Redefining General Solicitation for Securities Offerings...
Transcript of Redefining General Solicitation for Securities Offerings...
Redefining General Solicitation for Securities
Offerings in the Internet and Social Media
Age: SEC Guidance
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WEDNESDAY, APRIL 10, 2019
Presenting a live 90-minute webinar with interactive Q&A
Albert Lung, Of Counsel, Morgan Lewis & Bockius, Palo Alto, Calif.
Anthony R.G. Nolan, Partner, K&L Gates, New York
Vanessa J. Schoenthaler, Partner, Sugar Felsenthal Grais & Helsinger, New York
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Redefining General Solicitation
for Securities Offerings in the
Internet and Social Media Age:
SEC Guidance
© 2019 Sugar Felsenthal Grais & Helsinger LLP
Private Offering Basics• The Securities Act of 1933 requires that all offers and sales of
securities either be registered with the Securities and Exchange Commission or exempt from the registration.
• There are two types of exemptions, exempt securities and exempt transactions.
• Exempt securities are certain categories of securities specified in the Securities Act as exempt.
• Exempt transactions are transactions by an issuer not involving a public offering or transactions by persons other than an issuer, underwriter or dealer.
• Regulation D, Rule 506 is by far one of the most commonly used private offering transaction exemptions.
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Pre-JOBS Act Rule 506 Private
Offering Transaction Exemption• Issuers could raise an unlimited amount of money from an
• Offerings could include an unlimited number of accredited investors
and up to 35 nonaccredited investors.
• Nonaccredited investors must be sophisticated, either or alone or with
a purchaser representative.
• Sophistication requires that an investor have sufficient knowledge and
experience in financial and business matters such that they are capable
of evaluating the merits and risks of a prospective investment.
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Pre-JOBS Act Rule 506 Private
Offering Transaction Exemption• Nonaccredited investor participation requires certain disclosure
requirements to be met, including the provision of audited financial
statements.
• General solicitation and advertising are prohibited.
• Securities issued are “covered securities” under the National Securities
Market Improvement Act of 1993 (“NSMIA”). “Covered securities” are
preempted from state “blue sky” laws related to registration and
qualification, but not notice filings or the related filing fees.
• Securities issued are “restricted securities” and subject to resale
limitations.
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The JOBS Act of 2012
• The JOBS Act of 2012 required, among other things, that the
SEC amend Rule 506 of Regulation D to allow for general
solicitation and advertising in certain offerings made solely to
accredited investors.
• What was Rule 506 became Rule 506(b) and new Rule 506(c)
was adopted.
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Post-JOBS Act Rule 506(c)
Private Offering Transaction
Exemption• Issuers can raise an unlimited amount of money.
• Offerings can include an unlimited number of accredited investors.
• General solicitation and advertising are permitted provided that all
purchasers are accredited investors.
• Issuers must take reasonable steps to verify a purchaser’s accredited
investor status.
• Securities issued are “covered securities” under the National Securities
Market Improvement Act of 1993 (“NSMIA”). “Covered securities” are
preempted from state “blue sky” laws related to registration and
qualification, but not notice filings or the related filing fees.
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Post-JOBS Act Rule 506(c)
Private Offering Transaction
Exemption• Securities issued are “restricted securities” and subject to resale
limitations.
• Bad actor disqualification provisions apply (also added by the
JOBS Act; also applicable to Rule 506(b) offerings).
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Post-JOBS Act Private Offerings
• The prohibition on general solicitation in advertising in 506(b)
offerings and the permissibility of general solicitation and
advertising in 506(c) offerings naturally led to uncertainty
surrounding the types of activities that would constitute general
solicitation and advertising.
• In response, on August 6, 2015, the Securities and Exchange
Commission’s Division of Corporation Finance released a number
of compliance and disclosure interpretations and simultaneously
granted no-action relief to Citizen VC, Inc. addressing general
solicitation and advertising in the context of a platform offering
Rule 506(b) investments.
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General Solicitation Compliance
and Disclosure InterpretationsThe SEC’s August 2015 compliance and disclosure interpretations address:
• The use of an unrestricted, publicly available websites to offer or sell
securities (C&DI 256.23).
• When information is merely “factual business information” rather than
advertising (C&DIs 256.24 and 256.25).
• The role of “pre-existing” and “substantive” relationships in general
solicitation and how to establish such relationships (C&DIs 256.26 and
256.28 through 256.31).
• The role of general solicitation in angel investor networks, demo days
and VC fairs (C&DIs 256.27 and 256.32).
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Citizen VC No-Action Letter• Citizen VC (citizen.vc) is an online venture capital firm.
• Citizen VC planned to offer and sell LLC interests (“Interests”) in
special purpose vehicles (“SPVs”) set up to invest in specific portfolio
companies to members of the Citizen VC platform using Rule 506(b)
(without engaging in general solicitation or advertising).
• The SPVs were managed by a wholly-owned subsidiary of Citizen VC
(the “Manager”) which would become a registered investment adviser
as required under the Investment Advisers Act of 1940.
• Citizen VC wanted to accept membership applications from
prospective investors with whom it did not yet have a pre-existing
relationship and establish a relationship with those prospective
investors prior to offering Interests.
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Citizen VC No-Action Letter• Citizen VC’s investor qualification policies and procedures:
• The publicly assessable portion of Citizen VC’s platform only
contains generic information and no advertising or information
about current offerings.
• New visitors must register and be accepted as members in order
to gain access the password protected portions of the platform
where offerings are executed.
• The registration process requires completion and self-certification
of an accredited investor questionnaire.
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Citizen VC No-Action Letter• Following completion of the questionnaire Citizen VC engages in a
relationship building period with prospective investors during
which it may (among other things):
• contact the prospective investor by phone to introduce
representatives of Citizen VC and discuss the prospective
investor’s investing experience and sophistication, investment
goals and strategies, financial suitability, risk awareness, and
other topics designed to understand sophistication;
• contact the prospective investor online to answer questions
they may have about Citizen VC and potential investments;
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Citizen VC No-Action Letter• use third-party credit reporting services to confirm the
prospective investor’s identity and gather additional financial
information and credit history information to support
suitability; and
• encourage the prospective investor to explore the platform
and ask questions about the Manager’s investment strategy,
philosophy and objectives.
• Offerings of SPV Interests had a significant minimum capital
investment requirement of at least $50,000 per individual
investment.
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Citizen VC No-Action Letter• Once Citizen VC was satisfied as to the prospective investor’s
knowledge and financial experience and that a substantive
relationship had been established, the prospective investor was
admitted as a member to the site.
• Investment opportunities could only be presented to the
prospective investor after admission as a member.
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Citizen VC No-Action Letter• Key takeaways from the SEC’s Response Letter:
• The quality of the relationship between an issuer (or its agent) and an
investor is the most important factor in determining whether a substantive
relationship exists.
• There is no specific duration of time or particular short form accreditation
questionnaire that can be relied upon solely to create a substantive
relationship.
• A substantive relationship is one in which the issuer (or a person acting on
its behalf) has sufficient information to evaluate, and does, in fact, evaluate, a
prospective investor’s financial circumstances and sophistication, in
determining his or her status as an accredited or sophisticated investor.
• Whether an issuer has sufficient information to evaluate, and does in fact
evaluate, a prospective investor’s financial circumstances and sophistication
will depend on the facts and circumstances.19
Vanessa J. [email protected]
(212) 899-9781
Vanessa J. Schoenthaler is a partner in the New York office of Sugar Felsenthal Grais &
Helsinger LLP. She focuses her practice on corporate and securities matters with an
emphasis on private and public securities transactions, compliance and disclosure
obligations and corporate governance matters. Her clients rely on her deep experience
navigating the complexities of both the public and private securities regulatory
environment. She frequently contributes to publications such as The Corporate Counselor,
Buyouts and Transactional Advisors.
Vanessa’s corporate finance experience ranges from advising investors and development
stage companies in early round financings to representing issuers and intermediaries in
registered and exempt offerings of equity and debt securities. She has worked with foreign
and domestic issuers on matters such as periodic and ongoing disclosure obligations,
corporate governance practices, exchange listing standards, joint ventures, equity
compensation arrangements, ESOP transactions, securities offerings and mergers,
acquisitions and dispositions.
Vanessa counsels foreign and domestic sponsors, private funds and investment managers
with regard to formation and operation, investment adviser registration, and periodic and
ongoing disclosure obligations. She also guides her clients in structuring
investments, compliance with regulatory requirements (including under Section 13,
Section 16 and Rule 144) and addressing insider trading issues.
SFGH
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© Copyright 2019 by K&L Gates LLP. All rights reserved.
Anthony R.G. Nolan, Partner, K&L Gates LLP
General Solicitation Beyond Reg. D and
Intrastate Exemptions
AGENDA
▪ “Mixed” Concurrent Offerings
▪ Testing the Waters
▪ State Counterparts
▪ Public Offerings
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"MIXED" CONCURRENT OFFERINGS▪ Issue: avoiding integration of concurrent offerings
where one offering permits general solicitation and
the other does not
▪ Integration doctrine prevents issuers from improperly avoiding
registration by artificially dividing a single offering into multiple
offerings
▪ SEC’s 5-Factor test for integration of offerings
▪ Single plan of financing
▪ Same class of securities
▪ Same type of consideration
▪ Offerings are made at or about the same time
▪ Same general purpose
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"MIXED" CONCURRENT OFFERINGS
▪ Alternative framework based on manner of solicitation
▪ How were the investors in the private offering solicited?
▪ Compliance with separate exemptions prevents integration if solicitation is
conducted separately
▪ Specific Cases
▪ Rule 506(b) and Registered
▪ Rule 506(b) and Reg. A or Rules 147/147A
▪ Rule 506(b) and Section 4(a)(6)
▪ Rule 506(b) and Crowdfunding
▪ Private offering and Reg. S
klgates.com 24
TESTING THE WATERS▪ Issue: evaluating investor interest before incurring
the costs of an offering
▪ Section 5(d) – Emerging Growth Companies
▪ Regulation A – Rule 255
▪ Proposed Rule 163B
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STATE LAW ON GENERAL SOLICITATION
▪ Largely preempted
▪ Notable exceptions
▪ Tier 1 of Reg. A
▪ Rules 147 and 147A
▪ Sales literature filing requirements
▪ General solicitation often prohibited
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WHAT IS A PUBLIC OFFERING
▪ SEC has never explicitly defined a public offering, but certain
features include:
▪ Offers/sales to investors that are unable to fend for themselves
▪ Offers/sales to a numerous pool of investors
▪ General solicitation
▪ Offers/sales of small quantities/values of unrestricted securities
▪ Sales to purchasers who have a view to resell or distribute the
securities immediately
▪ Engaging in a series of “private” transactions that collectively
amount to a public sale
klgates.com 27
REDEFINING GENERAL SOLICITATION FOR SECURITIES OFFERINGS IN THE INTERNET AND SOCIAL MEDIA AGE
Presenter: Albert Lung
April 10, 2019
Regulation A+
• The last major SEC rulemaking of SEC that became effective in June 2015, that substantially amended and revised the then existing Regulation A, which was not used due to the low dollar threshold ($5 million).
• Provide U.S. and Canadian companies to raise up to $50 million in a public offering by filing and qualifying an offering statement with the SEC.
– A simplified and abbreviated process of registration
– Accelerated SEC review process with reduced disclosures compared to registration statement.
• The SEC recently changed rules to allow public companies to rely on Regulation A+.
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Regulation A+ Basics
• Two Tiers of Offering:
– Tier 1 offering: up to $20 million in 12 month period
– Tier 2 offering: up to $50 million in 12 month period
– Tier 2+ for NASDAQ listed transaction: additional disclosures and PCAOB audit—mini-IPO.
• Major distinctions between Tier 1 and Tier 2:
– Audited Financial Statements
– Federal preemption/State Blue Sky Review
– Investment Limitation
– On-going reporting requirements (annual report and semi-annual report)
– Disclosure requirements
• Regulation A+ Process: Similar to registered process but simpler and faster
• A convenient tool to offer securities for social media and consumer based companies.
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Regulation A+: Test the Water
• Rule 255 provide an innovation in general solicitation: testing the water communications,
which materially modified the “gun jumping” prohibition.
– A company may “communicate orally or in writing to determine whether there is any interest in a contemplated securities offering . . . . No solicitation or acceptance of money or other consideration, nor of any commitment, binding or otherwise, from any person is permitted until qualification of the offering statement”
• Provides an opportunity for companies to assess the interest of investors and obtain a better understanding of the market for the securities.
• TTW can be done at anytime prior to or after the filing of Offering Statement on Form 1-A.
• Unlike the EGC IPO rules, TTW is extended to include non-accredited investors, thus it is designed for website general solicitation.
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REGULATION A+ Rule 255 REQUIREMENTS
• Filing of TTW materials with the Form 1-A; subject to SEC review.
• No requirement to file TTW materials immediately prior to or after its use at the meeting—the filing would occur only in connection with the next filing of the Form 1-A.
• No filing of substantially same materials.
• Companies cannot take or accept any orders from investor.
• All written materials must contain the Rule 255 legend—a disclaimer to confirm that no money can be accepted until the Form 1-A is qualified.
• Links to preliminary offering circular if available.
• Subject to anti-fraud provisions of Securities Act.
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Website and Online Offering: Regulation A+
• Popularity of Regulation A+ created a cottage industry of funding portals and crowdfunding websites has, such as SeedInvest, StartEngine and others.
• Broker dealer registration requirements may be implicated.
• Advantages:
– No verification of accredited investor status.
– No prohibition on the pool of investors.
• Disadvantages:
– Cost of preparing Form 1-A
– No state law preemption.
• Best practices: (i) Review content of TTW materials; (ii) avoid financial projections; (iii) returning materials to the company.
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Intrastate Exemption: 3(a)(11) and Rule 147
• Section 3(a)(11) of the Securities Act provides an exemption: “any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within, or, if a corporation, incorporated by and doing business within, such State or Territory”
• No interstate commerce if the securities are being offering within the state to state residents.
• SEC established Rule 147 as a safe harbor to Section 3(a)(11), which was amended in 2016 in the form of Rule 147A to modernize Rule 147 and provide more flexibilities for companies to rely on 3(a)(11).
• Ability to sell to non-accredited in-state investors as long as the Rule 147 conditions are satisfied.
• Limitation on resale: only to in-state persons for a period of 6 months from the date of initial sale.
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Rule 147 Basics
Rule 147 Basic Requirements
• Companies must limit all offers and sales to in-state residents, or persons that the company reasonably believes are in-state residents/written representation.
• The company’s principal place of business and activities are in-state.
• The company must satisfy one of the three tests for the “doing business” in-state requirement, as discussed in the next slide.
• The company is organized in-state; and
• Any securities offered or sold must include a disclaimer stating that the securities have not been registered, and set limitations on resale.
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Rule 147 “Doing Business in State”
• Companies can meet the “Doing Business” Standard by passing one of the following three tests:
– the issuer, together with its subsidiaries, generated at least 80% of its gross revenues in the most recent fiscal year or most recent six-month period from that state, whichever is closer in time to the offering;
– If the offering was made during the second half of the year, then use the revenue from the first half to determine the 80%.
– the issuer had 80% of its assets located in that state in the most recent semiannual fiscal year; or
– the issuer intends to use and uses at least 80% of the net proceeds from the intrastate offering in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services in that state.
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Rule 147A
• SEC amended Rule 147 in October 2016 to facilitate capital formation for small companies.
• Provide that the test will based solely on “principal place of business” and not state of incorporation. Allow companies incorporated in other states to rely on Rule 147 if other conditions are satisfied. Prior Rule 147 was not available to any companies incorporated out of state, such as Delaware.
• Only “sales” but not “offers” are required to be in-state. Accordingly, the company will have the ability to conduct general solicitation through social media and internet.
• Add a fourth element to “Doing Business” test: a majority of the Company’s employees are located within the state
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