Securities Law

Archive for April 2012

Posted on Monday, April 30 2012 at 9:00 am by

ABA Federal Regulation of Securities Committee Comments on JOBS Act

The ABA Committee on Federal Regulation of Securities submitted a comment letter in response to the SEC’s invitation for comments on JOBs Act rulemaking prior to the SEC’s publication of formal rule proposals. The letter addresses the elimination of general solicitation and general advertising restrictions in connection with Rule 506 and Rule 144A transactions and can be found here.

Comment 2 is the most interesting, which is: 

“In setting forth the reasonable steps to be taken to verify that purchasers of the securities offered by means of general solicitation or general advertisement in Rule 506 offerings are accredited investors, the proposed rules should reflect current custom and practice.”

The translation is that issuers should not be required to ask for tax returns or balance sheets or do anything more than current practice when verifying accredited investor status, which is to ask the purchaser to check the box indicating how accredited status is achieved (and not to have information indicating that this claim is not true). Interesting how the authors take great care not to expressly say that.

Posted on Tuesday, April 24 2012 at 9:00 am by

The JOBS Act: What to Expect from the Not-So-Private Private Placement Regulations

One of the most significant provisions of the Jumpstart Our Business Startups Act (the “JOBS Act”), which was signed into law by President Obama on April 5, 2012, is the removal of the prohibition on general solicitation and advertising for securities offerings made pursuant to Rule 506 of Regulation D under the Securities Act of 1933 (“Rule 506 Offerings”) – so long as sales are made only to accredited investors.

This loosening of the most fundamental restriction on Rule 506 Offerings, which effectively takes the “private” out of “private placement”, is expected by many to have a much greater impact on small business capital formation than the headline-grabbing crowdfunding provisions of the JOBS Act. This is because the crowdfunding provisions only allow for relatively small offerings and impose a fairly complex and potentially burdensome regulatory scheme. The elimination of advertising prohibitions for Rule 506 Offerings, on the other hand, is a simple change with immediate impact because it will allow for Rule 506 Offerings to be broadcast to an unlimited number of investors for an unlimited amount of money so long as sales are made only to accredited investors.

Many unanswered questions remain regarding how the Securities and Exchange Commission (the “SEC”) will amend its regulations governing Rule 506 Offerings. The JOBS Act amendments to Rule 506 Offerings will not take effect until implemented by SEC rulemaking, which the statute directs the SEC to adopt within 90 days. However, the SEC staff is currently inundated with implementing regulations regarding the provisions of the JOBS Act that were effective upon its enactment. SEC action on the provisions of the JOBS Act that are only effective upon further SEC rulemaking, such as the elimination of the advertising ban on Rule 506 Offerings, are likely to be delayed. In addition, the substantial SEC rulemaking backlog resulting from the Dodd-Frank Act (not to mention the statement by SEC Chairman Schapiro prior to enactment of the JOBS Act that many of the rulemaking timelines in the JOBS Act would “not be achievable”), make it clear that the 90-day rulemaking deadlines in the JOBS Act will be extremely difficult for the SEC staff to meet.

The following are some of the Rule 506 Offering-related issues that we would like the SEC to address in its rulemaking:

Could One Non-Accredited Buyer Destroy the Exception? The statute states that all purchasers of the Rule 506 Offering must be accredited investors; but, in the next sentence, mandates that the SEC’s rules require the issuer to take “reasonable steps to verify that purchasers of the securities are accredited investors”. It is unclear whether the SEC will permit any flexibility from the literal reading of the statute that all investors must, without exception, be accredited investors. Many believe that the applicable standard for reliance upon the new Rule 506 Offering rule should be that the issuer “reasonably believes” that all investors in the offering are accredited investors, despite the fact that the plain language of the statute does not seem to provide any room for error. Unfortunately, it is not clear that the SEC has the authority to implement this view, even if it were so inclined.

What Constitutes “Reasonable Steps” to Verify that Investors are Accredited Investors?The JOBS Act requires the SEC’s amendment to Rule 506 to address what constitutes reasonable steps to verify accredited investor status. A big question is whether the SEC rules will change the existing practices of private placement issuers in determining that their purchasers are accredited investors. Private placement issuers have traditionally sought little more than a representation from the buyer that he, she or it qualifies as an accredited investor under one or more definitions, with no further information being required. In a context where potential purchasers may have been secured by broad advertisements on the Internet and have no prior relationships with the issuer, the SEC may require some greater amount of information regarding a potential investor’s financial condition – but how much more, if any, information is a big unknown.

Will There be Two Types of Rule 506 Offerings? The new regime may result in two types of Rule 506 Offerings – one where general solicitation is allowed but sales can only be made to accredited investors, and another where general solicitation is prohibited but sales can be made to up to 35 non-accredited investors (the existing Rule 506). It is unclear whether the new rules will require issuers to elect between the two types of offerings in advance, or whether issuers will be allowed to take the most favorable position after the offering. This has led some to question whether the SEC may ultimately eliminate the safe harbor for Rule 506 Offerings made to non-accredited investors.

Will Rule 506 Offerings be Integrated with Crowdfunding Offerings?There is language in the crowdfunding provisions of the JOBS Act suggesting that crowdfunding offerings should not be considered as one offering, i.e., “integrated”, with Rule 506 Offerings even if they occur at the same time. But this language is far from clear, which raises a major uncertainty because the two types of offerings have inconsistent requirements. Rule 506 Offerings must be sold only to accredited investors, while a crowdfunding offering would likely sell to many (if not mostly) non-accredited investors. A crowdfunding offering must be conducted through a financial intermediary, which is not required for a Rule 506 Offering and in many cases would not be done. The result is that these two types of offerings are effectively mutually exclusive. Without clarification in the upcoming SEC rules that they are not to be integrated, issuers might have to space these types of offerings at least six months apart to take advantage of the existing integration safe harbor. This result would decrease the usefulness of the two new means of private capital raising in the JOBS Act.

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Although the JOBS Act directs the SEC to amend Rule 506 within 90 days, existing rules will remain in effect until they are amended by the SEC. Kilpatrick Townsend will provide further updates regarding Rule 506 Offerings and other aspects of the JOBS Act on an ongoing basis as more information becomes available.

Posted on Wednesday, April 18 2012 at 9:00 am by

SEC Solicits Comments on JOBS Act Rulemaking Ahead of Publishing Proposed Rules

The SEC has posted an invitation for interested parties to provide preliminary comments regarding the rulemaking it must conduct in connection with the JOBS Act. While it is not common practice for the SEC to solicit public comments before it has actually promulgated proposed rules, it is not unprecedented either—it employed the same process in connection with its substantial rulemaking responsibilities under the Dodd-Frank Act. Interested parties will also have an opportunity to comment on JOBS Act rules during the formal comment period after publication of proposed regulations in the Federal Register. The preliminary comments can be submitted electronically here.

Please contact us if you would like assistance in submitting comments.

Posted on Monday, April 16 2012 at 9:00 am by

SEC Interprets JOBS Act Changes to Registration and Deregistration Requirements

On April 11, 2012, the SEC issued guidance, in the form of Frequently Asked Questions (FAQs), on the implementation of changes to Securities Exchange Act of 1934 (Exchange Act) registration and deregistration standards as a result of the passage of the Jumpstart Our Business Startups (JOBS) Act. We recently described the changes to the federal securities laws effected by the passage of the JOBS Act in our Alert issued on April 5, 2012.

As described in our Alert, the JOBS Act raised the threshold for the number of holders of record that trigger registration under Section 12(g) of Exchange Act (and the corresponding requirement to become a public reporting company) from 500 or more persons to either 2,000 or more persons or 500 or more persons who are not accredited investors. For bank holding companies, the registration threshold has been increased to 2,000 or more holders of record. The JOBS Act changed the way the number of record holders is calculated by permitting exclusion of employees who acquire their shares through an employee compensation plan that is exempt from the registration requirements of the Securities Act of 1933. The JOBS Act also amended the Exchange Act to permit bank holding companies to terminate registration under the Exchange Act (and suspend its obligation to file annual and quarterly reports) once it has fewer than 1,200 holders of record. The standards for a company to terminate registration or suspend reporting obligations under the Exchange Act were not changed for other issuers.

Registration
If an issuer, including a bank holding company, triggered a Section 12(g) registration obligation with respect to a class of equity security as of a fiscal year-end before April 5, 2012 but would not trigger such obligation under the amended holders of record threshold contained in the JOBS Act, the SEC FAQs clarify that it will implement the JOBS Act as follows:

  • If the issuer has not yet registered that class of equity security under Section 12(g), then the issuer is no longer subject to a Section 12(g) registration obligation with respect to that class.
  • If the issuer has filed an Exchange Act registration statement and the registration statement is not yet effective, then the issuer may withdraw the registration statement.
  • If the issuer has registered a class of equity security under Section 12(g), it would need to continue that registration unless it is eligible to deregister under Section 12(g) or current rules.

The SEC also advised that an issuer (including a bank holding company) now may exclude from the calculation of holders of record persons who received securities pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act of 1933, regardless of whether the person is a current employee of the issuer, notwithstanding that the SEC has not yet issued rules revising its definition of “held of record.”

Deregistration
The SEC’s FAQs make clear that the new, higher deregistration threshold for bank holding companies is effective immediately. The SEC advised that if a class of equity security of a bank holding company is held of record by less than 1,200 persons, the bank holding company may file a Form 15 to terminate the Section 12(g) registration of that class effective 90 days after filing. Because Form 15 hasn’t been revised to reflect the new deregistration threshold, a bank holding company should include an explanatory note in its Form 15 indicating that it is relying on revised Exchange Act Section 12(g)(4) to terminate its duty to file reports with respect to that class of equity security.

Separate from the public reporting requirements under Section 12(g) that apply based on the number of record holders of an issuer, when an issuer has a registration statement under the Securities Act of 1933 that has become effective, Section 15(d) of the Exchange Act requires the issuer to file quarterly and annual reports with respect to each class of securities covered by the registration statement. The SEC’s FAQs makes clear that the new, higher deregistration threshold also applies to suspension of reporting obligations under Section 15(d) of the Exchange Act, which is effective immediately upon filing.

Because the regulations regarding termination of registration are complex, and because many bank holding companies have outstanding registration statements on Form S-3 (shelf registrations) or Form S-8 (relating to employee benefit plans) that would require continued public reporting, bank holding companies should consult with counsel before terminating SEC registration.

Posted on Friday, April 6 2012 at 9:00 am by

SEC Publishes Guidance Regarding Confidential Pre-IPO Registration Statement Submissions

One of the advantages of “emerging growth company” status (see our April 5, 2012 posting) is the ability to submit draft registration statements confidentially to the SEC for initial review, provided that (1) the issuer has not yet sold common stock in an SEC-registered IPO and (2) the draft registration statements and all amendments thereto are publicly filed at least 21 days prior to any “road show”. This process is available not just for a common stock IPO registration statement itself, but also for any pre-IPO registration statements an emerging growth company may wish to file, including, for instance, a Form S-4 registration statement offering to exchange privately placed debt securities for substantially identical SEC-registered debt securities (traditionally called an “Exxon Capital” or “A/B” exchange offer).

The SEC has published guidance on how to make a confidential submission, which includes instructions to submit the draft registration statement in a text searchable PDF format on a CD/DVD, or alternatively, in unbound paper format. Click here to view.  

Another significant advantage of the confidential submission process—no SEC filing fee with the initial submission.

Posted on Thursday, April 5 2012 at 9:00 am by

New JOBS Act Facilitates Private and Public Capital Formation

The President is expected to sign into law this week the new Jumpstart Our Business Startups (JOBS) Act, which ushers in a series of reforms to facilitate capital formation by startups and other small or emerging enterprises by easing securities law compliance requirements. The principal reforms range from expanding sales techniques for certain private placements, to simplifying initial public offerings for “emerging growth companies”, to reducing some of the ongoing compliance obligations for emerging growth companies during the early stage of status as a public company.

Although a few provisions of the JOBS Act are self-effectuating from its effective date, the JOBS Act requires substantial rulemaking by the Securities and Exchange Commission (“SEC”) for full implementation of its reforms. Given the substantial SEC rulemaking backlog (much of which relates to required actions under the Dodd-Frank Act), the rulemaking timelines in the JOBS Act will be extremely difficult to meet.

This Legal Alert discusses the key practical implications of the JOBS Act’s principal reforms, assuming implementation by the contemplated SEC rulemaking.

….to read the rest of this article, please select this link.

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