Comparison of Private Offering Practice Before and After the JOBS Act General Solicitation Amendments September 2013

Transcription

1 Comparison of Private Offering Practice Before and After the JOBS Act General Solicitation Amendments September 2013

2 Introduction As mandated by the US Jumpstart Our Business Startups Act (the JOBS Act ), the US Securities and Exchange Commission (the SEC ) recently adopted final amendments to Rule 144A ( Rule 144A ) under the US Securities Act of 1933 (the Securities Act ), which is a safe harbor from the registration requirements of Section 5 of the Securities Act. The amendments provide that under Rule 144A, securities may be offered to persons other than qualified institutional buyers ( QIBs ), as long as they are only sold to QIBs or those reasonably believed to be QIBs meaning that, in practice, general solicitation and general advertising ( GSGA ) is permitted in connection with offerings relying on Rule 144A. 1 The safe harbor from Section 5 registration for offshore offerings provided by Regulation S under the Securities Act ( Regulation S ), however, continues to be conditioned upon the absence of directed selling efforts ( DSE ) in the United States, although the SEC has indicated that legitimate selling activities in connection with Rule 144A transactions will not be deemed DSE in concurrent Rule 144A and Regulation S offerings. The amendments also establish Rule 506(c), a new safe harbor from Section 5 registration that permits an issuer to engage in GSGA activities in connection with sales to accredited investors, provided certain conditions are met. Finally, the SEC has also proposed but not yet adopted significant amendments to Regulation D under the Securities Act ( Regulation D ) and Form D. 2 The GSGA amendments are effective as of September 23, The table below summarizes how we expect certain private offering practices to change once the GSGA amendments are effective. 3 Activity Before Effectiveness of GSGA Amendments After Effectiveness of GSGA Amendments Concurrent Rule 144A and Regulation S offerings 4 Pre-deal marketing Pre-deal marketing in the United States could be deemed GSGA or DSE unless the marketing materials are distributed to, and meetings are held only with, QIBs or persons reasonably believed to be QIBs. GSGA is permitted in connection with the Rule 144A tranche, and pre-deal marketing activities can include non-qibs in the United States, without raising Section 5 registration concerns. We do not expect market practice to change in terms of targeted audiences for pre-deal marketing activities in the United States, which we expect will continue to be limited to QIBs as a practical matter, although inadvertent (or intentional) marketing activities to non-qibs will not jeopardize the availability of the Rule 144A safe harbor. The amendments do not affect or reduce the risk of liability under Section 10(b) of, and Rule 10b-5 under, the US Securities Exchange Act of Issuers, sellers and other advisors will want to ensure that information in pre-deal marketing materials is verifiable and consistent with the prospectus, and that marketing is undertaken in a controlled and coordinated manner. 1 Our earlier client briefing summarizing the GSGA amendments is available here. 2 For further details on Rule 506(c) and the proposed amendments to Regulation D and Form D under the JOBS Act, please see our client briefing available here. 3 Please note that the table only addresses certain US federal securities law considerations, and not, for example, state blue sky laws. Also note that although the JOBS Act did significantly change the regulatory regime for US public offerings by emerging growth companies, the GSGA amendments will not affect US public offering practice. 4 This discussion assumes that the offering to end-investors in the United States is being made exclusively in reliance on Rule 144A. We believe that current market practice should not change in transactions where market standard underwriting documentation assumes the possible availability of more than one exemption from the registration requirements of Section 5 for the initial sale to QIB end-investors, such as in certain UK and Hong Kong stock exchange-listed public offerings of new shares. Linklaters September

3 Comparison table Activity Before Effectiveness of GSGA Amendments After Effectiveness of GSGA Amendments Concurrent Rule 144A and Regulation S offerings (continued) Press releases and advertisements Press conferences and interviews with the press The issuance of press releases and the placing of advertisements in the United States could be deemed GSGA or DSE, jeopardizing the availability of the Rule 144A or Regulation S safe harbors. Rule 135c under the Securities Act provides a safe harbor for certain limited notices made in the United States regarding a proposed offering. Notably, announcements made in reliance on Rule 135c are not permitted to name the underwriters of the securities being offered and sold and may only provide the basic terms of such securities. Rule 135e under the Securities Act generally provides a safe harbor for written press-related materials released outside the United States. Issuers often want to include any such press materials on their company website to inform investors and other stakeholders of any offering and sale of securities. However, SEC guidance makes clear that offering information posted on a public website could be deemed an offer, including by means of GSGA or DSE. Thus, press releases about an offering posted on websites (other than stock exchange or other regulator websites) are often placed behind website blockers that require viewers to confirm, for example, that they are QIBs or outside of the United States, in order to preserve the availability of the Rule 144A and Regulation S safe harbors. Providing US journalists with access to press conferences or conducting interviews with US journalists where issuers, sellers or other representatives discuss a proposed offering of securities could be deemed GSGA or DSE, thus jeopardizing the availability of the Rule 144A and Regulation S safe harbors. Rule 135e provides a safe harbor for certain offshore press conferences and meetings if they take place or are conducted outside the United States, deeming such conferences not to be an offer of a security for sale in the United States even if US journalists are present at such conferences or meetings. US journalists are prohibited, however, from accessing the conference or meeting from the United States (e.g., through a conference call or webcast while the journalist is physically in the United States). GSGA is permitted in connection with the Rule 144A tranche, and press releases about an offering can be freely distributed in the United States and posted on websites without blockers, without raising Section 5 registration concerns. Advertisements in the United States regarding the a Rule 144A offering will also not raise Section 5 registration concerns. The limitations imposed by Rule 135c and Rule 135e will not apply. We expect market practice to change in this respect and for publicity restrictions in Rule 144A transactions specifically meant to address GSGA concerns to be relaxed. Issuers and sellers may include the names of the initial purchasers or placing agents in press releases in the United States announcing offerings conducted in reliance on Rule 144A and other factual information that was previously outside the scope of the safe harbors. In addition, we expect the restrictions on website postings of press releases to be relaxed. The amendments do not affect or reduce the risk of Section 10(b) and Rule 10b-5 liability. Issuers, sellers and advisors will want to ensure that information in press releases is verifiable and consistent with the prospectus. In some cases, this may result in the continued use of separate US and non-us press releases. Further, given commercial and control considerations, we expect that offering participants, and in particular financial and public relations advisors, will want to continue to manage carefully the dissemination of any public communications. GSGA is permitted in connection with the Rule 144A tranche, and press conferences and interviews can be conducted in, and made accessible to, non-qibs in the United States, without raising Section 5 registration concerns. The limitations imposed by Rule 135e will not apply. The amendments do not affect or reduce the risk of Section 10(b) and Rule 10b-5 liability. Issuers, sellers and advisors will want to ensure that information provided in press conferences and interviews is verifiable and consistent with the prospectus. Further, given commercial and control considerations, we expect that offering participants, and in particular financial and public relations advisors, may want to continue to manage carefully access to press conferences, interviews and other live publicity activities. Linklaters September

4 Activity Before Effectiveness of GSGA Amendments After Effectiveness of GSGA Amendments Concurrent Rule 144A and Regulation S offerings (continued) Research reports Research analyst calls/pre-deal investor education Road shows Underwriting document GSGA/DSE representations The publication or distribution of a research report in the United States could be deemed GSGA or DSE, thus jeopardizing the availability of the Rule 144A and Regulation S safe harbors. In connection with initial public offerings, research analysts are subject to research guidelines with respect to any pre-deal research reports, which generally restrict publication to hard copies outside the United States. Ordinary course research reports distributed in the United States that comply with Rule 138 or Rule 139 will not be deemed GSGA or DSE. Research analyst calls and meetings made available to persons in the United States could be deemed GSGA or DSE unless access is limited to QIBs. Invitations to, and attendance at, investor road shows in the United States are limited to QIBs in order to ensure that any such road shows are not widely publicized or attended by non-qibs, which could be deemed GSGA or DSE and jeopardize the availability of the Rule 144A and Regulation S safe harbors. Any offering participant s activities that constitute GSGA or DSE would jeopardize the availability of the Rule 144A and Regulation S safe harbors, so representations, warranties and undertakings relating to such activities are included in the underwriting document. GSGA is permitted in connection with the Rule 144A tranche, and pre-deal research reports can be widely distributed in the United States to non-qibs, without raising Section 5 registration concerns. However, we do not expect market practice to change in terms of pre-deal research publication in the United States, given liability, analyst conflicts of interest rules and other regulatory considerations relating to the publication of research in the United States. Banks can distribute research reports in the United States without having to comply with Rule 138 or Rule 139, but may voluntarily choose to comply with certain of the Rule 138 and Rule 139 safe harbor requirements (e.g., no initiation). GSGA is permitted in connection with the Rule 144A tranche, and research analyst calls and meetings can include non-qibs, without raising Section 5 registration concerns. However, we do not expect market practice to change in terms of analyst communications in the United States given liability, analyst conflicts of interest rules and other regulatory considerations relating to analyst communications and research in the United States. GSGA is permitted in connection with the Rule 144A tranche, and road show activities in the United States can include non-qibs without raising Section 5 registration concerns. However, offering participants will need to consider whether there are any practical benefits to the physical attendance of non-qibs at road shows, since sales can only be made to QIBs. In connection with internet road shows, offering participants will also have to consider whether the securities regulations in other jurisdictions (e.g., Europe) impose access restrictions and whether unlimited access to road show materials increases liability risks, since the amendments do not affect or reduce the risk of Section 10(b) and Rule 10b-5 liability. In any case, issuers, sellers and other advisors will want to ensure that information in road show materials is verifiable and consistent with the prospectus. GSGA is permitted, and the representations and undertakings relating to GSGA can be removed in connection with Rule 144A offerings. However, the parties to the underwriting document should ensure, where the offering is relying on more than one exemption from Section 5 registration (such as Section 4(a)(2) and Rule 144A), for sales into the United States to end-investors, that GSGA is permitted under all the relevant exemptions before the GSGA representations and undertakings are removed. Since Regulation S has not been amended, the representations and undertakings relating to DSE should continue to be included. Linklaters September

5 Activity Before Effectiveness of GSGA Amendments After Effectiveness of GSGA Amendments Concurrent Rule 144A and Regulation S offerings (continued) Distribution of prospectus, term sheets and pricing information/ confirmations (together, offering documentation ) Disseminating the prospectus for an offering (including through website publication) or debt term sheets (such as through a public Bloomberg terminal) and pricing information/confirmations in the United States to persons other than QIBs could be deemed GSGA or DSE. SEC guidance makes clear that offering documentation posted on a public website could be deemed GSGA or DSE. Thus, offering documentation put on websites (other than stock exchange or other regulator websites) needs to be placed behind website blockers that require viewers to confirm that, for example, they are QIBs or outside of the United States. GSGA is permitted in connection with the Rule 144A tranche, and offering documentation can be freely distributed in the United States and posted on websites without website blockers, without raising Section 5 registration concerns. We expect market practice to change in this respect and that offering documentation for some transactions may be posted on websites without website blockers and electronic versions of offering documentation may be used more frequently than prior to the GSGA amendments. However, we also expect that the method of dissemination of term sheets and pricing and pricing-related information by initial purchasers or placing agents will remain largely unchanged since the securities will be sold only to QIBs pursuant to Rule 144A or in offshore sales pursuant to Regulation S. Regulation S-only offerings Market practice should not change with respect to Regulation S-only offerings, as the GSGA amendments do not amend Regulation S. This means that US publicity and marketing activities will be more restricted in a Regulation S-only offering than in a Regulation S offering with a concurrent Rule 144A offering in the United States. The SEC has indicated that legitimate selling activities in connection with Rule 144A transactions will not be deemed DSE in concurrent Rule 144A and Regulation S offerings. Section 4(a)(2) offerings Section 4(a)(2) of the Securities Act provides an exemption from Section 5 registration for any transaction by an issuer not involving any public offering, which is generally interpreted to require the avoidance of GSGA. Current market practice should not change with respect to offerings of securities that are made pursuant to Section 4(a)(2), such as rights issues, block trades effected in reliance on Section 4(a) (2) and other private placements of securities by issuers. The SEC has made clear its view that the GSGA amendments do not affect Section 4(a)(2), and that public advertising will continue to be incompatible with a claim of exemption under Section 4(a)(2). As a result, it will be particularly important for issuers, sellers and other offering participants to confirm which exemption from registration they will be relying on to offer securities into the United States, since GSGA will only be permitted in connection with certain offerings. If an issuer wants to engage in GSGA activities, a Section 4(a)(2) offering could be structured to fall within the new Rule 506(c) safe harbor, but Rule 506(c) requires that reasonable steps be taken to verify that all purchasers are accredited investors. Furthermore, if the SEC s Regulation D and Form D amendments are adopted as proposed, any written GSGA materials would have to include certain legends and be submitted to the SEC, and the issuer would need to make a Form D filing with the SEC 15 days before engaging in GSGA activities. Once the issuer has engaged in GSGA activities, it would not be able to fall back on the Section 4(a)(2) exemption if the Rule 506(c) conditions are not met. With respect to rights issues, often the rump shares (the shares for which the corresponding rights were not taken up by shareholders) are placed in the United States pursuant to Rule 144A. Under the GSGA amendments, GSGA will technically be permitted in connection with the rump placement, but issuers and banks will need to consider the risk that GSGA in connection with the rump placement could jeopardize the availability of the Section 4(a)(2) exemption for the offer and sale of the rights to shareholders. Section 4(1½) offerings The so-called Section 4(1½) exemption permits the private placement of securities by a person other than the issuer of the securities to a limited number of accredited investors. Private placements under Section 4(1½) are structurally similar to private placements under Section 4(a)(2) of the Securities Act, which is available only to issuers. Section 4(1½) does not appear in the Securities Act or any SEC rule thereunder, but has been generally accepted by the market as a valid exemption. As the GSGA amendments under the JOBS Act do not change Section 4(a)(2), similarly we do not expect Section 4(1½) practice to change. Linklaters September

6 Contacts Mike Bienenfeld Tel: Marco Carbonare Partner, Frankfurt Tel: Jeff Cohen Partner, New York Tel: Jon Gray Partner, Hong Kong Tel: Jason Manketo Tel: Cecil Quillen Tel: Luis Roth Partner, Paris Tel: luis.roth@linklaters.com Patrick Sheil Tel: patrick.sheil@linklaters.com Pam Shores Partner, Hong Kong Tel: pam.shores@linklaters.com linklaters.com CP0329_F/09.13