On December 18, 2013, the Securities and Exchange Commission (“SEC”) voted to propose amendments to its public offering rules to exempt an additional category of small capital raising efforts as mandated by Title IV of the Jumpstart Our Business Startups Act (the “JOBS Act”). The SEC has proposed to amend Regulation A to exempt offerings of up to $50 million within a 12-month period, and in so doing has created two tiers of offerings under Regulation A: Tier 1, for offerings of up to $5 million in any twelve-month period, and Tier 2, for offerings of up to $50 million in any twelve-month period. Rules regarding eligibility, disclosure and other matters would apply equally to Tier 1 and Tier 2 offerings and are in many respects a modernization of the existing provisions of Regulation A. Tier 2 offerings would, however, be subject to significant additional requirements, such as the provision of audited financial statements, ongoing reporting obligations and certain limitations on sales.
Posts Tagged ‘Securities Act’
Today [Oct. 23, 2013], the Commission is proposing new rules to implement Title III of the JOBS Act, which exempts qualifying crowdfunding transactions from the registration and prospectus delivery requirements of the Securities Act. The new Regulation Crowdfunding is expected to be used primarily by small companies. As is well known, although personal savings is the largest source of capital for most start-ups, external financing is very important to many small and medium-sized businesses. Unfortunately, as is also well known, many small businesses have difficulty finding external capital. It is worth noting that the need for outside investment is even greater among minority entrepreneurs, who tend to have lower personal wealth than their non-minority counterparts.
Supporters of crowdfunding believe that it may offer a potential solution to the small business funding problem. Observers point to the success of existing crowdfunding services around the world, which raised almost $2.7 billion in 2012, an increase of more than 80% from the prior year.
Section 5 of the Securities Act of 1933 is slowly dying. We have to be careful about making such a bold-sounding claim because Section 5 performs two distinct legal functions. First, it creates a presumption that offerings of securities using the facilities of interstate commerce have to be registered with the Securities and Exchange Commission. That is not the aspect of Section 5 that concerns us here, however. Our aim in our current research is entirely at the separate function that takes up most of Section 5’s statutory text: restraining the marketing of registered public offerings so that salesmanship does not run ahead of the mandatory disclosure that is supposed to inform investor decisions of whether to buy or not, often referred to as “gun-jumping.” This is a devolution we find interesting and insufficiently examined in legal scholarship. Our focus is entirely on the IPO, the paradigmatic form of issuer capital-raising, and not offerings by seasoned issuers.
We describe this as a slow death because it began almost as soon as the Act was passed. Section 5 started as a simple, rigid and coherent rule that limited sales efforts after the SEC had declared the registration statement “effective.” The industry found this impracticable and to some extent just ignored it, setting in motion two decades of negotiations as to a proper balance between the demand for pre-effective marketing and the concerns about gun-jumping. A legislative compromise, eventually reached in 1954, gave us the statutory language that is mostly still with us today.
FINRA has proposed a trade-reporting rule change that would result in the public dissemination of secondary market transactions in corporate debt securities sold under Securities Act Rule 144A. If adopted, this change could affect secondary market transactions in a number of assets classes, including high-yield debt securities.
On July 8, 2013, the US Financial Industry Regulatory Authority, Inc. (“FINRA”) submitted an amendment to its Rule 6750 to the Securities and Exchange Commission (“SEC”). If adopted, the amendment would allow FINRA to disseminate information on transactions effected pursuant to Rule 144A under the Securities Act of 1933 (“Rule 144A”) through the Trade Reporting and Compliance Engine (“TRACE”), the principal trade-reporting system for fixed-income securities. The proposed amendment would allow FINRA to disseminate information regarding secondary transactions effected pursuant to Rule 144A. It would not require the reporting of primary transactions.
On July 10, 2013, the U.S. Securities and Exchange Commission (the “SEC”) approved final rules that eliminate the prohibition against general solicitation and general advertising (collectively referred to herein as “general solicitation”) in certain offerings of securities pursuant to Rule 506 of Regulation D (“Reg D”) and Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The SEC also approved final rules disqualifying felons and other “bad actors” from Rule 506 offerings, and proposed related amendments to Reg D, Form D and Rule 156 under the Securities Act. The final rules become effective 60 days after publication in the Federal Register (with an estimated effective date of September 13, 2013). The proposed amendments will be open for comment for a period of 60 days after publication.
I. Rules Permitting General Solicitation in Private Offerings
The final rules create a new form of offering under Rule 506(c) that permits issuers to use general solicitation in connection with the sale of securities in private placements if: (i) the purchasers of all securities are “accredited investors;”  and (ii) the issuer takes reasonable steps to verify that the purchasers are accredited investors. The new rules leave intact Section 4(a)(2) of the Securities Act (which exempts from registration transactions by an issuer “not involving any public offering”) and existing Rule 506(b) (which provides a safe harbor under Section 4(a)(2) for offerings conducted without general solicitation).
Although new Rule 506(c) allows for the use of advertising in connection with fundraising activities, there are certain limitations for private funds relying on Rule 506(c):
At long last, the U.S. Securities and Exchange Commission (SEC) took action July 10, 2013 to implement rules that complied with the JOBS Act mandate to relax the prohibition against general solicitation in certain private offerings of securities. The original SEC proposal from August 2012, proposing amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act, had drawn significant comments. The final rule, as well as the SEC’s proposed rules relating to private offerings discussed below, are likely to generate additional commentary. One might say that the July 10, 2013 webcast of the SEC’s open meeting provided a glimpse into the too-hot/too-cold Goldilocks-type debate that will continue to play out over the next few months regarding the appropriate balance between measures that facilitate capital formation and investor protection provisions.
In addition to promulgating rules to relax the ban on general solicitation, which will have a significant market impact, the SEC also adopted the bad actor provisions for Rule 506 offerings that it was required to implement pursuant to the Dodd-Frank Act. The bad actor proposal had been released in 2011, and SEC action had been anticipated on the bad actor proposal for some time. The SEC also approved a series of proposals relating to private offerings that are intended to safeguard investors in the new world of general advertising and general solicitation. All told, will these measures encourage or discourage issuers and their financial intermediaries from availing themselves of the opportunity to use general solicitation? Will this new ability to reach investors with whom neither the issuer nor its intermediary have a pre-existing relationship create serious investor protection concerns? Will the proposed investor protection measures be sufficient to address the concerns of consumer and investor advocacy groups, or will we ultimately see revamped investor accreditation standards?
Below we provide a very brief summary of the July 10, 2013 actions.
Last week, the United States Court of Appeals for the Sixth Circuit held that a claim alleging a false statement of opinion or belief in a registration statement may proceed under Section 11 of the Securities Act notwithstanding the absence of allegations showing that the defendants did not actually hold the opinion or believe the statement. Indiana State District Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc., (6th Cir. May 23, 2013). The Sixth Circuit’s decision conflicts with decisions of the Second and Ninth Circuits holding that liability under Section 11 for a statement of belief or opinion would exist only if the statement was both objectively and subjectively false or misleading. See Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011); Rubke v. Capital Bancorp Ltd., 551 F.3d 1156 (9th Cir. 2009). Under that standard, a Section 11 complaint that fails to plausibly allege that a defendant did not actually believe the false statement or hold the opinion would be dismissed.
The SEC staff for the first time issued interpretive guidance regarding Section 402 of the Sarbanes-Oxley Act of 2002 (SOX). To date, in the absence of authoritative guidance, issuers have largely steered clear of activities arguably within the ambit of SOX 402′s prohibition on personal loans to officers and directors. The staff’s new letter provides a measure of clarity regarding SOX 402′s scope.
SOX 402, codified as Section 13(k) of the Securities Exchange Act of 1934, makes it unlawful for an issuer “directly or indirectly … to extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loan” to any of its directors or executive officers. Violations of SOX 402 can subject issuers to civil and criminal penalties under Sections 21B and 32(a) of the Exchange Act.
On September 6, 2012, the United States Court of Appeals for the Second Circuit issued an important decision in NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 11-02762-cv (Sept 6, 2012) (“NECA-IBEW”), vacating in part the dismissal of a putative class action brought under §§ 11, 12(a)(2) and 15 of the Securities Act by an RMBS purchaser. The decision includes important holdings concerning both standing in the class action context and the standard for pleading a cognizable injury under the Securities Act. First, the Court ruled that, in some defined circumstances, purchasers of RMBS certificates have standing to assert claims on behalf of purchasers of certificates in other offerings. Second, the Court held that holders of a security need not allege an out-of-pocket loss to adequately plead damages under Section 11.
The financial press and blogs were abuzz in late January 2012 about the Securities Act of 1933 (Securities Act) registration statement filed by The Carlyle Group L.P. for its initial public offering. Its limited partnership agreement required all shareholder disputes with the partnership to be resolved by mandatory, binding and confidential arbitration. The provision included a prohibition against shareholders bringing class actions. Much of the discussion that was critical of the provision focused on the elimination of class actions and not on the pros and cons of arbitration as such.
According to published reports, the SEC advised Carlyle that it would not grant an acceleration order permitting the registration statement to become effective unless the arbitration provision was withdrawn. As a practical matter, Carlyle had no means to challenge the Commission and no practical alternative other than to withdraw its arbitration provision, which it did.
I object to the process by which the SEC killed Carlyle’s arbitration provision.