Developments: Reaching U.S. Investors in New Ways

Posted on August 13, 2013

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JOBS Act 1The U.S. Securities and Exchange Commission (“SEC”) recently adopted final rules which will provide funds and other issuers greater flexibility in conducting private offerings of securities in the U.S.  These rules, which relax long-time restrictions on general solicitation and advertising, take effect on September 23, 2013.

It is no exaggeration to say that these new rules change the game for issuers, permitting novel ways to reach prospective investors, fund managers and others when conducting private securities offerings in the U.S.

One result of more general solicitation and advertising activity will be that more information about private offerings will become available to investors and analysts and thus increase liquidity for private offerings.

The new rules were mandated by Section 201(a) of the U.S. Jumpstart Our Business Startups Act (the “JOBS Act”), part of a series of recent financial reforms of the U.S. capital markets, and permit general solicitation and advertising for private offerings for SEC Regulation D and Rule 144A offerings.

General solicitation or general advertising as the SEC sees it is a broad category that includes any notice or communication published in any newspaper, magazine, or similar media or broadcast over television, radio or Internet, or any meeting whose attendees have been invited by general solicitation or general advertising.

Regulation DSEC Logo 1

Private offerings conducted under Regulation D of the Securities Act had previously allowed issuers to sell securities only to accredited investors and a limited number of other sophisticated investors, but barred the use of general solicitation or advertising in conducting these sales.

Under the new rules, issuers would now be able to use general solicitation or advertising to reach accredited investors.  In relaxing these restrictions, however, the SEC still requires that the purchasers of securities qualify as “accredited investors” (for individuals, this generally means passing a net-worth or annual income test).   The issuer is also required to take reasonable steps to verify that each purchaser qualifies as an accredited investor at the time of sale.   And, of course, the other portions of Regulation D must still be complied with.

Rule 144A

Rule 144A permits underwriters, placement agents and others (but not issuers) to resell securities without registering them with the SEC if these securities were sold by them to qualified institutional buyers (“QIBs”) and some additional criteria were met.  Under the new rules, these securities can be sold with general solicitation and advertising so long as only QIBs or persons reasonably believed to be QIBs purchase the securities.

Importantly for fund managers, the SEC confirmed that funds that engage in general solicitation and advertising will not thereby become investment companies if they rely on the 3(c)(1) and 3(c)(7) exemptions from registration under the Investment Company Act which do not permit conducting the public offering of securities.  The new rules will also not, according to the SEC, affect simultaneous offerings outside the US in accordance with the Regulation S safe harbor.

Conclusion

While the new rules offer exciting possibilities for new issuers, some caution is still in order.  Certain types of offerings retain the ban on general solicitation and advertising in some form.   As always, it is important to check with your legal advisor about your specific situation before proceeding.

Also, the application of these rules in the market place, and whether they affect the currently understood scope of general solicitation and advertising, remains to be seen.

It will take some time for funds and other issuers to adapt their solicitation strategies to the new rules.  Many issuers are taking a “wait and see” approach to learn how other companies will take advantage of the new possibilities.

Lastly, in light of these developments, can widespread solicitation in web comments, chat boards and the like be far behind?