Presenting a live 90-minute webinar with interactive Q&A Redefining General Solicitation for Securities Offerings in the Internet and Social Media Age Update on Recent SEC Guidance and Other Developments TUESDAY, JANUARY 31, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Yelena M. Barychev, Partner, Blank Rome , Philadelphia Stanley Keller, Of Counsel, Locke Lord , Boston Richard M. Leisner, Shareholder, Trenam Law , Tampa, Fla. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Redefining General Solicitation and Advertising for Securities Offerings in the Internet and Social Media Age Yelena M. Barychev Blank Rome, Philadelphia Stanley Keller Locke Lord, Boston Richard M. Leisner Trenam Law, Tampa January 31, 2017
Prohibition on General Solicitation • “General solicitation” is prohibited in a Rule 506(b) private offering (Rule 502(c)) ⁻ Also prohibited in a Rule 504 offering that is not state registered ⁻ General solicitation is inconsistent with a statutory 4(a)(2) private offering (CDI § 260.13), as well as a 4 (1 ½) or 4(a)(7) resale • “General solicitation” is permitted in a Rule 506(c) offering • The choice between relying on Rule 506(b) or (c) puts new pressure on what constitutes “general solicitation” • 2015 SEC guidance – CDIs §§ 256.23-256.33 and Citizen VC letter • In the internet era, use of an unrestricted website to offer and sell securities is general solicitation (CDI § 256.23) 6
What is General Solicitation – Absence of an Offer • In the absence of an “offer” there cannot be general solicitation (CDI § 256.24) • Thus, factual business information is not necessarily an offer Limited to information about the issuer’s business, ‾ financial condition, products or services, provided not presented in a manner to constitute an offer of securities (CDI § 256.25) • Similar to “gun jumping” analysis and use of Rules 168 and 169 7
What is General Solicitation – Pre-existing, Substantive Relationship • Existence of a pre-existing, substantive relationship with offeree, although not required, negates general solicitation (CDI § 256.26) • “Pre - existing” means it was formed prior to the offering or, if formed by a broker or other intermediary, was formed prior to the intermediaries participation in the offering (CDI § 256.29) ‾ Does it mean before offer to particular investor or before commencement of the offering? 8
What is General Solicitation – Pre-existing, Substantive Relationship (cont’d.) • “Substantive” means sufficient information was obtained to evaluate person’s “financial circumstances and sophistication” in determining status as an accredited or sophisticated investor (CDI § 256.31) ‾ Quality of relationship more important than any waiting period (CDI § 256.30 and Citizen VC ) 9
How to Form Pre-existing, Substantive Relationship • Requisite relationship can be formed by various parties in different ways • Historic guidance blessed broker “two - call” rule, and that still applies • That approach is extended to investment advisers (CDI § 256.28) • Issuers can have a pre-existing, substantive relationship, but it is unlikely to be able to create it using “two - call” rule Success in creating such a relationship depends on “facts and ‾ circumstances” (CDI § 256.32) ‾ When may an issuer solicit information from potential investors to establish the relationship without its being an “offer”? 10
How to Form Pre-existing, Substantive Relationship (cont’d.) • However, issuer can rely if justified on relationships established by others (CDIs §§ 256.27 and 256.32) • Thus, issuer may be able to rely on investors within a network of sophisticated investors, such as an angel investor network 11
Online Platforms and Events • Online investor platforms can avoid general solicitation even though widely soliciting potential investors as long as they establish the requisite relationship before making any specific offer ( Citizen VC ) • Guidance on conducting demo-days, pitch events and venture fairs (CDI § 256.33) Structure to avoid “offers” – just factual business ‾ information ‾ Limit attendees to persons with whom there is a pre- existing, substantive relationship or contacted through network creating that relationship ‾ Use Rule 506(c) 12
Use of Rule 506(c) • Authorized by JOBS Act • Permits general solicitation (without losing status as “not involving a public offering”) • Form D filing requirement (not a condition of exemption) • Condition is purchasers must be solely accredited investors whose status as such is reasonably verified • Reasonable steps to verify is a facts and circumstances determination (unless safe harbor is used for natural persons) 13
Use of Rule 506(c) (cont’d.) • Safe Harbors based on ‾ Income test ‾ Net worth test ‾ Regulated third-party verification Grandfathering ‾ • How is Rule 506(c) being used Experience to date ‾ With general solicitation – “accredited investor ‾ crowdfunding” ‾ As safety net • Disadvantages of using Rule 506(c) 14
Some Lessons from SEC Guidance • Different lessons for different types of participants ‾ Brokers ‾ Investment advisers ‾ Private funds Online investor platforms ‾ ‾ Angel investor networks ‾ Issuers (and their counsel) • Should not affect determination of accredited investor status • Relevance for 4(a)(2), 4 (1 ½) and 4(a)(7) offerings 15
Some Lessons from SEC Guidance (cont’d.) • Rule 506(c) may be available as an alternative or as a safety net for Rule 506(b) offerings that involve “general solicitation ” 16
Exemptive Alternatives • Section 4(a)(2) ‾ no general solicitation • Regulation D ‾ Rule 504 restricted (no general solicitation) o state registered (general solicitation in specified ways) o Rule 505 (will soon be gone and replaced by expanded ‾ Rule 504) • Crowdfunding (Equity) ‾ General solicitation in specified ways 17
Exemptive Alternatives (cont’d.) • State Crowdfunding ‾ Intrastate/Rule 147 no out-of-state offers (what constitutes such an o “offer”?) effect of “not an offer outside this state” legends? o ‾ Rule 147A out-of-state offers permitted but only in-state sales o ‾ Rule 504 regional exemption o 18
Exemptive Alternatives (cont’d.) • Regulation A ‾ Tier 1 ‾ Tier 2 ‾ General solicitation in specified ways 19
Integration Considerations • Firewall approach for certain exemptions (Regulation A, Crowdfunding, Rules 147 and 147A) • Rule 506(c) offering following completed Rule 506(b) offering (CDI § 256.34) • What about a 4(a)(2) or Rule 506(b) offering following a Rule 506(c) offering? • What about a registered offering after a Rule 506(c) offering? 20
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