Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC has adopted final rules eliminating the ban on general solicitations in Rule 506 offerings.  As a result of the magnitude of the changes, the SEC has proposed a number of amendments in conjunction with the adoption of new Rule 506(c). These amendments:

  • are intended to enhance the SEC’s understanding of the Rule 506 market by improving compliance with Form D filing requirements;
  • expanding the information requirements of Form D, primarily with respect to Rule 506 offerings, and
  • requiring the submission, on a temporary basis, of written general solicitation materials used in Rule 506(c) offerings to the Commission. 

Form D and Regulation D

With respect to Form D and to Regulation D as it relates to Form D, the SEC has  proposed to:

  • amend Rule 503 of Regulation D to require:
    • the filing of a Form D no later than 15 calendar days in advance of the first use of general solicitation in a Rule 506(c) offering; and
    • the filing of a closing Form D amendment within 30 calendar days after the termination of a Rule 506 offering;
  • amend Form D to require additional information primarily in regard to offerings conducted in reliance on Rule 506; and
  • amend Rule 507 of Regulation D to disqualify an issuer from relying on Rule 506 for one year for future offerings if the issuer, or any predecessor or affiliate of the issuer, did not comply, within the last five years, with all of the Form D filing requirements in a Rule 506 offering.

Legends for General Solicitation Material

In addition, in light of the ability of issuers to publicly advertise Rule 506(c) offerings, the SEC is concerned that prospective investors may not be sufficiently informed as to whether they are qualified to participate in these offerings, the type of offerings being conducted and certain potential risks associated with such offerings. To address these concerns, the SEC has proposed a new Rule 509 of Regulation D, which would require issuers to include prescribed legends in any written communication that constitutes a general solicitation in any offering conducted in reliance on Rule 506(c).

The legends would include the following:

  • The securities may be sold only to accredited investors, which for natural persons, are investors who meet certain minimum annual income or net worth thresholds;
  • The securities are being offered in reliance on an exemption from the registration requirements of the Securities Act and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act;
  • The Commission has not passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials;
  • The securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and
  • Investing in securities involves risk, and investors should be able to bear the loss of their investment.

Hedge Funds, Private Equity Funds and Venture Capital Funds

Legends

Private funds, such as hedge funds, private equity funds and venture capital funds, would also be required to include a legend disclosing certain information:

  • The securities offered are not subject to the protections of the Investment Company Act;
  • If performance data is included:
    • performance data represents past performance;
    • past performance does not guarantee future results;
    • current performance may be lower or higher than the performance data presented;
    • the private fund is not required by law to follow any standard methodology when calculating and representing performance data; and
    • the performance of the fund may not be directly comparable to the performance of other private or registered funds.

Fees, Expenses and Other Information

The proposed rule would also require the legend to identify either a telephone number or a website where an investor may obtain current performance data.  The SEC also proposed to require private funds that include performance data that does not reflect the deduction of fees and expenses in their written general solicitation materials to disclose that fees and expenses have not been deducted and that if such fees and expenses had been deducted, performance may be lower than presented.

Additional Antifraud Provisions Apply

The SEC has also proposed to amend Rule 156 under the Securities Act, which interprets the antifraud provisions of the federal securities laws in connection with sales literature used by investment companies, to apply to the sales literature of private funds because it believes it is important for private funds to consider the SEC’s views on the applicability of the antifraud provisions to their sales literature.

Filing of General Solicitation Materials

As the SEC believes it will need to be aware of developments in the Rule 506 market after the effectiveness of Rule 506(c), the SEC proposed Rule 510T to require issuers, on a temporary basis, to submit any written general solicitation materials used in their Rule 506(c) offerings to the SEC no later than the date of the first use of these materials. The materials would be required to be submitted through an intake page on the SEC’s website. The SEC has not proposed, at this time, that these materials would be available to the public.  Compliance with proposed Rule 510T would not be a condition of Rule 506(c).  Rule 510T is proposed as a temporary rule that will expire two years after the effective date of proposed Rule 510T.

Check jobs-act-info.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

SEC Commissioner Daniel M. Gallagher recently gave a speech to the National Conference of the Society of Corporate Secretaries  & Governance Profesionals.  In the speech Commissioner Gallagher noted that:

  • In 2003, the SEC adopted a new rule and rule amendments under the Investment Advisers Act of 1940 addressing an investment adviser’s fiduciary obligation to its clients when the adviser has authority to vote its clients’ proxies.
  • When proxy advisors asked the SEC staff for guidance and clarity with respect to the new rule, they got their wish in the form of a pair of staff no-action letters effectively blessing the practice of investment advisers simply voting the recommendations provided by proxy advisers.
  •  He is very concerned that these letters have unduly increased the role of proxy advisory firms in corporate governance.  He also has grave concerns as to whether investment advisers are indeed truly fulfilling their fiduciary duties when they rely on and follow recommendations from proxy advisory firms.

Commissioner Gallagher also noted that staff no-action letters are not approved by the Commission, and do not necessarily represent the view of the Commission or the Commissioners.  He stated that he believes “we should replace these two staff no-action letters with Commission-level guidance. Such guidance should seek to ensure that institutional shareholders are complying with the original intent of the 2003 rule and effectively carrying out their fiduciary duties.  Commission guidance clarifying to institutional investors that they need to take responsibility for their voting decisions rather than engaging in rote reliance on proxy advisory firm recommendations would go a long way toward mitigating the concerns arising from the outsized and potentially conflicted role of proxy advisory firms.”

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The SEC has adopted final rules to implement Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 926 required the SEC to adopt rules that disqualify securities offerings involving certain “felons and other ‘bad actors’” from reliance on Rule 506 of Regulation D.

Covered Persons

The disqualification provisions of Rule 506(d) will cover the following persons, which the SEC  refers to as “covered persons”:

  • the issuer and any predecessor of the issuer or affiliated issuer;
  • any director, executive officer, other officer participating in the offering, general partner or managing member of the issuer;
  • any beneficial owner of 20% or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power;
  • any investment manager to an issuer that is a pooled investment fund and any director, executive officer, other officer participating in the offering, general partner or managing member of any such investment manager, as well as any director, executive officer or officer participating in the offering of any such general partner or managing member;
  • any promoter connected with the issuer in any capacity at the time of the sale;
  • any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with sales of securities in the offering (which we refer to as a “compensated solicitor”); and
  • any director, executive officer, other officer participating in the offering, general partner, or managing member of any such compensated solicitor.

The final rules include a provision under which events relating to certain affiliated issuers are not disqualifying if they pre-date the affiliate relationship.

Disqualifying Events

The final rules provide the following are disqualifying events if a covered person:

  • Has been convicted, within ten years before such sale (or five years, in the case of issuers, their predecessors and affiliated issuers), of any felony or misdemeanor:
    • In connection with the purchase or sale of any security;
    • Involving the making of any false filing with the Commission; or
    • Arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser or paid solicitor of purchasers of securities; or
  • Is subject to any order, judgment or decree of any court of competent jurisdiction, entered within five years before such sale, that, at the time of such sale, restrains or enjoins such person from engaging or continuing to engage in any conduct or practice:
    • In connection with the purchase or sale of any security;
    • Involving the making of any false filing with the Commission; or
    • Arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser or paid solicitor of purchasers of securities; or
  • Is subject to a final order of a state securities commission (or an agency or officer of a state performing like functions); a state authority that supervises or examines banks, savings associations, or credit unions; a state insurance commission (or an agency or officer of a state performing like functions); an appropriate federal banking agency; the U.S. Commodity Futures Trading Commission; or the National Credit Union Administration that:
    • At the time of such sale, bars the person from:
      • Association with an entity regulated by such commission, authority, agency, or officer;
      • Engaging in the business of securities, insurance or banking; or
      • Engaging in savings association or credit union activities; or
    • Constitutes a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct entered within ten years before such sale; or
  • Is subject to an order of the SEC entered pursuant to section 15(b) or 15B(c) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(b) or 78o-4(c)) or section 203(e) or (f) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-3(e) or (f)) that, at the time of such sale:
    • Suspends or revokes such person’s registration as a broker, dealer, municipal securities dealer or investment adviser;
    • Places limitations on the activities, functions or operations of such person; or
    • Bars such person from being associated with any entity or from participating in the offering of any penny stock; or
  • Is subject to any order of the SEC entered within five years before such sale that, at the time of such sale, orders the person to cease and desist from committing or causing a violation or future violation of:
    • Any scienter-based anti-fraud provision of the federal securities laws, including without limitation section 17(a)(1) of the Securities Act of 1933 (15 U.S.C. 77q(a)(1)), section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. 78j(b)) and 17 CFR 240.10b-5, section 15(c)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(c)(1)) and section 206(1) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-6(1)), or any other rule or regulation thereunder; or
    • Section 5 of the Securities Act of 1933 (15 U.S.C. 77e); or
  • Is suspended or expelled from membership in, or suspended or barred from association with a member of, a registered national securities exchange or a registered national or affiliated securities association for any act or omission to act constituting conduct inconsistent with just and equitable principles of trade; or
  • Has filed (as a registrant or issuer), or was or was named as an underwriter in, any registration statement or Regulation A offering statement filed with the Commission that, within five years before such sale, was the subject of a refusal order, stop order, or order suspending the Regulation A exemption, or is, at the time of such sale, the subject of an investigation or proceeding to determine whether a stop order or suspension order should be issued; or
  • Is subject to a United States Postal Service false representation order entered within five years before such sale, or is, at the time of such sale, subject to a temporary restraining order or preliminary injunction with respect to conduct alleged by the United States Postal Service to constitute a scheme or device for obtaining money or property through the mail by means of false representations.

Reasonable Care Exception

The Rule 506 exemption is still available if the issuer establishes that it did not know and, in the exercise of reasonable care, could not have known that a disqualification existed under the bad actor provision.  The SEC believes the steps an issuer should take to exercise reasonable care will vary according to the particular facts and circumstances. For example, the SEC anticipates that issuers will have an in-depth knowledge of their own executive officers and other officers participating in securities offerings gained through the hiring process and in the course of the employment relationship, and in such circumstances, further steps may not be required in connection with a particular offering. Factual inquiry by means of questionnaires or certifications, perhaps accompanied by contractual representations, covenants and undertakings, may be sufficient in some circumstances, particularly if there is no information or other indicators suggesting bad actor involvement.

The SEC also believes the timeframe for inquiry should also be reasonable in relation to the circumstances of the offering and the participants. Consistent with this standard, the SEC stated the objective should be for the issuer to gather information that is complete and accurate as of the time of the relevant transactions, without imposing an unreasonable burden on the issuer or the other participants in the offering. With that in mind, the SEC expects that issuers will determine the appropriate dates to make a factual inquiry, based upon the particular facts and circumstances of the offering and the participants involved, to determine whether any covered persons are subject to disqualification before seeking to rely on the Rule 506 exemption.

The SEC noted issuers should make factual inquiry of the covered persons, but in some cases—for example, in the case of a registered broker-dealer acting as placement agent—it may be sufficient to make inquiry of an entity concerning the relevant set of covered officers and controlling persons, and to consult publicly available databases concerning the past disciplinary history of the relevant persons.

Waivers

The rules provide the SEC can provide a waiver from the bad actor disqualification upon a showing of good cause and without prejudice to any other action by the SEC, if the SEC determines that it is not necessary under the circumstances that an exemption be denied.

A waiver can also be granted by the court or regulatory authority that entered the relevant order, judgment or decree advises in writing that the bad actor disqualification should not arise as a consequence of such order, judgment or decree.

Disqualifying Events Prior to the Effective Date; Disclosure

The final rule includes a provision specifying that disqualification will not arise as a result of triggering events that occurred before the effective date of the rule amendments.  Although no disqualification results, the rules require disclosure to investors regarding such events.  Issuers will be required to provide disclosure “a reasonable time prior to sale.”

If disclosure is required and not adequately provided to an investor, the SEC does not believe that relief will be available under Rule 508, under which “insignificant deviations” from Regulation D requirements do not necessarily result in loss of the Securities Act exemption with regard to an offer or sale of securities to a particular individual or entity.  The reason is for Rule 508 to apply to an offer or sale of securities, the failure to comply with a Regulation D requirement must not pertain to a term, condition or requirement directly intended to protect that offeree or purchaser.

New Rule 506(e) does, however, provide that the failure to furnish required disclosure on a timely basis will not prevent an issuer from relying on Rule 506 if the issuer establishes that it did not know, and in the exercise of reasonable care could not have known, of the existence of the undisclosed matter or matters. This “reasonable care” exception to the disclosure requirement is similar to the “reasonable care” exception to disqualification described above, and will preserve an issuer’s claim to reliance on Rule 506 if disclosure is required but the issuer can establish that it did not know and in the exercise of reasonable care could not have known of the matters required to be disclosed. The provision also includes an instruction, clarifying that reasonable care requires factual inquiry.

New Form D

Form D has also been revised.   As revised the signature block of the Form D contains a certification, whereby issuers claiming a Rule 506 exemption confirm that the offering is not disqualified from reliance on Rule 506 as a result of the bad actor disqualification provisions.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The SEC has adopted final rules eliminating the ban on general solicitation and advertising in Rule 506 offerings.  The changes are mostly embodied in new Rule 506(c).

Definition of General Solicitation and Advertising

Although the terms “general solicitation” and “general advertising” are not defined in Regulation D, Rule 502(c) does provide examples of general solicitation and general advertising, including advertisements published in newspapers and magazines, communications broadcast over television and radio, and seminars where attendees have been invited by general solicitation or general advertising.   By interpretation, the SEC has confirmed that other uses of publicly available media, such as unrestricted websites, also constitute general solicitation and general advertising.

General Requirements

Under new Rule 506(c), issuers can offer securities through means of general solicitation, provided that they satisfy all of the conditions of the exemption.   These conditions are:

  • all terms and conditions of Rule 501 and Rules 502(a) and 502(d) must be satisfied.  Rule 501 consists mostly of definitions, Rule 502(a) addresses integration with other offerings and Rule 502(d) requires issuers to take reasonable steps to prevent purchasers from further distributions of securities so that they are not underwriters;
  • all purchasers of securities must be accredited investors; and
  • the issuer must take reasonable steps to verify that the purchasers of the securities are accredited investors.

Verifying Accredited Investor Status – General Rules

Under Rule 506(c), issuers are required to take reasonable steps to verify the accredited investor status of purchasers. Whether the steps taken are “reasonable” will be an objective determination by the issuer (or those acting on its behalf), in the context of the particular facts and circumstances of each purchaser and transaction. Among the factors that issuers should consider under this facts and circumstances analysis are:

  • the nature of the purchaser and the type of accredited investor that the purchaser claims to be;
  • the amount and type of information that the issuer has about the purchaser; and
  • the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.

These factors are interconnected and are intended to help guide an issuer in assessing the reasonable likelihood that a purchaser is an accredited investor – which would, in turn, affect the types of steps that would be reasonable to take to verify a purchaser’s accredited investor status. After consideration of the facts and circumstances of the purchaser and of the transaction, the more likely it appears that a purchaser qualifies as an accredited investor, the fewer steps the issuer would have to take to verify accredited investor status, and vice versa.

Nature of the Purchaser:  Rule 501(a) sets forth different categories of accredited investors, such as broker-dealers, investment companies, employee benefit plans established by state governmental entities, and tax exempt organizations.  Issuer’s should recognize that the steps that will be reasonable to verify whether a purchaser is an accredited investor will vary depending on the type of accredited investor that the purchaser claims to be. For example, the steps that may be reasonable to verify that an entity is an accredited investor by virtue of being a registered broker-dealer – such as by going to FINRA’s BrokerCheck website – will necessarily differ from the steps that may be reasonable to verify whether a natural person is an accredited investor.

Information about the Purchaser: The amount and type of information that an issuer has about a purchaser can also be a significant factor in determining what additional steps would be reasonable to take to verify the purchaser’s accredited investor status. The more information an issuer has indicating that a prospective purchaser is an accredited investor, the fewer steps it may have to take, and vice versa.  Examples of the types of information that issuers could review or rely upon – any of which might, depending on the circumstances, in and of themselves constitute reasonable steps to verify a purchaser’s accredited investor status – include, without limitation:

  • publicly available information in filings with a federal, state or local regulatory body – for example, if the purchaser claims to be an IRC Section 501(c)(3) organization with $5 million in assets, and the organization’s Form 990 series return filed with the Internal Revenue Service discloses the organization’s total assets;
  •  third-party information that provides reasonably reliable evidence that a person falls within one of the enumerated categories in the accredited investor definition – for example, without limitation:
    • the purchaser is a natural person and provides copies of pay stubs for the two most recent years and the current year; or
    • verification of a person’s status as an accredited investor by a third party, provided that the issuer has a reasonable basis to rely on such third-party verification.

Nature and Terms of the Offering: The nature of the offering – such as the means through which the issuer publicly solicits purchasers – may be relevant in determining the reasonableness of the steps taken to verify accredited investor status. An issuer that solicits new investors through a website accessible to the general public, through a widely disseminated email or social media solicitation, or through print media, such as a newspaper, will likely be obligated to take greater measures to verify accredited investor status than an issuer that solicits new investors from a database of pre-screened accredited investors created and maintained by a reasonably reliable third party. The SEC believes that an issuer will be entitled to rely on a third party that has verified a person’s status as an accredited investor, provided that the issuer has a reasonable basis to rely on such third-party verification. The SEC does not believe that an issuer will have taken reasonable steps to verify accredited investor status if it, or those acting on its behalf, required that a person check a box in a questionnaire or sign a form, absent other information about the purchaser indicating accredited investor status.

The terms of the offering will also affect whether the verification methods used by the issuer are reasonable. The SEC continues to believe that there is merit to the view that a purchaser’s ability to meet a high minimum investment amount could be a relevant factor to the issuer’s evaluation of the types of steps that would be reasonable to take in order to verify that purchaser’s status as an accredited investor. By way of example, the ability of a purchaser to satisfy a minimum investment amount requirement that is sufficiently high such that only accredited investors could reasonably be expected to meet it, with a direct cash investment that is not financed by the issuer or by any third party, could be taken into consideration in verifying accredited investor status.

Non-Exclusive Methods of Verifying Accredited Investor Status

The SEC has included in Rule 506(c) four specific non-exclusive methods of verifying accredited investor status for natural persons that, if used, are deemed to satisfy the verification requirement in Rule 506(c). Issuers are not required to use any of these methods, and can apply the reasonableness standard directly to the specific facts and circumstances presented by the offering and the investors.

First, in verifying whether a natural person is an accredited investor on the basis of income, an issuer is deemed to satisfy the verification requirement in Rule 506(c) by reviewing copies of any Internal Revenue Service (“IRS”) form that reports income, including, but not limited to, a Form W-2 (“Wage and Tax Statement”), Form 1099 (report of various types of income), Schedule K-1 of Form 1065 (“Partner’s Share of Income, Deductions, Credits, etc.”), and a copy of a filed Form 1040 (“U.S. Individual Income Tax Return”), for the two most recent years, along with obtaining a written representation from such person that he or she has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year. In the case of a person who qualifies as an accredited investor based on joint income with that person’s spouse, an issuer would be deemed to satisfy the verification requirement in Rule 506(c) by reviewing copies of these forms for the two most recent years in regard to, and obtaining written representations from, both the person and the spouse.

Second, in verifying whether a natural person is an accredited investor on the basis of net worth, an issuer is deemed to satisfy the verification requirement in Rule 506(c) by reviewing one or more of the following types of documentation, dated within the prior three months, and by obtaining a written representation from such person that all liabilities necessary to make a determination of net worth have been disclosed. In the case of a person who qualifies as an accredited investor based on joint net worth with that person’s spouse, an issuer would be deemed to satisfy the verification requirement in Rule 506(c) by reviewing such documentation in regard to, and obtaining representations from, both the person and the spouse. For assets: bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports issued by independent third parties are deemed to be satisfactory; and for liabilities: a consumer report (also known as a credit report) from at least one of the nationwide consumer reporting agencies is required.  The SEC recognizes that it will be difficult for an issuer to determine whether it has a complete picture of a natural person’s liabilities, and therefore, it is requiring a consumer report and a written representation from such person that all liabilities necessary to make a determination of net worth have been disclosed.

Third, an issuer is deemed to satisfy the verification requirement in Rule 506(c) by obtaining a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a certified public accountant that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the prior three months and has determined that such purchaser is an accredited investor.  While third-party confirmation by one of these parties will be deemed to satisfy the verification requirement in Rule 506(c), depending on the circumstances, an issuer may be entitled to rely on the verification of accredited investor status by a person or entity other than one of these parties, provided that any such third party takes reasonable steps to verify that purchasers are accredited investors and has determined that such purchasers are accredited investors, and the issuer has a reasonable basis to rely on such verification.

Fourth, with respect to any natural person who invested in an issuer’s Rule 506(b) offering as an accredited investor prior to the effective date of Rule 506(c) and remains an investor of the issuer, for any Rule 506(c) offering conducted by the same issuer, the issuer is deemed to satisfy the verification requirement in Rule 506(c) with respect to any such person by obtaining a certification by such person at the time of sale that he or she qualifies as an accredited investor.

Amendment to Form D

Form D is the notice of an offering of securities conducted without registration under the Securities Act in reliance on Regulation D.  Under Rule 503 of Regulation D, an issuer offering or selling securities in reliance on Rule 504, 505 or 506 must file a notice of sales on Form D with the SEC for each new offering of securities no later than 15 calendar days after the first sale of securities in the offering.

The SEC has adopted revisions to Form D. Issuers conducting Rule 506(c) offerings must indicate that they are relying on the Rule 506(c) exemption by marking the new check box in Item 6 of Form D. The prior check box for “Rule 506” has been renamed “Rule 506(b).”

The SEC is of the view that an issuer will not be permitted to check both boxes at the same time for the same offering. According to the SEC’s long-held views, once a general solicitation has been made to the purchasers in the offering, an issuer is precluded from making a claim of reliance on Rule 506(b), which remains subject to the prohibition against general solicitation, for that same offering.

Hedge Funds, Private Equity Groups and Venture Capital Funds

Private funds, such as hedge funds, venture capital funds and private equity funds, typically rely on Section 4(a)(2) and Rule 506 to offer and sell their interests without registration under the Securities Act.  In addition, private funds generally rely on one of two exclusions from the definition of “investment company” under the Investment Company Act – Section 3(c)(1)144 and Section 3(c)(7) – which enables them to be excluded from substantially all of the regulatory provisions of that Act.  Those exclusions are only available to private funds that are not making or propose to make public offerings. The SEC has historically regarded Rule 506 transactions as non-public offerings for purposes of Sections 3(c)(1) and 3(c)(7).  The SEC reaffirmed that the effect of Section 201(b) of the JOBS Act is to permit private funds to engage in general solicitation in compliance with new Rule 506(c) without losing either of the exclusions under the Investment Company Act

Reasons to Use Rule 506(b) Without General Solicitation

Issuers will continue to have the ability under Rule 506(b) to conduct Rule 506 offerings subject to the prohibition against general solicitation. The continued availability of existing Rule 506(b) will be important for those issuers that either do not wish to engage in general solicitation in their Rule 506 offerings (and become subject to the requirement to take reasonable steps to verify the accredited investor status of purchasers) or wish to sell privately to non-accredited investors who meet Rule 506(b)’s sophistication requirements. It is also beneficial to investors with whom an issuer has a pre-existing substantive relationship.

No General Solicitations in Section 4(a)(2) Private Placements

This rule making makes clear that the new provisions affect only Rule 506, and not Section 4(a)(2) offerings in general. Section 4(a)(2) is the traditional statutory exemption for private offerings. This means that even after the effective date of Rule 506(c), an issuer relying on Section 4(a)(2) outside of the Rule 506(c) exemption will be restricted in its ability to make public communications to solicit investors for its offering because public advertising will continue to be incompatible with a claim of exemption under Section 4(a)(2).

Check jobs-act-info.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

FSOC has designated the following as nonbank financial companies:

  • American International Group, Inc
  • General Electric Capital Corporation, Inc

Under Section 113 of the Dodd-Frank Act, the Council is authorized to determine that a nonbank financial company’s material financial distress—or the nature, scope, size, scale, concentration, interconnectedness, or mix of its activities—could pose a threat to U.S. financial stability. Such companies will be subject to consolidated supervision by the Federal Reserve and enhanced prudential standards.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The SEC has denied granting an award to another whistleblower in the second action of this year.  The SEC determined that the whistleblower did not provide any “original information.”   Under Rule 21F-4(b)(1)(iv), information will be considered “original information” only if it was provided to the Commission for the first time after July 21, 2010.   The SEC is not saying the information wasn’t helpful, it was just provided before the Dodd-Frank Act.  So the last couple of actions do not really portray a trend  as to how the SEC will ultimately interpret the term “original information.”  Sometimes the early bird doesn’t get the worm I guess.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

On June 20, 2013, FINRA proposed changes to Rule 5123 that would require offering documents in connection with certain private placements to be filed electronically by FINRA members and would also expand the applicable form to include a number of substantive questions regarding the offering at issue.

New FINRA Rule 5123 became effective on December 3, 2012, and requires that FINRA members file with FINRA copies of private placement memoranda, term sheets, or other offering documents used in connection with certain types of private offerings in which the FINRA member participates (prior coverage here and here).  Rule 5123 requires that the offering materials be submitted to FINRA within fifteen calendar days of the first sale in the offering.  FINRA developed a form to facilitate the filing and processing of this information electronically in pdf format through FINRA’s Firm Gateway.

FINRA has now proposed changes to the text of Rule 5123 that codify the requirement that the offering documents be submitted via the online form through Firm Gateway and also expand the information required to be submitted with the form.  Specially, the form as proposed to be amended would now include the following questions about the offering:

  • Whether the offering is a contingency offering;
  • Whether independently audited financial statements are available for the issuer’s most recently completed fiscal year;
  • Whether the issuer is 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;
  • Whether the issuer has a board of directors comprised of a majority of independent directors or a general partner that is unaffiliated with the firm;
  • Whether the issuer has engaged, or the FINRA mmber anticipate that the issuer will engage, in a general solicitation in connection with the offering or sale of the securities;
  • Whether the issuer, any officer, director, or executive management of the issuer, general partner, manager, advisor or any of the issuer’s affiliates has been the subject of SEC, FINRA, or state disciplinary actions or proceedings or criminal complaints within the last ten years; and
  • The industry category for the specified private placement.

FINRA emphasizes that if a FINRA member does not know the answer to one or more of these additional questions, it may respond “unknown.”  The rule change is not intended to impose any additional burden on the FINRA member to conduct inquiries into specific matters, but is only intended to gather information to the extent known by the FINRA member.  However, as a practical matter, it’s easy to see where an issue could arise if a FINRA member provides an “unknown” answer when the information in question is actually included within the private placement memorandum.  In other words, perhaps FINRA members will be imputed with knowledge of all matters disclosed in the offering documents that are filed with FINRA.

FINRA has requested that this rule change become effective immediately pursuant to Section 19(b)(3) of the Securities Act and Rule 19b-4 under the Securities Act (which allow for rules to become immediately effective upon filing if they meet certain requirements relating to not imposing additional substantive burdens). Normally, an immediately effective rule change under Section 19(b)(3) is not “operative” for at least thirty days after filing – in fact, this is one of the conditions of Rule 19b-4. However, in this instance FINRA has requested that the SEC waive the thirty day period and allow FINRA to begin implementation of the new rule immediately.

Check Dodd-Frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The United States District Court for the District of Columbia has vacated the SEC resource extraction disclosure rules.  In so doing, the Court noted:

  • The Dodd-Frank Act did not require that issuers’ resource extraction reports be publicly disclosed.  Use of the phrase “annual report” does not command public filing.
  • The SEC made an error by assuming that the reports should be made public because the Exchange Act is fundamentally a public disclosure statute.  Other provisions of the Dodd-Frank Act require the SEC to make available a public compilation to the extent practicable.
  • The compilation required by the Dodd-Frank Act does not require an issuer-by-issuer compilation of data.
  • Four countries, Angola, Cameroon, China and Qatar, prohibit public disclosure of payment information.  The impact of these host country laws could add billions of dollars to affected issuers costs and have a significant impact on the issuers’ profitability and competitive position.  The SEC could have used exemptive authority to avoid these problems but did not.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The CFPB has issued a bulletin encouraging self-policing, self-reporting, remediation, and cooperation. The bulletin notes the  CFPB considers many factors in the exercise of its enforcement discretion. These include:

  • the nature, extent, and severity of the violations identified;
  • the actual or potential harm from those violations;
  • whether there is a history of past violations; and
  • a party’s effectiveness in addressing violations.

The CFPB provided the guidance to inform those subject to the Bureau’s enforcement authority that in addition to these and other factors, there are activities they can engage in both before and after the conduct in question has occurred that the Bureau may favorably consider in exercising its enforcement discretion.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

President Obama has appointed two new SEC Commissioners, Kara Stein and Michael Piwowar.  At their confirmation hearing, both supported completing the JOBS Act as a priority.  See the reports in Compliance Week and Bloomberg.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.