Valley, AZ, and is also available as a webcast. For more information about the event, and to register, please visit:

On March 25-26, 2014, Morrison & Foerster partner Anna Pinedo will chair a PLI conference entitled Private Placements and Other Financing Alternatives 2014. This is the first in-person PLI conference that will discuss the proposed crowdfunding rules, the proposed Reg A+ rules, and the practical issues emerging in connection with Rule 506 offerings using general solicitation. Morrison & Foerster Partner Marty Dunn is also participating in the conference and will be speaking on the panels entitled “Overview of 4(a)(2) and Regulation D” and “Staying Private, Private Secondary Markets, Using the Internet.” For more information about the event, and to register, please visit:

In September 2013, the SEC’s Office of Investor Education and Advocacy issued an alert for investors relating to the SEC’s new general solicitation rules.  In addition, a second bulletin provides details on the definition of “accredited investor.”  These documents are available on the SEC’s website at the following links:

The general solicitation alert reminds investors that private placements often involve a variety of risks, including that the relevant offering documents do not typically contain the same amount of information relating to an issuer and the offering as is the case for a registered offering.  In addition, if an issuer does not take steps to verify an investor’s accredited investor status, it could be a warning sign that something isn’t quite kosher about the offering.

The SEC’s “accredited investor” bulletin is designed to help individuals determine whether they are in fact accredited investors.  The bulletin includes a few examples as to how the “net worth” test may be (or may not be) satisfied in different scenarios.

These bulletins reflect the SEC’s continuing efforts to ensure that market participants do not utilize the new rules in an inappropriate manner, and that private placement investors understand the risks of their investments.

Today is a big day for issuers seeking to raise capital in private placements.  For 80 years, issuers have been constrained in their private capital raising efforts: allowed only to reach out to those potential investors with whom the issuer or the broker dealer engaged to assist with the offering have a pre-existing relationship.  Today, thanks to the JOBS Act, all that changes, as the SEC’s rules allowing issuers to generally solicit go into effect. The implication of choosing to generally solicit under new Rule 506(c) is that issuers must take reasonable steps to verify the accredited investor status of potential investors.  The new rules include a non-exclusive list of steps that an issuer can take that will be deemed to be reasonable, including reviewing documentation evidencing net income or net worth itself or engaging a regulated entity (registered broker dealer, registered investment adviser, lawyer, or CPA) to do the review on its behalf.  As a result, SecondMarket (a registered broker-dealer) is offering a general solicitation solution that allows an issuer to offload much of the administration burden involved in closing a Rule 506(c) private placement – on-boarding potential investors, verifying their accredited investor status by through manual review of documents uploaded onto our platform, electronic transaction document execution, and funds transfer.  More details and a cool presentation showing our product are available here:  At the end of the verification process, we will provide the issuer with a report for their files that certifies which investors were determined to be accredited.  We will also maintain all materials provided by investors for three years in accordance with FINRA’s books and records requirements.  As the day progresses, I am seeing a growing range of funds and startups taking advantage of the ability to publicly discuss the fact that they are raising capital.  It is so exciting to see these issuers take the first steps into previously forbidden territory!  The private placement market will never be the same.

Annemarie Tierney is General Counsel at SecondMarket Holdings, Inc.

FINRA posted today an investor alert that highlights risks relating to private placements.  The alert summarizes the differences between private placements and registered offerings, and underscores FINRA’s concerns about fraud and sales abuse, long holding periods and lack of issuer information.  This alert was issued six days prior to the effectiveness of amendments lifting the general solicitation ban for Rule 506 and Rule 144A offerings.  Consequently, FINRA is stepping in to warn investors who are not normally exposed to advertising for private placements.  The investor alert is at:

In an earlier post, we commented on some considerations for issuers and their advisers in respect of offerings made in reliance on Rule 506 after September 23, 2013.  Broker-dealers that are serving as financial intermediaries or placement agents in connection with private offerings also should plan ahead and take into account that, with the effective date of the changes to Rule 506, documentation and compliance and other practices may need to be revisited.  The following highlights some of the considerations for broker-dealers:

  • Financing plans:  at the outset of an engagement, the broker-dealer will want to discuss with the company and agree on the desired approach, which may involve an offering made in reliance on the Section 4(a)(2) statutory private placement exemption (not involving the use of general solicitation), an offering made in reliance on Rule 506(b) (not involving the use of general solicitation), or an offering made in reliance on Rule 506(c) (permitting the use of general solicitation).  The discussion of financing alternatives may involve a detailed overview of the company’s financing activities in the months prior to the proposed offering (which might reasonably be integrated with the proposed offering) as well as the company’s financing objectives generally.  The company’s funding plans should be considered as a whole in order to determine the most appropriate structure for the proposed offering.
  • Engagement letter:  based on the financing alternative, the broker-dealer may want to implement specific changes to its form engagement letter.  The broker-dealer may want to identify specifically the exemption being relied upon, and, to the extent that general solicitation will be used, the broker-dealer may want to specify in the engagement letter the types of communications that will be used, and require that communications be agreed between the parties, and the responsibilities for the communications.
  • Purchase agreement or placement agency agreement:  the broker-dealer also may want to review and revise their forms of purchase agreement and/or placement agency agreement to address Rule 506 and bad actor issues.  See our earlier post regarding proposed provisions.
  • Relationship with prospective investors:  the broker-dealer will want to consider whether it will be approaching only investors that are current clients of the broker-dealer (with whom the broker-dealer has a pre-existing relationship, and as to whom the broker-dealer has undertaken a know-your-customer and suitability inquiry), or whether it will approach, or the issuer will approach, investors with whom the broker-dealer does not have an existing relationship.  The broker-dealer will nonetheless need to follow its established know-your-customer, suitability, AML and other processes in respect of prospective investors that are not pre-existing customers.
  • Investor verification:  if general solicitation will be used, will the broker-dealer be responsible for undertaking the verification process, or will a third party be engaged?
  • Diligence:  FINRA has long been focused on the Regulation D market and has reminded broker-dealers of their diligence obligations in respect of private offerings, including in Regulatory Notice 10-22.  It is important to keep in mind that private offerings will be under close scrutiny.
  • Compliance Considerations:  the broker-dealer also will have to keep in mind that, although we’re entering into a new world of general solicitation, existing FINRA and other rules and regulations remain in effect, including, the following:
  • FINRA know-your-customer and suitability obligations:  the broker-dealer must still undertake all of the steps it would ordinarily undertake in connection with selling or recommending investments to customers;
  • AML and other requirements:  either the broker-dealer or a third party will have to undertake necessary steps;
  • Communications rules:  under FINRA Rule 2210, most communications that would be used in connection with a general solicitation would be considered a “retail communication” and, therefore, subject to review, filing and recordkeeping requirements;
  • Private offering requirements:  under FINRA Rule 5123, the broker-dealer will be required to make certain filings with FINRA, and may be required to file offering materials;
  • Social media use:  the broker-dealer will want to ensure that those employees involved in the offering are familiar with the firm’s social media policy.  In the context of an offering using general solicitation, the broker-dealer should understand how the company will use social media (if at all), and how its own employees may be pulled into certain social media communications;
  • Bad actor rule:  the bad actor rule also will become effective on September 23rd.  This means that broker-dealers involved in private offerings will have to ensure that they have undertaken an analysis of whether any employees involved in these offerings are affected by the rule.  See our earlier post on the bad actor disqualifying events compared to the events that are required to be disclosed on Forms U-4/U-5; andForeign regulations:  the broker-dealer should also consider that, while a general solicitation may be permissible in the United States, selling restrictions and limited offering exemptions may still be applicable in foreign jurisdictions.
  • Issuer education:  the broker-dealer may want to spend additional time discussing with the company and management the issues that they may want to consider in connection with undertaking a private offering or an offering using general solicitation, the types of general solicitation that may be used, whether written general solicitation should be used, the messaging and the individuals responsible for communicating on the company’s behalf, and the types of purchasers that are desirable investors for the company.

In its continuing quest to improve member firm due diligence in private placements, thereby enhancing investor protections (See our posts on July 7, July 24 and August 6, 2013), on August 19, 2013, FINRA issued Regulatory Notice 13-26 about the updated Private Placement Form (a copy of which is attached to the Notice) that firms must file pursuant to Rule 5123 (Private Placements of Securities) and Rule 5122 (Private Placements of Securities Issued by Members).  The Notice also announced that FINRA had updated the FAQs relating to the Private Placement Form.  The updated Private Placement Form, which has been in effect since July 1, 2013 includes six new questions:

  • Is this a contingency offering?
  • Does the issuer have any independently audited financial statements for the issuer’s most recent fiscal year?
  • Is the issuer able to use offering proceeds to make or repay loans to, or purchase assets from, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor or any of the issuer’s affiliates?
  • Does the issuer have a board of directors comprised of a majority of independent directors or a general partner that is unaffiliated with the firm?
  • Has the issuer engaged, or does the member anticipate that the issuer will engage, in a general solicitation in connection with the offering or sale of the securities?
  • Has the issuer, any officer, director or executive management of the issuer, sponsor, general partner, manager, advisor, or any of the issuer’s affiliates been the subject of SEC, FINRA, or state disciplinary actions or proceedings or criminal complaints within the last 10 years?

FINRA states that the Form assists FINRA in prioritizing its review of private placement reviews.  It notes that firms can respond “unknown” to any of the questions, although we believe answering “unknown” is likely to trigger heightened scrutiny by FINRA, particularly because the questions address basic diligence questions. FINRA’s statistics show that since July 1, 2013, on average, 18% of filers have answered “unknown” to at least one of the six questions: of these, approximately 28% have answered “unknown” to the question regarding SEC, FINRA, or state disciplinary actions or proceedings or criminal complaints within the last 10 years; and approximately 8% have answered “unknown” to the question whether the issuer has independently audited financial statements available for its most recent fiscal year.

The SEC’s proposed changes to private offerings, including proposed changes to Form D, Form D filing requirements, and temporary requirements to submit general solicitation materials, already are generating comment.  Reps. McHenry and Garrett have requested that, among other things, the SEC clarify that issuers will be able to rely on new Rule 506(c) following the September effective date without having to comply with the additional proposals in the future.  Their letter requests answers to a number of other questions.  The letter may be accessed here:

Earlier this year, FINRA announced that the policing of private placements would be its regulatory priority for 2013.  However, FINRA enforcement actions relating to private placements have been dramatically increasing since 2010, as the chart below indicates. With the adoption of FINRA Rule 5123 (requiring broker-dealers to file with FINRA copies of offering documents used in certain private placements), this trend of increased enforcement seems likely to continue.

Recent FINRA enforcement actions suggest that FINRA is actively pursuing its 2013 regulatory priority and indicate the types of violations that are likely to draw the SRO’s attention, including:

  • Disclosing investment objectives that exceed or fail to accurately capture the objectives stated in the offering documents;
  • Making unsubstantiated or exaggerated claims, or statements that promise investment success;
  •  Making unwarranted performance projections;
  • Failing to adequately disclose risk;
  • Providing materials with contradictory information;
  • Failing to provide a sound basis for evaluating the provided information; and
  • Violating applicable general solicitation rules.

With the SEC’s recent adoption of Rule 506(c) (allowing for general solicitation in private placements made in reliance on Rule 506 of Regulation D) and the eventual adoption of SEC rules implementing Title III of the JOBS Act (creating an exemption from registration for crowdfunding offerings), FINRA seems likely to continue, if not increase, its concerted effort to enhance the policing of private placements. As such, broker-dealers must remain mindful of applicable private placement rules and diligent in their preparation of offering documents.

For more information on rules regulating private placements and communications with the public, see our client alerts on FINRA Rules 5123 and 2210 and SEC Rules 506 and 144A.