Capital Raising in US: Do s and Don ts on Solicitation Activities for Australian Fund Managers

Transcription

1 Capital Raising in US: Do s and Don ts on Solicitation Activities for Australian Fund Managers AIMA Australia Education Forum Sydney, Australia (February 2016) Presented by Peter J. Bilfield, Partner, Shipman & Goodwin LLP HARTFORD STAMFORD GREENWICH NEW HAVEN NEW YORK WASHINGTON, DC

2 Key Elements of Conducting a Private Offering in the United States BACKGROUND ON RULE 506(B) SAFE HARBOR FROM REGISTRATION 2

3 Private Placements General Rule: Each Offer and Sale Must be Registered with SEC, Unless Exempt Includes sale and resale Applies to securities previously sold in registered offering Statutory Exemption: Section 4(a)(2) of Securities Act - Transactions by an issuer not involving any public offering Case law driven (some uncertainty) No federal preemption for Section 4(a)(2) offerings 3

4 Safe harbor under Regulation D Regulation D Safe Harbors: 3 Rules Providing Safe Harbor Exemption from Registration Requirement Rule 504 and 505 Exemptions have, among other things, significant capital raise size limitations ($1 million and $5 million, respectively) and are not covered securities under Section 18 of Securities Act, thus not exempt from state blue sky registration laws Rule 506 is most widely used (approx. 99% of capital raised under Reg. D from ) See SEC Division of Economic and Risk Analysis Study July 2013 No dollar limitation 4

5 Rule 506 Key Elements Explanation of Safe Harbor: Deemed not to be transactions involving any public offering Key Elements: Must satisfy terms and conditions of Rules 501 and 502 Rule US investors must be accredited investors Unlimited number (See Rule 501(e) for definition and calculation of number of purchasers) issuer must reasonably believe investor falls into AC categories at time of investment Up to 35 Non-Accredited Investors subject to public reporting disclosure under Rule 502 5

6 Rule 506 Key Elements (continued) Rule 502 (1) sales made as part of same Reg D offering must meet all terms of Regulation D; (2) neither issuer nor anyone acting on its behalf may offer/sell securities by form of general solicitation or general advertising; and (3) Issuer takes reasonable care to assure purchasers are not underwriters within Section 2(a)(11) of Act Reasonable Inquiry Investors are purchasing for own account and not distributing to other persons Notice to investors/ legend on certificates Securities not registered under Securities Act and may not be resold unless registered or exempt Issuer will file a Form D with the SEC within 15 days of first closing 6

7 Rule 506 Bad Actor Bad Actor Disqualification: Issuer complies with requirements of Rules 506(d) and (e) otherwise the Safe Harbor not available. No safe harbor if any covered persons have engaged in certain disqualifying events (U.S. scienter based securities violations look back 5 or 10 years) Covered Persons issuer, directors, officers and other participants in offering and GPs of issuer, promoters, 20% beneficial owners who have voting power and/or investment power and solicitors (and their officers, directors, etc.) Disqualifying events prior to Sept. 23, 2013: Requires timely written disclosure but will not prevent issuer from relying on 506 if it did not know and in the exercise of reasonable care could not have known about disqualifying event 7

8 Rule 506 Bad Actor (continued) Practice Tips Create matrix of relevant issuer participants in offering who must complete bad actor questionnaire Secure and execute 20% beneficial owner/participant questionnaires Verify no pre Sept violations Annual bring-downs for continuous offerings 8

9 Key Elements of Conducting a Private Offering in the United States WHAT COMMUNICATIONS CONSTITUTE A GENERAL SOLICITATION 9

10 A General Solicitation Background Rule 502(c) provides that neither the issuer nor any person acting on its behalf shall offer/sell securities by any form of general solicitation or general advertising, including, but not limited to: (1) any advertisement, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and (2) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising Limitations apply to brokers or anyone else involved in effort to sell securities Pre-existing relationship needed - general communications to investors only where issuer has a pre-existing relationship sufficient to enable investment qualifications (established through series of no-action letters) Seminal Case for determining General Solicitation - Lamp Technologies Inc. 10

11 GS Background (continued) Seminal Case for determining General Solicitation - Lamp Technologies Inc. (May 1997) Lamp Technologies Inc. No enforcement action for posting information relating to private funds on its website (password protected) not a general solicitation if: Accredited investor questionnaire on website generic and did not reference specific funds posted on website; Website available only after issuer made determination investor was accredited; and Potential investors could purchase securities after 30 day waiting period 11

12 General Solicitation (continued) Pre-Existing Relationship In CGI Capital, Inc., SEC Interpretive Release No (September 29, 2000) the SEC staff determined CGI willfully violated Section 5 of the Securities Act because securities it offered were not registered or exempt from registration. Staff found CGI did NOT have a PER with certain individuals it contacted CGI Capital had solicited numerous individuals via . CGI failed to determine whether the individuals it contacted were sophisticated or accredited investors. Messages sent by CGI contained a link to its website, which navigated to a passwordprotected site that allowed users to view an online offering presentation. Password to view the offering materials provided to each recipient of the , but there was no warning or restriction that prevented recipients from forwarding the password to others Offer of Settlement cease and desist from violating Section 5 and pay $25K fine 12

13 Key Elements of Conducting a Private Offering in the United States ESTABLISHING PRE-EXISTING RELATIONSHIPS 13

14 Establish a Pre-Existing Relationship Issuer who has Pre-existing Relationship with Offeree: Several no action letters provide that such relationship would not contravene General Solicitation prohibition under Rule 502(c) The question of [w]hether an issuer has sufficient information to evaluate, and does in fact evaluate, a prospective offeree s financial circumstances and sophistication will depend on the facts and circumstances. Citizen VC, Inc., SEC No-Action Letter (August 6, 2015) Establishing the Pre-Existing Substantive Relationship Issuer or agent must have a pre-existing personal or business relationship Issuer or agent in a position to assess whether investor has knowledge and experience to make investment Issuer or agent in a position to form reasonable belief that investor meets eligibility requirements under Regulation D and offer is personally directed to investor 14

15 Establish a PER (continued) Citizen VC, Inc. No Action Letter Facts: A VC firm created policies and procedures to establish a PER with investors over the internet Established online VC investment platform Investors admitted to site were pre-qualified and accredited Password protected portions of site for offering documents and had to fill out questionnaire 15

16 Establish a PER (continued) Citizen VC, Inc. No Action Letter Facts: After vetting questionnaires, Firm engaged in a relationship establishment period connecting with the prospective investor offline to discuss such investor s investment experience and sophistication; utilizing third party credit reporting services to confirm the investor s identity and to gather additional financial information; and fostering offline and online interactions with the investor to answer questions about the website, the venture capital firm and potential investments. No specific time period for relationship period Firm relationship with new members pre-exists offering of securities 16

17 Establish a PER (continued) Citizen VC, Inc. No Action Letter SEC concluded Firm policies for establishing pre-existing relationship over password protected website worked and there was no general solicitation Quality of relationship between issuer and investor most important factor to determine substantive relationship exists evaluate sophistication, financial circumstances and ability to understand risks 17

18 Establish a PER (continued) Using a Broker-Dealer Firm can solicit current clients for whom it has current information regarding qualification under Rule 506 Non-customers who prior to the offering have been pre-screened as qualified through contacts or questionnaires Matching Services General Solicitation limitations do not extend to internet-based matching services if they satisfy statutory and regulatory qualifications Through Agents - PER Issuer s Agents, attorneys, accountants, consultants can be referral sources so long as they have necessary knowledge of offeree s qualifications 18

19 Key Elements of Conducting a Private Offering in the United States RECENT SEC STAFF GUIDANCE ON GENERAL SOLICITATION 19

20 Highlights of SEC Staff Guidance Pre-existing Relationship Checking the box on investor suitability is not sufficient to create a substantive relationship Relationship must be established prior to the consummation of an offering Prior to guidance, a waiting period of 30 days was required before accepting subscriptions to ensure pre-existing relationship New Guidance eliminates 30 day waiting period Still applies to offerings for private funds relying on Section 3(c)(1) or (7) Who can form PER In addition to brokers, RIAs can form PERs with offerees that are a client of the RIA Other third parties (depends on facts) 20

21 Highlights Staff Guidance (continued) Angel Investor Networks Networks share information and may introduce issuers to investors within network Staff concluded issuer introduced through member network to angel investor may be able to rely on PER with members of network to establish a reasonable belief other offerees have requisite experience and sophistication Staff cautions greater number of persons lacking financial sophistication contacted by issuer through impersonal means, more likely SEC will find general solicitation 21

22 Highlights Staff Guidance (continued) Factual Business Information can be widely disseminated General business information on the issuer, its business, financial condition, products, services or advertisements of such products Can t be presented in a way that would constitute an offer of securities can t condition the public re: a securities offering Will not be deemed factual business information if it includes predictions, projections, forecasts or opinions on valuation of a security or past performance for open ended fund Publicly Available Website Unrestricted, publicly available website is a general solicitation if it contains an offer of securities 22

23 Key Elements of Conducting a Private Offering in the United States MITIGATION AND COMPLIANCE STRATEGIES 23

24 Mitigation and Compliance General Solicitation There is no substantial compliance defense under Rule 508 [Insignificant deviations from a term, condition or requirement of Reg D] No cure under federal law for conducting a general solicitation Could convert offering to a Rule 506(c) verifying accredited investor status of investors (but can t have non-accredited investors) Isolate investor and prevent them from purchasing securities Rescission offering with interest and transaction costs Terminate offering and undertake a new offering 6 months later Policies and Procedures to avoid General Solicitation Maintain records of each communication (oral or written) with investors Number offering materials sequentially and place offeree name on cover to track a specific offeree 24

25 Mitigation &Compliance (continued) Policies and Procedures to avoid General Solicitation Include restrictive legends on all offering materials Obtain reps from investors that they are eligible to participate and understand risks Educate personnel on sales process and require pre-clearance from officer familiar with Rule 506 requirements before soliciting US persons Refrain from using forms of mass mailing Refrain from listing any offering materials on issuer s website, unless password protected and restricted to pre-screened accredited investors Refrain from engaging in marketing-related or offering activities through social media Consider using the services of a registered broker/dealer when sourcing and soliciting U.S.-based targets 25

26 Thank you. QUESTIONS? 26