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Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
Business Law & Order - November 18, 2013 - General Solicitation Rules
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Business Law & Order - November 18, 2013 - General Solicitation Rules

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  • 1. Business Law & Order: General Solicitation November 18, 2013
  • 2. Ann Arbor SPARK Business Law and Order General Solicitations and Rule 506(c): An Overview Richard Hoeg Partner Honigman Miller Schwartz and Cohn LLP November 18, 2013
  • 3. History – General Prohibition  Securities Act, Section 4(a)(2): “The provisions of section 5 [prohibiting issuance without a registration statement] shall not apply to transactions by an issuer not involving any public offering.”  Rule 502(c) of Regulation D: “…neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising…” 3
  • 4. History – JOBS Act of 2012  JOBS Act Section 201(a)(1): “…the prohibition against general solicitation or general advertising … shall not apply to offers and sales of securities made pursuant to [Rule 506].”  JOBS Act Section 201(b)(2): “…Offers and sales exempt under [Rule 506] shall not be deemed public offerings under the Federal securities laws as a result of general advertising or general solicitation’.” 4
  • 5. Rule 506(c)  New Rule 506(c) sets forth that an issuer may seek investment by means of general solicitation provided that such issuer:  sells only to accredited investors, and  takes reasonable steps to verify that all purchasers are accredited investors.  Effective September 23, 2013 5
  • 6. Accredited Investors  Notable accreditation categories:  Individual Net Worth ($1,000,000)  Individual Income ($200,000)  Organizational Net Worth ($5,000,000)  Any person or entity that the issuer reasonably believes comes within any of the other “accredited investor” categories 6
  • 7. Rule 506(c) – Important Notes  If an issuer did not take “reasonable steps to verify” an investor’s status to the satisfaction of the SEC, it will not be able to use Rule 506(c) even if all of the investors actually turn out to be “accredited”.  The current Rule 506 possibilities (offering to up to 35 non-accredited investors without general solicitation) remain open under Rule 506 in the form of Rule 506(b).  Most importantly, Rule 506(c) itself does not establish what “reasonable steps to verify” actually are. 7
  • 8. “Reasonable Steps” - Generally  Issuers are expected to adopt a “principles-based approach” in determining the reasonable steps necessary to verify accreditation status in Rule 506(c) offerings.  July 10th Release: “After consideration of the facts and circumstances of the purchaser and of the transaction, the more likely it appears that a purchaser qualifies as an accredited investor, the fewer steps the issuer would have to take to verify accredited investor status, and vice versa.” 8
  • 9. “Principles-Based” Examples  What “might” an issuer use to verify?  Government filings, pay stubs, reliable third party verifications of status, and “specific information about average compensation”  When will an issuer “likely” be required to utilize heightened verification standards?   What about lower standards?   If solicitation is made through “widely disseminated” means such as e-mail and social media Offerings with a high minimum investment amount “could” require lesser verification A mere “box in a questionnaire” (i.e., self-verification) will almost never be sufficient. 9
  • 10. Inherent Risk Rule 506(b) is a safe harbor, Rule 506(c) is not  Failure to qualify under Rule 506(b) leaves the issuer with the possibility of claiming that the offering is not “public”.  A 506(c) offering is public in reality, non-public only by statute.  If technical compliance with Rule 506(c) is not achieved, failure to register the offering will likely be a violation of the Securities Act.  The consequences for non-compliance are severe. 10
  • 11. “Reasonable Steps” – Safe Harbors     Income Verification Net Worth Verification Third Party Verification Pre-existing 506 Investors 11
  • 12. Income Verification An issuer can verify a proposed investor’s income level by:  reviewing any Internal Revenue Service form that reports income for the two most recent years and  obtaining a written representation that the investor has “a reasonable expectation” of receiving sufficient income during the current year. 12
  • 13. Net Worth Verification An issuer can verify a proposed investor’s net worth by reviewing:  For Assets: bank statements, brokerage statements and other similar third party statements and  For Liabilities: both (1) a credit report and (2) a written representation that all liabilities necessary to determine net worth have been disclosed. All documents must be dated within the last three months 13
  • 14. Third Party Verification An issuer may rely on the determination that an investor is “accredited” if made by any one of the following:  a registered broker-dealer,  an SEC-registered investment adviser,  a licensed attorney  a certified public accountant  Such determination must have been made within the last three months 14
  • 15. Pre-Existing 506 Investors  Issuers don’t need to separately verify the status of current investors that participated in a previous Rule 506 offering of the issuer  Caveats   Only applies to Rule 506 offerings closed before September 23, 2013 The investor in question will still need to certify that they are accredited at the time of the Rule 506(c) offering (“check the box”) 15
  • 16. Additional Proposed SEC Rules  Pre-sale Notice Filings (Form D)  Additional Information on Filings (including regarding investors)  Post-Closing Filing Requirements  Additional Disclosures and Legends  Submission of all advertising materials to the SEC (limited) 16
  • 17. Practical Impact  Rule could represent a sea change, but perhaps not right away.  Much to consider for potential securities issuers in deciding whether to use the new Rule or not. 17
  • 18. Exceptional service. Dykema delivers. Ann Arbor SPARK Business Law and Order November 18, 2013 Presented by D. Richard McDonald drmcdonald@dykema.com 248-203-0859 California | Illinois | Michigan | Minnesota | North Carolina | Texas | Washington, D.C. www.dykema.com
  • 19. ADVERTISED PRIVATE PLACEMENTS PRACTICAL CONSIDERATIONS • SEC Integration concepts will require that all private offerings be carefully planned – If an issuer conducts a Rule 506(c) private offering using advertising or general solicitation, the issuer may not be able to conduct a Rule 506(b) traditional private offering for six months. • Special care should be given when drafting sales and advertising materials relating to the offering, as an untrue statement of a material fact or omission of a material fact necessary in order to make a statement made, in light of the circumstances, not misleading, could create Securities Act or Rule 10b-5 liability. 19 Exceptional service. Dykema delivers.
  • 20. PRACTICAL CONSIDERATIONS (CONT’D) • The issuer should establish a communications policy – Identify the officers permitted to speak and the “message” – The issuer should control when and where advertising/general solicitation occurs and what is said – If using a placement agent, discuss early on whether to use advertising and if it will be used, how and when • Consider what steps to verify may be necessary before proceeding with an advertised offering – Who will be targeted by the ads? – Who are potential investors? – Will the company have any information about the investors? – What is the cost of using a third party service? 20 Exceptional service. Dykema delivers.
  • 21. PRACTICAL CONSIDERATIONS (CONT’D) • Continue use of investor questionnaires as part of the process. • For individual investors, use of registered broker or investment advisor to collect information and certify accredited status would be sufficient. • For entity investors, consider verification methods that are similar to the individual safe harbor methods, or use public information filed with regulator, other reasonably reliable third party information or verification from other reliable third parties. • Comprehensive record keeping is critical. 21 Exceptional service. Dykema delivers.
  • 22. PRACTICAL CONSIDERATIONS (CONT’D) • Securities sold in a compliant advertised private offering are “covered securities” for purposes of state blue sky preemption – States generally will require a notice filing and fee. • Potential broker-dealer registration issues for individuals actively involved in multiple selling efforts when there is no registered intermediary participating. 22 Exceptional service. Dykema delivers.
  • 23. SAMPLE SOLICITATION METHODS • • • • • • • • • • Social media Internet Mass mailings Newspaper or magazine ads Billboards Bus sides Shipping containers Sky writing T-shirts worn by skyscraper window washers Others? 23 Exceptional service. Dykema delivers.
  • 24. SAMPLE SOLICITATION 24 Exceptional service. Dykema delivers.
  • 25. TRADITIONAL V. ADVERTISED PRIVATE OFFERINGS TRADITIONAL -- Rule 506(b) ADVERTISED – Rule 506(c) •No dollar limit •No limit on the number of accredited investors •Up to 35 non-accredited but sophisticated investors may purchase •General solicitation or advertising not permitted – Need pre-existing relationship •Securities are restricted from transfer •Certain information must be delivered if any non-accredited investors •“Traditional” accredited investor verification procedures – Self-certification may work •Record keeping important •No dollar limit •No limit on the number of accredited investors •No non-accredited investors are permitted to purchase •General solicitation and advertising expressly permitted – May approach anybody •Securities are restricted from transfer •No information delivery requirement imposed on issuer •Heightened accredited investor verification procedures – Self-certification not sufficient •Record keeping critically important 25 Exceptional service. Dykema delivers.
  • 26. TRADITIONAL V. ADVERTISED PRIVATE OFFERINGS (CONT’D) PROS OF RULE 506(C) OFFERING • Assured to reach a larger audience to solicit interest • Use social media or Internet • No limitations on what type of investor receives information • Easier for a company to try to raise money without paying a broker dealer • Better access to a larger universe of smaller investors CONS OF RULE 506(C) OFFERING •Issuer responsible that purchaser is an accredited investor •Issuers may prefer a targeted marketing approach driven by sensitivity about disseminating information about their company •Potential to waste time with investors that are not serious or do not fit the profile of opportunity •Don’t know what type of investor you are bringing into the capital structure 26 Exceptional service. Dykema delivers.
  • 27. TRADITIONAL V. ADVERTISED PRIVATE OFFERINGS (CONT’D) NO GENERAL SOLICITATION YES GENERAL SOLICITATION •Issuer is sensitive about disseminating private company information needed to make an investment decision •Issuer wants only serious investors to be considered – Leverage broker dealer’s relationships and knowledge of investor types •Issuer is raising capital for an asyet undisclosed strategic purpose or plan •Issuer wants to run a more controlled offering process •Smaller sized capital raises •Equity growth opportunities with lots of upside •Too small for investment banks •Companies that can’t attract large institutional capital providers – Poor financial results – Out of favor industry sectors – Early stage 27 Exceptional service. Dykema delivers.
  • 28. Rick McDonald is the Leader of Dykema’s Securities-Public Company practice area. His practice focuses on mergers and acquisitions, SEC matters, securities offerings and corporate finance transactions, with an emphasis on counseling public companies on all aspects of corporate governance as well as SEC reporting, disclosure and compliance. 248.203.0859 / DRMcDonald@dykema.com This presentation is for informational purposes only, and not for the purpose of providing legal advice. You should not consider any information in this presentation to be legal advice and should not act upon any such information without seeking professional counsel. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. 28 Exceptional service. Dykema delivers.
  • 29. Next Business Law & Order Program: Tax Planning January 20, 2014

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