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

On March 15, 2016, the Consumer Financial Protection Bureau (CFPB) announced that it requested a federal court to enter a final order shutting down student debt relief company Student Loan Processing.US.

In December 2014, the CFPB filed a complaint against Student Loan Processing.US and its owner, James Krause, in federal district court in California.  The lawsuit alleges that the defendants charged consumers illegal upfront enrollment fees prior to providing any services, deceived consumers about the cost of services, and falsely represented an affiliation with the Department of Education.  According to the lawsuit, the defendants marketed and sold services promising to advise and assist consumers applying for Department of Education student loan repayment programs.  In return for those services, the defendants charged 1 percent of the consumer’s federal student loan balance plus a monthly maintenance fee of at least $39 per month for the entire repayment term.  The CFPB’s lawsuit accuses the defendants of misrepresenting the amount and duration of the fees they charged.

If the proposed consent judgment is entered by the court, Student Loan Processing.US and Krause must:

  • Shut down all operations within 45 days of the entry of the court’s judgment;
  • Cancel all contracts with consumers and stop charging fees for services;
  • Pay approximately $326,000 to the CFPB which will be used to compensate affected consumers;
  • Permanently stop directly or indirectly marketing or providing debt relief and student loan services to consumers;
  • Ensure that consumers do not miss recertification or renewal deadlines with the Department of Education; and
  • Pay $1 into the CFPB’s Civil Penalty Fund to permit consumers to seek additional relief in the future.

The CFPB’s March 15 proposed judgment follows a February 5, 2016 court ruling in favor of the CFPB on its claim that the defendants violated the Telemarketing Sales Rule and the Dodd Frank Act’s prohibition against deceptive acts or practices by charging customers an advance fee before providing the debt relief service they advertised.  The CFPB views this ruling as significant and precedent setting, because it establishes that student loan companies can be held responsible for violating federal law if they collect upfront fees in connection with promises to assist consumers in enrolling in Department of Education repayment programs.

Consumers have an estimated $1.3 trillion in total outstanding student loan debt.  Approximately one-in-four student loan borrowers are past due or in default on their student loan.  As such, the CFPB has made it clear that policing the student loan industry will be a priority for the Bureau going forward.  The CFPB’s Student Loan Processing.US consent judgment and its earlier court rulings will likely only further encourage the CFPB to continue its student loan enforcement efforts.  Consequently, companies operating in the student loan market should evaluate the CFPB’s recent student loan-related enforcement actions and guidance and consult with experienced counsel to ensure that they are in compliance.

You can view the CFPB’s proposed final judgment and order here: http://files.consumerfinance.gov/f/201603_cfpb_proposed-stipulated-final-judgment-and-order-student-loan-processing-us.pdf.

You can view the CFPB’s complaint against Student Loan Processing.US here: http://files.consumerfinance.gov/f/201412_cfpb_complaint_student-loan-processing.pdf.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

Zane Gilmer is a member of the firm’s litigation practice group.  His practice focuses on business litigation and compliance and he is a member of the firm’s CFPB taskforce.  Zane works out of the firm’s Denver office and he can be reached at zane.gilmer@stinson.com or 303.376.8416.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The Division of Swap Dealer and Intermediary Oversight of the Commodity Futures Trading Commission, or CFTC, announced that certain banking entities subject to Appendix B of Part 75 of the Commission’s regulations should submit their CEO attestations through the following email address: VolckerAttestation@cftc.gov.

Part 75 of the CFTC’s regulations implements section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred as the “Volcker Rule.” Regulation 75.20(c) requires that banking entities meeting certain conditions must satisfy the requirements of Appendix B. Appendix B requires, among other things, that a CEO attestation be submitted to the CFTC regarding the banking entity’s Volcker Rule compliance program.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC charged Kansas-based Central States Capital Markets, its CEO, and two employees for breaching their fiduciary duty by failing to disclose a conflict of interest to a municipal client.  The case is the SEC’s first to enforce the fiduciary duty for municipal advisors created by the 2010 Dodd-Frank Act, which requires these advisors to put their municipal clients’ interests ahead of their own.

According to the SEC’s order, while Central States served as a municipal advisor to a client on municipal bond offerings in 2011, two of its employees, in consultation with the CEO, arranged for the offerings to be underwritten by a broker-dealer where all three worked as registered representatives.  The order found that Central States CEO John Stepp and employees Mark Detter and David Malone did not inform the client, identified in the order as “the City,” of their relationship to the underwriter or the financial benefit they obtained from serving in dual roles.

“By failing to disclose their financial interest in the underwriting of the City’s offerings, Central States — the City’s municipal advisor — and its employees deprived the City of the opportunity to seek unbiased financial advice,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.  “A municipal advisor’s first duty should be to its municipal client, not its own bottom line.

Without admitting or denying the findings, Central States, Detter, Malone, and Stepp consented to the SEC’s order that they cease and desist from similar future securities-law violations and violations of Rule G-17 of the Municipal Securities Rulemaking Board (MSRB) that requires advisors to deal fairly with their clients.  Detter, Malone, and Stepp also agreed to cease and desist from future violations of MSRB Rule G-23 that bars those acting as municipal advisors on a bond offering from underwriting that offering.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC recently denied no-action relief to a request by Baker Hughes Incorporated to exclude a Rule 14a-8 shareholder proposal submitted by Newground Social Investment, SPC, a registered investment adviser, on behalf of an advisory client. The advisory client and proponent making the proposal was the Equality Network Foundation.

The proposal submitted by Newground did not include any proof of Newground’s authority as an investment advisor to act for the proponent and no statement from the proponent itself that it planned to continue to hold the shares through the date of the annual meeting. The proposal only stated “the Proponent acknowledges its responsibility under Rule 14a-8(b)( l ), and Newground is authorized to state on its behalf that it intends to continue to hold a requisite quantity of shares in Company stock through the date of the next annual meeting of stockholders.”

Baker Hughes sought to exclude the proposal on the following grounds:

  • Exchange Act Rules 14a-8(b) and 14a-8(t) because Newground failed to demonstrate that it is either eligible under Exchange Act Rule 14a-8(b)(2) to submit the Proposal itself or authorized to submit the Proposal on behalf of a shareholder proponent that is eligible under Exchange Act Rule 14a-8(b)(2) to submit the Proposal; and
  • Exchange Act Rules 14a-8(b) and 14a-8(t) because the shareholder proponent failed to provide its own written statement that it intends to continue to hold sufficient shares of the Company’s common stock through the date of the Company’s 2016 Annual Meeting of Stockholders.

The SEC apparently accepted Newground’s arguments that all an investment adviser needs to do to submit a shareholder proposal on behalf of a client is to:

  • state that it represents a client,
  • demonstrate a relationship with the client by providing rule-compliant, third-party documentation of proof of continuous ownership, and
  • convey the intent of that client to continue to hold the requisite value of shares through the time of the next shareholders meeting.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

FINRA is seeking comment on proposed amendments to FINRA rules shortening the securities settlement cycle to two days.  The rulemaking notice cites a September 2015 letter in which SEC Chair White responded to industry groups expressing her strong support for industry efforts to shorten the trade settlement cycle to T+2 and urging the industry to continue to pursue the necessary steps towards achieving T+2 by the third quarter of 2017. SEC Chair White also indicated that she instructed SEC staff to develop a proposal to amend Exchange Act Rule 15c6-1(a) to require settlement no later than T+2.

Exchange Act Rule 15c6-1 currently establishes “regular way” settlement as occurring no later than T+3 for all securities, except for government securities and municipal securities, commercial paper, bankers’ acceptances, or commercial bills. In anticipation of the SEC’s changes to Rule 15c6-1 to facilitate settlement no later than T+2 and to ensure that FINRA acts in concert and conformity with the impending rule changes by other self-regulatory organizations, or SROs, FINRA is proposing definitional changes to its rules pertaining to securities settlement by, among other things, amending the definition of “regular way” settlement as occurring on T+2. The proposed technical changes would implement the anticipated rule changes of the SEC and the other SROs.

The Municipal Securities Rulemaking Board, or MSRB, has also filed a rule proposal with the SEC to define regular-way settlement for municipal securities transactions as occurring on a two-day settlement cycle.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC alleges that Uni-Pixel Inc. began publicly touting sales of a touchscreen sensor product supposedly in speedy high-volume commercial production when in fact only a few samples had been manually completed. The misrepresentations caused Uni-Pixel’s stock price to more than double, allegedly enabling the former CEO and former CFO to make more than $2 million in personal profits from selling their own shares of company stock.  The CEO and CFO allegedly knew the company’s statements were untrue and Uni-Pixel’s manufacturing process was still incapable of mass producing commercial quantities of sensors.

Without admitting or denying the charges, Uni-Pixel settled the matter with the SEC, and litigation against the CEO and CFO continues.

Perhaps more interestingly, the SEC entered into a deferred prosecution agreement with the company’s former chairman of the board, who has agreed to cooperate and be barred from serving as an officer and director for five years. The deferred prosecution agreement with former board chairman alleges the former chair became aware that information in Uni-Pixel’s press releases was inaccurate but failed to ensure that the company corrected the releases.  The agreement requires the former chair to cooperate with the SEC’s continuing case while complying with certain undertakings in order to avoid civil charges against him.

The deferred prosecution agreement states the former Board chair testified:

  • Uni-Pixel’s CEO was “basically out of control on [company] press releases;”; and
  • Despite repeatedly instructing Uni-Pixel’s CEO to stop issuing press releases containing false and/or misleading information, he took no affirmative steps to implement any oversight of outgoing press releases or correct misleading press releases after their issuance.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

On March 8, 2016, the Consumer Financial Protection Bureau (CFPB) released its tenth edition of Supervisory Highlights, which outlines the latest supervisory actions taken against banks and nonbanks, between September 2015 and December 2015.

According to the report, the CFPB’s supervisory actions resulted in $14.3 million in relief to more than 228,000 consumers.  The non-public actions are a result of the CFPB’s supervisory actions and are in addition to public enforcement actions that is has taken.  The CFPB has supervisory authority over banks and credit unions with more than $10 billion in assets as well as nonbanks, including mortgage companies, private student loan lenders, and payday lenders, as well as nonbanks the CFPB designates as “larger participants.”  The CFPB has designated as “larger participants” companies from the debt collection, consumer reporting, international money transfers, student loan servicing, and auto finance industries.

According to the Supervisory Highlights, the CFPB uncovered the following violations in the course of its supervisory actions:

  • Student loan servicers engaged in unfair practices by automatically defaulting private student loans on the occurrence of a certain event, such as a co-borrower filing for bankruptcy;
  • Student loan debt collectors engaged in false, deceptive, or misleading representations when attempting to collect student loans, such as threatening improper garnishment actions;
  • Banks and nonbanks violated CFPB’s new remittance rule, by failing to provide complete or accurate information or failing to cancel transactions within the required time;
  • Banks and credit unions failed to update checking account information they supplied to checking account reporting companies; and
  • Debt collectors failed to honor consumers’ written requests to cease debt collection communications.

You can view the CFPB’s Tenth Edition of Supervisory Highlights here: http://files.consumerfinance.gov/f/201603_cfpb_supervisory-highlights.pdf.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

Zane Gilmer is a member of the firm’s litigation practice group.  His practice focuses on business litigation and compliance and he is a member of the firm’s CFPB taskforce.  Zane works out of the firm’s Denver office and he can be reached at zane.gilmer@stinson.com or 303.376.8416.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

On March 7, 2016, the Consumer Financial Protection Bureau (CFPB) announced that it now accepting complaints from consumers related to problems with loans from online marketplace lenders.  The CFPB also announced the release of a consumer bulletin that provides an overview of marketplace lending and outlines tips for consumers who are considering taking out loans from these types of lenders.

Consumer Complaints Related to Online Marketplace Lenders

Marketplace lending, also referred to as “peer-to-peer” or “platform” lending, is a new type of lending program, in which a marketplace lender uses an online interface to connect consumers or businesses seeking to borrow money with investors willing to buy or invest in the loan.  Consumers experiencing issues with this type of lending program can now submit their complaints to the CFPB.

Consumer complaints can be submitted to the CFPB in a variety of manners.  One of the most popular ways in which consumers submit complaints is via the Consumer Complaint Database.  Once the CFPB receives a complaint it forwards the complaint to the relevant company for a response.  Companies generally have 15 days to respond to the complaint, unless an extension is secured in the meantime.  The consumer complaint and company’s response, if one is provided, is published on the public facing Consumer Complaint Database, which can be accessed and viewed by the public.  The information provided on the database can be valuable to not only consumers, but also to companies.  For example, it provides a valuable tool for companies to understand how consumers view the quality of the company’s products and services.  It also provides companies with an opportunity to evaluate whether complaint trends suggest that problems exist with certain products and services that need to be addressed to avoid or minimize regulatory action.  As such, although the Consumer Complaint Database is not generally viewed favorably by financial industry companies, it can provide valuable information.    For more information on navigating Consumer Complaint Database and consumer complaint process click here.

Marketplace Lending Consumer Bulletin

In connection with beginning to accept marketplace lending complaints, the CFPB released a consumer bulletin which provides information for consumers who are considering a loan from a marketplace lender.  The information included in the bulletin includes:

  • Statements concerning the application of state and federal consumer protection laws to marketplace lenders;
  • A warning to consumers about refinancing certain types of debt, because doing so may forfeit certain consumer protections.

The bulletin also provides tips to consumers seeking marketplace loans, including:

  • Evaluating whether consumers can actually afford by analyzing the total cost of the loan as well as the monthly cost;
  • Review their credit reports for errors; and
  • Compare loans and shop for the best deal.

You can view the CFPB’s Consumer Complaint Database here: http://www.consumerfinance.gov/complaintdatabase/.

For more information on the CFPB’s consumer complaint process go here: https://www.stinson.com/Resources/PDF_Files/Navigating_CFPBs_Consumer_Complaint_Process.aspx.

You can view the CFPB’s Marketplace Lending Consumer Bulletin here: http://files.consumerfinance.gov/f/201603_cfpb_understanding-online-marketplace-lending.pdf.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

Zane Gilmer is a member of the firm’s litigation practice group.  His practice focuses on business litigation and compliance and he is a member of the firm’s CFPB taskforce.  Zane works out of the firm’s Denver office and he can be reached at zane.gilmer@stinson.com or 303.376.8416.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Blockchain shows great promise for certain applications in the financial services industry, including securities clearance and settlement. Given all of the recent publicity, one has to consider the Gartner “hype cycle.” Some recent articles discuss drawbacks for the use of blockchain technology in the securities settlement business.

Scalability

Bitcoin has recently seen a slowdown in transaction processing times, indicating that the bitcoin version of blockchain may not be suitable for public markets:

The average time it takes for a bitcoin transaction to be verified is now 43 minutes, and some transactions remain unverified forever. Some of the problem stems from the fact that anyone can add a fee to every bitcoin transaction, which bumps that transaction up in the queue, meaning that those who didn’t pay such a fee — or didn’t pay a sufficiently big fee — may be waiting hours and sometimes even days for a transaction to complete.

This is how it works. When someone uses bitcoin to pay for an item in a shop, that transaction needs to be verified on the blockchain. This is done by what are known as miners, individuals or groups who use massive computing power to solve increasingly complex mathematical equations to mine new bitcoins, which come in “blocks” and are mined about every 10 minutes. These blocks are used to record all transactions made on the bitcoin network, and have a maximum size of 1 megabyte (MB), meaning they can record just seven transactions per second at most.

Confidentiality

Blockchain clearance may not permit confidential trading that some believe is necessary in capital markets that we are used to:

Capital markets expert Larry Tabb has issued a report “Blockchain Clearing and Settlement: Crossing the Chasm”, which takes a realistic — some might say pessimistic – view of hurdles in the way of blockchain-enabled real time clearing and settlement.

Tabb highlights what he sees as insurmountable problems relating to identity and transparency, and explores these in some depth from both a buy-side and sell-side perspective. One of the key issues raised in Tabb’s report is information leakage. This inevitably follows if registration changes from generic “street name”, where brokers and custodians know which securities are held by clients, to an exacting shared ledger, whereby the client name should be on the transaction record prior to entering the trade.

Large investors, hedge funds, activist investors, and especially takeover firms, do not want to let others know that they are accumulating positions, notes Tabb. Information leakage will also happen when securities are lent out by investors to cover short positions because moving to real-time clearing would require securities to be on hand before they were sold (because they would clear virtually immediately).

Netting

Larry Tabb also discusses netting, a practice common with the current DTC-based settlement system:

Whether blockchains will settle trades on a gross or a net basis is a vexing question. Some advocates of blockchain technology believe netting will be integrated into the ledger, although they concede this will not be straightforward, others say everything will be done on a gross basis. Tabb believes a blockchain model would necessarily entail gross settlement and that this would be hugely inefficient to the way markets function.

“If a blockchain is an irrevocable record then the question becomes is — how do you actually net it? It needs to be a lot more complicated than a simple ledger of who bought what, when, and a chronological list of all the transactions. You have netting transactions, so how do I figure out exactly which securities I own?

Newer, less developed blockchain systems may be subject to more security flaws:

Blockchains provide a global append-only log that is publicly writeable. Writes to the global log, called transactions, are organized as blocks and each block packages multiple transactions into a single atomic write. Writing to the global log requires a payment in the form of a transaction fee. Nodes participating in a blockchain network follow a leader-election protocol for deciding which node gets to write the next block and collect the respective transaction fees. Not all nodes in the network participate in leader election. Nodes actively competing to become the leader of the next round are called miners. At the start of each round, all miners start working on a new computation problem, derived from the last block, and the miner that is the first to solve the problem gets to write the next block.

Miners often pool their resources to form a mining pool, which is essentially a super node on the network (a lot of computational power behind a single miner node). If the amount of computational power under the control of a single miner (or pool) is more than the rest of the network, called a 51% attack, then that miner has the ability to attack the network and rewrite recent blockchain history, censor transactions (e.g., for name registrations), and steal cryptocurrency using double spend attacks. This is because it will win the leader election majority of the time, and produce a blockchain history with more proof-of-work than any disagreeing miner. The more expensive it is to control a majority of the compute power on a particular blockchain, the more secure the blockchain.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

United States Representative Steve Chabot of Ohio first introduced the Helping Angels Lead Our Startups Act (the “HALOS Act”) on February 9, 2016.  Less than a month later, on March 2, 2016 the House Committee on Financial Services reported the bill out of committee meaning it will be sent to either the full House or Senate for consideration.

The HALOS Act would require the SEC to revise section 502(c) of Regulation D to carve-out certain types of communications made during “startup pitch shows” from the prohibition on general solicitation.

Background

Startup companies searching for early investment capital frequently present at “pitch” or “demo” days sponsored by various groups such as venture capital firms or trade associations.  These events aim to help startups grow while controlling costs by offering networks of contacts, mentors, and of course, capital.  Although these events are more frequently geared towards providing startups with publicity for their ideas, it almost goes without saying that the companies present are interested, if not actively seeking, financing.  Specifically mentioning this intent, or disclosing details about proposed financing rounds, however, may be deemed a general solicitation under the securities laws and disqualify the issuer from certain exemptions from registration found in the Regulation D safeharbor.

HALOS Act Proposed Changes to Regulation D Section 502(c) (17 C.F.R. § 230.502(c))

In order to facilitate pitch days and avoid the potential to sour an otherwise available exemption (such as 506(b)), the HALOS Act provides an additional carve-out from the prohibition on general solicitation under Regulation D (the other two are Rules 504(b)(1) and 506(c)) if four conditions are satisfied.

  1. The event is sponsored by certain enumerated groups, such as nonprofits, universities, “angel investor groups”, venture forums, venture capital associations, and trade associations.
  2. Advertising for the event does not reference any specific securities offerings.
  3. The event sponsor does not: (a) make investment recommendations or advice, (b) engage actively in any investment negotiations between an issuer and investor attendees, (c) only charges administrative fees in connection with admission to the event, and (d) does not receive compensation with respect to the event that would require it to register as a broker or dealer under the Securities and Exchange Act of 1934.
  4. During the event the issuer or event sponsor disseminates only the following limited information regarding a specific offering of securities: (a) that the issuer is in the process of offering securities or planning to do so; (b) the type and amount of securities being offered; (c) the amount of securities already subscribed for; and (d) the intended use of proceeds of the offering.

Additionally, the HALOS Act defines the term “angel investor group” listed above in requirement #1, as a group composed of accredited investors interested in investing personal capital in early-stage companies that hold regular meetings, have defined processes for making investment decisions–either individually or as a group–and are not associated or affiliated with brokers, dealers or investment advisors.

If the HALOS Act eventually becomes law, it will further erode the prohibition on general solicitation in the context of private placements that began with section 201(a) of the JOBS Act of 2012.

The text of the HALOS Act bill can be read here.