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Public Solicitation of Private Offerings: Implications of the SEC’s Repeal of the Marketing Ban for Reg D Deals
1. Monthly
Webinar
Series
presents
Public
Solicitation
of
Private
Offerings:
Implications
of
the
SEC’s
Repeal
of
the
Marketing
Ban
for
Reg
D
Deals
July
25,
2013
Panelists
John
Hogoboom,
Partner,
Lowenstein
Sandler
LLP
Mark
Wood,
Partner
and
Co-‐Chair,
Securities
Practice
Group,
Katten
Muchin
Rosenman
LLP
William
Hicks,
Member,
Mintz,
Levin,
Cohn,
Ferris,
Glovsky
and
Popeo,
P.C.
Moderator
Brett
Goetschius,
Editor
and
Publisher,
Growth
Capital
Investor
2. Thank
you
for
participating
in
“Public
Solicitation
of
Private
Offerings:
Implications
of
the
SEC’s
Repeal
of
the
Marketing
Ban
for
Reg
D
Deals.”
This
manual
contains
information
you
will
need
for
this
webinar.
CONFERENCE
MANUAL
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manual
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Speaker
bio
and
contact
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submitting
questions.
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the
pages
of
Growth
Capital
Investor.
CONFERENCE
DETAILS
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July
25,
2013
at
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EDT,
1:00
p.m.
CDT,
12:00
p.m.
MDT,
and
11:00
a.m.
PDT.
It
will
last
90
minutes.
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Conference Manual Page 1
3. General Solicitation in Private Placements
MarketNexus Media – July 25, 2013
Conference Manual Page 2
4. 2
JOBS Act General Solicitation Provisions
Section 201(a) of the JOBS Act required the SEC to adopt final
rules on or before July 4, 2012 permitting widespread
advertising and other forms of “general solicitation” in private
offerings in reliance on Rule 506 under Regulation D or Rule
144A so long as all of the actual purchasers of the securities are
“accredited investors” (in the case of Regulation D) or “qualified
institutional buyers” (in the case of Rule 144A).
SEC failed to meet the required deadline.
On August 29, 2012, the SEC proposed amendments to Rule
506 of Regulation D and Rule 144A to implement the
requirements of Section 201(a).
Final rules adopted July 10, 2013.
Conference Manual Page 3
5. New General Solicitation Rules
New Rule 506(c) provides a new and separate exemption under
the Rule that permit issuers to use general solicitation and
general advertising to offer securities, provided that the issuer
takes reasonable steps to verify that all purchasers of the
securities are accredited investors.
Whether the steps taken by the issuer to verify the accredited
investor status of the purchasers are “reasonable” is an
objective determination, based on the particular facts and
circumstances of each offering and investor.
SEC has declined to mandate specific methods of verification;
however, the final rule sets forth several non-exclusive, non-
mandatory methods that may be used to verify the status of
individual accredited investors.
3
Conference Manual Page 4
6. Verification Procedures
Whether the verification steps taken are “reasonable” will
be an objective determination by the issuer (or those acting
on its behalf), considering the particular facts and
circumstances of each purchaser and transaction,
including, among other things:
– The nature of the purchaser and the type of accredited investor that
the purchaser claims to be.
– The amount and type of information that the issuer has about the
purchaser.
– The nature of the offering, such as the manner in which the
purchaser was solicited to participate in the offering, and the terms
of the offering, such as a minimum investment amount.
4
Conference Manual Page 5
7. Nature of the Person
SEC acknowledges that reasonable steps to verify the
accredited investor status of natural persons poses greater
practical difficulties as compared to other categories of
accredited investors.
Natural persons may be accredited investors based on
either a “net worth test” or an “income test.”
SEC recognizes that it may be more difficult for an issuer
to obtain information about a person’s assets and liabilities
than about a person’s income.
Potential privacy concerns.
5
Conference Manual Page 6
8. Purchaser Information
The more information an issuer has indicating that a
prospective purchaser is an accredited investor, the fewer
steps it would have to take to verify the purchaser’s status,
and vice versa.
If actual knowledge that purchaser is an accredited
investor, no additional steps required.
Verification examples:
– Publicly available information in filings with a federal, state or local
regulatory body.
– Third-party verification of a person’s status as an accredited
investor, provided that the issuer has a reasonable basis to rely on
such third-party verification.
6
Conference Manual Page 7
9. Natural Person Verification
Under the “income test,” an issuer may rely on any IRS form that
reports income of the purchaser for the two most recent years,
along with a written representation from the purchaser that he or
she has a reasonable expectation of reaching the necessary
income level during the current year.
Under the “net worth test,” an issuer may rely on certain
documentation disclosing the assets and liabilities of the
purchaser, dated within the prior three months:
– Assets -- bank statements, brokerage statements, certificates of deposit,
tax assessments and appraisal reports issued by independent third
parties;
– Liabilities -- a credit report from at least one of the nationwide consumer
reporting agencies, provided that purchaser represents in writing that all
liabilities necessary to make a determination of net worth have been
disclosed.
7
Conference Manual Page 8
10. Natural Person Verification
Under either test, issuers may rely on written confirmations
from broker-dealers, registered investment advisers,
licensed attorneys and/or CPAs that such entity or person
has taken reasonable steps to verify the purchaser’s
accredited investor status within the prior three months.
– Statements by others may also be acceptable if the party takes
reasonable steps to verify the purchaser’s accredited investor status
and the issuer has a reasonable basis to rely on that verification.
Issuers can verify existing investors who are natural
persons by having the person certify at the time of sale that
he or she qualifies as an accredited investor.
8
Conference Manual Page 9
11. Nature and Terms of the Offering
Issuers soliciting new investors from the general public (e.g.,
through a public website or a widely disseminated email) must
take additional steps to verify accredited investor status.
– Not sufficient for the issuer only to require that a person check a box in
a questionnaire or sign a form, absent other information about the
purchaser indicating accredited investor status
– Can’t rely solely on investor representations in subscription documents,
absent other information.
Issuers soliciting new investors from a database of pre-screened
accredited investors created and maintained by a reasonably
reliable third party may rely on the database as long as they
have a reasonable basis for doing so.
9
Conference Manual Page 10
12. Nature and Terms of the Offering
Minimum investment amount.
– If required minimum is sufficiently high that only accredited investors
could reasonably be expected to meet it, it may be reasonable for
the issuer to take no steps other than to confirm that the purchaser’s
investment is not being financed by the issuer or any other third
party.
– No specific SEC guidance as to what minimum investment level is
high enough.
Issuers may be able to check the accredited investor status
of potential investors with third-party services where the
services, rather than the issuers themselves, obtain
appropriate documentation or take other steps to verify
such status.
10
Conference Manual Page 11
13. Issuer Burden
Rule 506(c) continues to apply the “reasonable belief”
standard to the condition that all purchasers are accredited
investors.
Issuer has the burden of demonstrating that its offering is
entitled to an exemption.
– Issuers need to create and retain adequate records that document
the steps taken throughout the verification process.
– SEC intends to monitor the development of verification practices,
and will review the impact of compliance with the verification
requirement on investor protection and capital formation.
Verification process only one part of perfecting the Rule
506 exemption.
11
Conference Manual Page 12
14. Other New Changes
Rule 144A also amended to permit general solicitation so long as issuer reasonably
believes all purchasers are QIBs.
Consistent with the historical treatment of concurrent Regulation S and Rule 144A/
Rule 506 offerings, concurrent offshore offerings that are conducted in compliance
with Regulation S will not be integrated with domestic unregistered offerings that
are conducted in compliance with Rule 506 or Rule 144A.
Privately offered funds can make a general solicitation under amended Rule 506
without losing the ability to rely on Sections 3(c)(1) and 3(c)(7) of the Investment
Company Act, which provide commonly used exclusions from the definition of
“investment company”.
– However, due to concerns about investor protection, the SEC intends to monitor and study the
development of private fund advertising and review whether any further action is necessary.
SEC confirmed that securities issued in new Rule 506(c) offerings will be “covered
securities” for purposes of Section 18(b)(4)(E) of the Securities Act. As a result,
state blue sky registration requirements will not apply to securities offered and sold
in Rule 506(c) offerings.
12
Conference Manual Page 13
15. Bad Actor Disqualification
New Rule 506(d) precludes reliance on Rule 506 (subject to a reasonable care
exception) when a “covered person” has been the subject of a specified triggering
event.
“Covered Persons”
– the issuer and any predecessor or affiliated issuer;
– any director, executive officer, other officer participating in the offering, general partner or
managing member of the issuer;
– any beneficial owner of 20% or more of the issuer’s outstanding voting equity securities,
calculated on the basis of voting power;
– any investment manager of an issuer that is a pooled investment fund and any director, executive
officer, other officer participating in the offering, general partner or managing member of the
investment manager, as well as any director, executive officer or participating officer of any such
general partner or managing member;
– any promoter connected with the issuer in any capacity at the time of the sale;
– any person that has been or will be paid (directly or indirectly) remuneration for solicitation of
purchasers in connection with sales of securities in the offering (a “compensated solicitor”); and
– any director, executive officer, other officer participating in the offering, general partner, or
managing member of any compensated solicitor.
13
Conference Manual Page 14
16. Bad Actor Disqualification
New Rule 506(d) will apply if a covered person is subject to certain
disqualifying events, including:
– a criminal conviction within ten years before the proposed sale of securities (or
five years, in the case of issuers) in connection with the purchase or sale of any
securities, involving the making of any false filing with the SEC or arising out of
the conduct of the business of certain financial intermediaries;
– a court injunction or restraining order, entered within five years before the sale,
in connection with the purchase or sale of a security, the making of a false filing
with the SEC, or arising out of the conduct of certain types of financial
intermediaries;
– an SEC stop order or order suspending use of the Regulation A exemption
issued within five years before the sale;
– certain SEC cease and desist and disciplinary orders;
– a suspension or expulsion from membership in a self-regulatory organization
(“SRO”) or from association with an SRO member; and
– certain regulatory orders barring a covered person from certain associations or
that are based on fraudulent, manipulative or deceptive conduct and was issued
within 10 years of the proposed sale of securities.
14
Conference Manual Page 15
17. Bad Actor Disqualification
SEC waiver possible if:
– SEC determines that the issuer has shown good cause “that it is not
necessary under the circumstances that an exemption be denied.”
– Several factors noted that could be relevant in deciding whether to grant
a waiver, such as a change of control or a change of supervisory
personnel.
506(d) only relates to events occurring after the effective date of
the new rule.
– Issuer must provide investors written disclosure of prior events that
would have triggered disqualification.
– Applies to all offerings under Rule 506, regardless of whether the
purchasers are accredited investors.
– Must provide disclosure “a reasonable time prior to sale.”
– Failure to comply with this disclosure requirement could result in loss of
the exemption.
15
Conference Manual Page 16
18. New Rule Proposals
In addition to amending Rule 506 to add new paragraphs
(c) and (d), the SEC proposed a number of additional
changes to Regulation D, Form D and Rule 156.
Proposed changes intended to address concerns regarding
general solicitation and to permit the SEC to monitor
activity under Regulation D,
Proposed rules are subject to comment.
Unlikely to be effective before the effective date of new
Rules 506(c) and (d).
16
Conference Manual Page 17
19. Advance Filing and Updating of Form D
Rule 503 would be amended to require an issuer intending to engage in
general solicitation for a Rule 506(c) offering to file an initial Form D at
least 15 calendar days in advance of commencing any general solicitation
and to disclose certain information required by revised Form D.
The initial Form D would be required to be updated within 15 calendar
days after the date of first sale of securities in the offering, to update the
initial Form D and to provide additional information.
A final amendment would be required within 30 calendar days after the
termination of any offering conducted in reliance on Rule 506(b) or (c).
Until the termination amendment is filed, the offering would be deemed to
be ongoing, and the issuer would be subject to the current Rule 503
requirements to file amendments to Form D at least annually and
otherwise as needed to reflect changes in previously filed information.
SEC seeks comment on inadvertent general solicitation issue.
17
Conference Manual Page 18
20. Additional Form D Information
The proposal would amend Form D to require issuers to
provide additional information to enable the SEC to better
analyze the impact of general solicitation on the market for
Rule 506 offerings.
Also would increase information available to the SEC
regarding the overall use of the Rule 506 exemption.
18
Conference Manual Page 19
21. Penalties for Failure to File Form D
SEC proposes to amend Regulation D to disqualify an issuer from
using Rule 506 in any new offering if the issuer, or any predecessor or
affiliate of the issuer, did not comply, within the past five years, with the
Form D filing requirements in a Rule 506 offering.
– Five-year look-back period would not apply to offerings prior to the effective date
of the proposed amendment.
– The disqualification period would end one year after the filing of all required
Form D filings in connection with each offering conducted in reliance on Rule
506.
– Failure to comply with the filing requirements for a particular offering that has
been completed or is ongoing would not jeopardize the availability of the
exemption for that offering, as long as the conditions of Rule 506 continue to be
met.
Rule would permit a 30-day cure period for the failure to timely file a
Form D or Form D amendment.
– available only once per offering.
SEC waiver possible.
19
Conference Manual Page 20
22. General Solicitation Materials
New Rule 509 would require an issuer to include specified
legends in all written general solicitation materials used in a Rule
506(c) offering.
Compliance with the proposed legend requirements wouldn’t
affect issuer requirement to take reasonable steps to verify that
purchasers in a Rule 506(c) offering are accredited investors.
The legend and other disclosure requirements of proposed Rule
509 would not be conditions to the Rule 506(c) exemption.
Proposal would disqualify an issuer from relying on Rule 506 in
subsequent offerings if the issuer, or any of its predecessors or
affiliates, has been subject to any court order enjoining non-
compliance with proposed Rule 509.
20
Conference Manual Page 21
23. Submission of General Solicitation Materials
New Rule 510T would require an issuer conducting a Rule 506(c) offering
to submit to the SEC any written general solicitation materials prepared by
or on behalf of the issuer and used in connection with the offering.
– Materials would have to be submitted to the SEC no later than the date of first use.
– Materials submitted would not be treated as “filed” or “furnished” for purposes of the
Securities Act or the Exchange Act, including the liability provisions thereof
– Submitted materials would not be made publicly available.
SEC does not intend that submitted materials would be subject to the staff
review and comment process.
SEC expects that the temporary rule would expire two years after its
effective date.
Submission requirement would not be a condition to the Rule 506(c)
exemption.
– issuer would be disqualified from relying on Rule 506 in subsequent offerings if it or
any of its predecessors or affiliates has been subject to any court order enjoining non-
compliance with proposed Rule 510T.
21
Conference Manual Page 22
24. Private Funds
Private funds making an offering under Rule 506(c) would be required to include
additional disclosures in their written general solicitation materials.
– Any performance data provided would have to be given as of the most recent practicable date.
– If performance data do not reflect the deduction of fees and expenses, the disclosure would have
to state that fees and expenses have not been deducted and that performance may have been
lower than presented had such fees and expenses been deducted.
SEC proposes to extend Rule 156 (which provides guidance on manipulative
practices) to apply to all sales literature used by private funds, whether in offerings
under Rule 506(c) or otherwise.
– Sales literature would include any communication used by any person to offer to sell or induce the
sale of securities of any investment company or private fund.
SEC has asked for comment on whether additional restrictions on private fund
offerings are necessary in connection with Rule 506(c) offerings by private funds
– Use of performance data
– Should the SEC impose standardized calculation methodologies.
22
Conference Manual Page 23
25. Legal Disclaimer
Although this presentation may provide information
concerning potential legal issues, it is not a substitute
for legal advice from qualified counsel. The
presentation is not created or designed to address the
unique facts of circumstances that may arise in any
specific instance, and you should not and are not
authorized to rely on the contents of this presentation
as a source of legal advice and this presentation
material does not create any attorney-client
relationship between you and Lowenstein Sandler LLP.
23
Conference Manual Page 24
26. Legal Disclaimer
Although this presentation may provide information
concerning potential legal issues, it is not a substitute
for legal advice from qualified counsel. The
presentation is not created or designed to address the
unique facts of circumstances that may arise in any
specific instance, and you should not and are not
authorized to rely on the contents of this presentation
as a source of legal advice and this presentation
material does not create any attorney-client
relationship between you and Lowenstein Sandler LLP.
23
Conference Manual Page 25
27. SPEAKER
BIOS
AND
CONTACT
INFORMATION
John
D.
Hogoboom
is
a
founding
member
of
the
Lowenstein
Sandler
Specialty
Finance
Group
and
is
co-‐chair
of
the
Life
Sciences
Group.
He
specializes
in
representing
clients
in
the
life
sciences
and
other
industries
in
mergers
and
acquisitions,
public
and
private
securities
offerings,
private
equity
investments
and
general
corporate
and
securities
law.
Mr.
Hogoboom
is
listed
inThe
Best
Lawyers
in
America
in
the
2007-‐2012
editions
of
the
publication,
in
both
the
corporate
law
and
securities
law
categories.
CONTACT
John
D.
Hogoboom
Founding
Member,
Specialty
Finance
Group
Lowestein
Sandler
LLP
646-‐414-‐6846
jhogoboom@lowenstein.com
Conference Manual Page 26
28.
Mark
D.
Wood
is
head
of
Katten
Muchin
Rosenman's
securities
practice
and
concentrates
in
corporate
and
securities
law.
He
represents
public
companies,
issuers
and
investment
banks
in
initial
public
offerings
(IPOs)
and
other
public
offerings,
private
investment
in
public
equity
(PIPE)
transactions,
debt
securities
and
other
securities
matters.
Mr.
Wood
is
a
leading
practitioner
in
representing
investors,
public
companies
and
placement
agencies
in
PIPE
transactions.
CONTACT
Mark
D.
Wood
Head,
Securities
Practice
Katten
Muchin
Rosenman
312-‐902-‐5493
mark.wood@kattenlaw.com
Conference Manual Page 27
29.
William
Hicks
is
a
Member
with
Mintz
Levin
Cohn
Ferris
Glovsky
and
Popeo.
He
has
extensive
experience
representing
placement
agents
and
underwriters
in
structuring
and
executing
initial
public
offerings,
alternative
public
offerings,
including
reverse
mergers,
Form
10/Resale
S-‐1
club
deals
and
confidentially
marketed
IPOs,
Confidentially
Marketed
Public
Offerings
(CMPOs),
registered
directs,
PIPEs
and
private
placements.
Mr.
Hicks
represents
venture
capital
firms
and
private
equity
firms
in
customized
investments
in
public
companies,
including
structured
PIPEs
and
registered
directs.
CONTACT
William
Hicks
Member
Mintz
Levin
Cohn
Ferris
Glovsky
and
Popeo
617-‐348-‐1799
WCHicks@mintz.com
Conference Manual Page 28
30. Vol. II Issue 13 The Journal of Emerging Growth Company Finance July 15, 2013
Repeal of General Solicitation Ban
Brings New Era for Private Offerings
by Brett Goetschius
L
ast week’s long-anticipated repeal of the ban on public advertising of
private securities offerings either ushers in a new era of transparent, in-
formation-rich, digitally-greased, and crowd-vetted capital markets, or
it is a leap into the abyss that will pervert the most trusted capital markets in
the world into a carnival midway of investment hustlers, crowd madness pan-
derers and common thieves. That seems to be the consensus, or lack thereof, of
regulators and growth capital professionals surveyed in the wake of the SEC’s
action to implement the mandate set by Congress a year ago when it passed
the JOBS Act.
On July 10, the Securities and Exchange Commission held an open meet-
ing regarding its nine-month old proposal to repeal the ban on the advertis-
ing and general solicitation of Regulation D securities offerings. Although the
amendment, known as Rule 506(c), was ultimately adopted, concerns regard-
ing investor protection were raised by two commissioners, Elisse Walter and
Luis Aguilar.
Walter’s concerns about the risks of fraud and the promotion of invest-
ments inappropriate to less sophisticated investors came short of persuading
her to vote against the repeal. Aguilar was blunter in his criticism, decry-
ing the Commission’s move to repeal the ban before approving additional
Energy Exploration,Medical
Device Growth EPP Issuers Buck
Post-Deal Price Drops in Q2
by Joe Gose
T
he stock market’s bull run in the first half of 2013 that pushed the
Dow Jones Industrial Average and Standard & Poor’s 500 indexes to
all time highs failed to influence initial investor reaction to growth
equity private placements (EPPs).
Looking at stock price performance on an industry-by-industry basis, in-
vestors largely sold on the news of a private deal, and sentiment three days after
announcement was frequently more pessimistic than the response over the first
half of 2013, according to analysis by Growth Capital Investor.
Additionally, transaction activity slowed from a year earlier while the
IN THIS ISSUE
Sponsored Deals Recovering
from Slow Q1
After a slow 2013 first quarter,sponsored growth
equity private placements – deals taken by
long-onlyfundamentalinvestors–generatedmore
deals and more dollars in the second quarter....2
Rollup King Returns to SPAC Market
Jonathan Ledecky is making a big bet investing in
mobile advertising...............................................3
Judge LimitsYuhe Investor Suit
Against Underwriters
Underwriters of a $40 million secondary offering
from chicken breeder Yuhe International fight-
ing investor suit in alleged $12 million diversion
scheme................................................................4
ALSO INSIDE
Former Deephaven Manager Launches New Fund;
FINRA Readies Crowdfunding Portal Rules for
Comment;Oramed Pharm Raises $4.6M viaAegis;
OakRidgeMicro-EnergyRaises$2.5MfromPrecept
Fund,Insiders;other stories and deals of note.....5
EPP, PIPE & APO MARKET DATA
AggregateYear-to-Date MarketActivity...............9
Deal Performance – Growth Capital EPPs..........11
Growth Capital EPP Candidates........................15 See Repeal on page 13
See Q2 on page 16
Growth Capital Investor
Growth Equity Private Placement Activity
Source: PlacementTracker, a service of Sagient Research.
April data thru 7/15/13.
Investment ($B) Deals
0
$0.5
$1.0
$1.5
$2.0 billion
Feb. Mar. Apr. May June July*
2013
31
48
40
50
53
12
Conference Manual Page 29