SEC Speaks, Cuban Tweets

The leaders of the Securities and Exchange Commission addressed the public on February 21-22 at the annual SEC Speaks conference in Washington, D.C.  The presentations covered an array of topics, but common themes included the Commission’s ongoing effort to carry out the rulemaking agenda set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act, its role as an enforcement body post-financial crisis, its increasing utilization of technology, and its renewed focus on the conduct of gatekeepers.  In a surprise appearance, Dallas Mavericks owner and former insider trading defendant Mark Cuban attended the first day of the conference.  During his time at the conference, Mr. Cuban shared his thoughts on a number of the presentations via his Twitter account.

From a litigation and enforcement perspective, key takeaways from the conference include the following: Read More

Route 506: The General Solicitation Highway

A new route to soliciting direct securities investments has opened.  For the first time in 80 years, start-ups and small businesses can broadly advertise and broadly solicit to raise money for private offerings.  Changes to SEC Rule 506, which took effect September 23, 2013, allow companies to avoid complex and costly public offerings and instead search for investors via the Internet, newspaper, social media, direct mail, and other media.  The change is the result of the JOBS Act, which required the SEC to permit general solicitation for certain private placements that are exempt from the registration requirements of Section 5 of the 1933 Act.

To travel this route, investors must be “accredited,” defined in the new rule as having a net worth of over $1,000,000 or at least $200,000 in annual income.  While the accreditation has long been required for private placements, issuers were permitted to sell to non-accredited investors who qualified as sophisticated purchasers.  Businesses who raise funds under the new rule must now take additional “reasonable steps” to ensure all investors are accredited.  Rule 506(c) provides a non-exclusive list of means to satisfy this “reasonable steps” requirement.  Issuers may use investor’s tax forms, bank statements, credit reports, and certifications from accountants, brokers, and investment advisors to ensure accreditation – assuming that investors are willing to deliver copies of such documents to issuers.  There may be other means not specified that would also be acceptable also.  Issuers will want to keep careful records about how they accredit investors, because they will bear the burden to establish their exemption from the registration provisions of the Securities Act.  If an issuer cannot do so, it may be subject to liability for general solicitation in connection with an unregistered offering in violation of the federal securities laws. Read More

When a “Public Offering” Is Not a “Public Offering”: The SEC Rule Proposal Eliminating the Ban on General Solicitation and Advertising in Securities Offerings

Introduction

On April 5, 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) was enacted. The stated objective for the JOBS Act is to improve access to the public capital markets for startup and emerging companies and thus increase job creation and economic growth in the United States.

Title II of the JOBS Act (“Title II”) mandated the Securities and Exchange Commission (the “Commission”) to amend applicable rules within 90 days of its enactment (i.e., July 5, 2012) in order to eliminate the prohibitions against general solicitation or general advertising (collectively, “General Solicitation”) in Rule 506 of Regulation D (“Rule 506”) under the Securities Act of 1933, as amended (the “Securities Act”), and under Rule 144A under the Securities Act (“Rule 144A”). These changes are intended to allow issuers to advertise broadly when conducting private placements and thus enable them directly to reach a greater number of potential investors at lower costs without an intermediary, subject to certain requirements, as described more fully below. For a complete overview of all provisions of the JOBS Act, please click here.

On August 29, 2012, the Commission issued Release No. 33-93544 (the “Release”) which, belatedly, proposed a new Rule 506(c) (“Proposed Rule 506(c)”) and an amendment to Rule 144A (collectively, the “Proposed Rules”) to implement Title II. The Proposed Rules would:

(i) Create Proposed Rule 506(c) which does not prohibit General Solicitation for offers and sales of securities that otherwise comply with Rule 506, provided that all purchasers of the securities are “accredited investors” and the issuer takes “reasonable steps to verify” that the purchasers are “accredited investors;”

(ii) Amend Form D5 to add a check box to indicate whether an offering is being conducted pursuant to Proposed Rule 506(c); and

(iii) Amend Rule 144A to allow securities resold pursuant to Rule 144A to be offered to persons other than “qualified institutional buyers”6 (“QIBs”), including by way of General Solicitation, provided that the securities are sold only to persons that the seller (or any person acting on behalf of the seller) “reasonably believes” are QIBs.

Comments on the Proposed Rules are due on or before October 5, 2012. A more comprehensive summary of the Proposed Rules is annexed hereto.

READ MORE . . .

JOBS Act Eases Restrictions on Startup and Emerging Companies

Earlier this month, President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) into law.  The JOBS Act, which had strong bipartisan and business support, is aimed at stimulating economic growth by allowing U.S. and foreign startup and emerging companies to more easily raise capital and transition to public companies.

The JOBS Act works by reducing a number of regulatory burdens that were imposed by the 2002 Sarbanes-Oxley Act.  It directs the Securities and Exchange Commission to revise Rule 506 under the 1933 Securities Act to allow general advertising and solicitation for private placements, with no limit on the number of securities that are bought and sold, so long as they are sold only to accredited investors.  It also amends Rule 144A(d)(1) of the Securities Act, which allows private resales of securities to qualified institutional buyers (“QIBs”), to permit such securities to be generally advertised to persons other than QIBs—as long as they are only later sold to QIBs.  These changes have the effect of allowing firms to market themselves to a greatly expanded base of potential investors. Read More