The Alphabet Soup of Raising Capital: Regulation A or Regulation D — What Would You Prefer?

On June 19, 2015, amended Regulation A recently adopted by the SEC will become effective. The new Regulation A, mandated by the JOBS Act and often dubbed as Regulation A+, is a significant improvement over the old Regulation A, which was rarely used as a capital raising vehicle. The old Regulation A permits unregistered offerings of up to $5 million of securities in any 12-month period, including no more than $1.5 million of securities offered by security holders of the company. Permissible thresholds of Regulation A+ are much higher. It provides for two tiers of offerings: “Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.”

However, will Regulation A+ become a more popular choice for smaller companies than Regulation D in raising capital? Is Regulation A+ a workable compromise between the company’s need to have access to capital and the SEC’s goal of investor protection?

Rule 506 of Regulation D is one of the most widely used capital raising exemptions under the US securities laws. The main reason of its popularity is its flexibility. Although Rule 506 does not provide an opportunity for selling security holders to participate in the offering as Regulation A+ does, Rule 506 does not have any caps on the dollar amount that can be raised. In addition, any company: public or private, US or foreign can raise capital under Rule 506. However, only a US or Canadian issuer that is not (i) a reporting company under the Securities Exchange Act of 1934 immediately prior to the offering, (ii) an investment company, or (iii) a blank check company is considered an “eligible issuer” under Regulation A+. Note that “bad actor” disqualification applies to both Rule 506 and Regulation A+ offerings. Also, a company that had its registration revoked under Section 12(j) of the Exchange Act within five years before the filing of the offering statement or that has been delinquent in filing required reports under Regulation A+ during the two years before the filing of the offering statement (or for such shorter period that the issuer was required to file such reports) is not eligible to do an offering under such Regulation.

In some instances, Regulation A+ appears to be more accommodating than Rule 506. For example, Rule 506 allows an unlimited number of accredited investors as purchasers (with Rule 506(b) also permitting up to 35 non-accredited investors), and Tier 1 of Regulation A+ does not have any limitation on the number or type of investors. Tier 2 also does not have any limitations on the number of investors, but imposes a per-investor cap for non-accredited investors (unless the securities are listed on a national exchange) of the aggregate purchase price to be paid by the purchaser for the securities to be no more than 10% of the greater of annual income or net worth for individual investors or revenue or net assets most recently completed fiscal year for entities.  In addition, Regulation A+ allows issuers to “test-the-waters” by trying to determine whether there is any interest in a contemplated securities offering (assuming such practice is allowed under applicable blue sky laws for Tier 1 offerings), while the traditional Rule 506(b) does not allow for general solicitation and advertising (Rule 506(c) permits general solicitation and advertisement).

The biggest downside of Regulation A+ structure is that blue sky registration requirements are not preempted for Tier 1 offerings, which significantly limits the use of Tier 1 for offerings in multiple states. Such preemption exists for Rule 506 offerings as well as Tier 2 of Regulation A+ offerings. But the welcomed flexibility of doing nationwide offerings under Tier 2 comes with a heavy price tag of ongoing reporting. After a Tier 2 offering, an issuer must file with the SEC annual reports on Form 1-K, semi-annual reports on Form 1-SA and current reports on Form 1-U (within 4 business days of the event). The SEC also noted that companies may “voluntarily” file quarterly financial statements on Form 1-U, but the practical effect of desired compliance with Rules 15c2-11 and Rule 144 to maintain placement of quotes by market makers and resales of securities, will lead to “voluntary” quarterly reporting becoming essentially mandatory.

Rule 506 offerings are usually accompanied by private placement memoranda, or PPMs, (even when offerings are solely to accredited investors) to protect issuers from Rule 10b-5 liability under the Exchange Act. There is no prescribed format for such PPMs and they are not reviewed by the SEC. In connection with Regulation A+ offerings, an issuer must file Form 1-A (a “mini” registration statement) through EDGAR with the SEC (first-time issuers are eligible to initially do a non-public submission of a draft of Form 1-A). Such Forms 1-A are subject to the SEC review and comment process, which increases the cost of the transaction and extends the time from the beginning of the transaction and the closing.

The good news is that Regulation A+ provides a new way for smaller companies to raise capital and get some liquidity in their securities. However, if a company is confident that it can raise money through the traditional Rule 506 private placement, it may still want to avoid the SEC review process, the hassle of blue sky compliance under Tier 1 or ongoing reporting obligations of Tier 2 introduced by Regulation A+.

NYSE Proposes New Global Market Capitalization Test for Listing Companies

On September 30, 2014, the SEC published an NYSE amendment, effective as of such publication, to adopt a new initial listing standard, and to eliminate all but one of the current NYSE initial listing standards, for US operating companies.

The amendment provides for a global market capitalization test to serve as a new initial listing standard for US operating companies. The global market capitalization test requires that a listing operating company have a minimum total global market capitalization of $200 million at the time of initial listing. A company that is already publicly traded at the time it applies to list on the NYSE must meet the $200 million global market capitalization requirement for at least 90 consecutive trading days immediately preceding the date on which it receives clearance to submit an application to list on the NYSE.

The amendment also eliminates four of the NYSE’s five current initial listing standards for US operating companies: (1) the valuation/revenue with cash flow test, (2) the pure valuation/revenue test, (3) the affiliated company test, and (4) the assets and equity test.

Despite the proposed global market capitalization test, companies listing must also meet both the existing distribution requirements of Section 102.01A, and the stock price and market value of publicly-held shares requirements of Section 102.01B, of the Listed Company Manual. In addition, companies listing under the proposed global market capitalization test must comply with all other applicable NYSE listing rules.

The notes relating to the amendment highlight that Nasdaq and Nasdaq Global Market have a competitive advantage over the NYSE under existing listing standards, particularly with respect to pre-revenue research and development companies. The amendment, and the implementation of the global market capitalization test, is the NYSE’s attempt to level the playing field.

Is the SEC Doing Enough to Promote Capital Formation?

If you believe Commissioner Daniel M. Gallagher, the answer is an emphatic “no”, at least with respect to small businesses. On September 17, 2014, at a Heritage Foundation event, Commission Gallagher gave a speech criticizing the Securities and Exchange Commission’s failure to adequately promote capital formation by small businesses:

[S]adly, we at the SEC are not doing nearly enough to ensure that small businesses have the access to capital that they need to grow. We layer on rule after rule until it becomes prohibitively expensive to access the public capital markets.

After noting that not all of the regulatory burden is the SEC’s fault as “much of the ever-growing rulebook is a direct result of congressional mandates,” Commissioner Gallagher makes a number of recommendations for the SEC. Highlights include recommendations to:

  • Withdraw the proposed amendments to Regulation D. (Commission Gallagher did not support the proposed amendments as he stated in the SEC’s July 10, 2013 open meeting.)
  • Consider more deeply Regulation D, including considering broadening the blue sky exemption to help make the choice between the various exemptions available under Regulation D more meaningful.  According to Commissioner Gallagher, nearly all Regulation D offerings are conducted under Rule 506, even though 2/3 of the offerings are small enough that they could have been conducted pursuant to Rule 504 or 505, because Rule 506 offerings are exempt from blue sky regulations.
  • Analyze the secondary market for private company shares, where innovation has slowed. “We need more facilities to improve trading among accredited investors in the private secondary market.”
  • Finish implementing the JOBS Act’s reforms to Regulation A and couple the reforms with the formation of venture exchanges (national exchanges with listing rules tailored for smaller companies, including those issuing shares issued pursuant to Regulation A). Commission Gallagher noted that the SEC had proposed a robust set of rules, including blue sky preemption in certain larger Regulation A Offerings. (Commissioner Gallagher also noted, with respect to the proposal for blue sky exemption, that an “outpouring of anger from state regulators . . . wasn’t unexpected. After all, state regulators have been “protecting” investors from investment opportunities that are too risky for decades – I’m sure the Massachusetts residents who missed out on the offering of Apple Computer in 1980 because of their regulator’s concerns about the risk know this all too well.”)
  • Reconsider the current thresholds for scaled disclosure and the amount of disclosure that is required at each level – including having two tiers of scaling: significant scaling of disclosure for “nanocap” companies (i.e., companies with market capitalizations of up to $50 million) and moderate scaling for “microcap” companies with market capitalizations of $50 million to $300 million.

Coincidently, the SEC released its 2014 – 2018 Strategic Plan on September 19, 2014, two days after Commissioner Gallagher’s speech. Featured on the cover of the Strategic Plan is the SEC’s mission statement – “Protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation” (emphasis added).

But, judging by the SEC’s own Strategic Plan and its current rulemaking agenda, it is unlikely that the SEC will be vigorously addressing many of Commissioner Gallagher’s concerns regarding capital formation for small businesses in the near future.

SIFMA Issues Guidance on Rule 506(c) Verification

On June 23, 2014, the Securities Industry and Financial Markets Association (“SIFMA”) issued a memorandum (the “Memorandum”) containing guidance for broker-dealers and investment advisers with respect to verifying the status of purchasers as accredited investors in connection with offerings made pursuant to Rule 506(c) (Reg D offerings utilizing general solicitation, as we have previously blogged about).

Pursuant to Rule 506(c), an issuer utilizing general solicitation for a Reg D offering must, among other things, take reasonable steps to verify that purchasers in the offering are accredited investors. The reasonable verification requirement is a separate condition from the condition that all purchasers in a Rule 506(c) offering must be accredited investors, and the requirement has generated significant commentary.

The Rule 506(c) adopting release provided four non-exclusive safe harbor methods that an issuer can utilize for such reasonable verification, two of which require the issuer to obtain detailed financial information from a purchaser. An issuer may also rely on the written confirmation of a purchaser’s accredited investor status issued by a registered broker-dealer or investment adviser, licensed attorney or certified public accountant. Any such third party must, however, take reasonable steps to verify the purchaser’s accredited investor status before providing written confirmation to the issuer.

To this end, the Memorandum provides two verification methods for broker-dealers and investment advisers to use in verifying natural persons as accredited investors that SIFMA believes satisfies the “reasonable verification” requirement.

One verification method (the “account balance method”) is essentially a determination by the broker-dealer or investment adviser of the purchaser’s net worth. For a broker-dealer or investment adviser to utilize the account balance method, a purchaser must have been a client of the broker-dealer or investment adviser for at least six months, must have (either individually or together with a spouse, if applicable) at least $2 million in cash and marketable securities in the purchaser’s account prior to making the investment in the Rule 506(c) offering, must make certain representations (pursuant to purchaser representations provided by SIFMA as part of the Memorandum) regarding, among other things, the purchaser’s indebtedness, and the broker-dealer or investment adviser must be unaware of any facts to indicate that the client is not an accredited investor.

The other method (the “investment amount method”) uses the purchaser’s investment amount as a proxy for the purchaser’s status as an accredited investor. For a broker-dealer or investment adviser to utilize the investment amount method, a purchaser must have been a client of the broker-dealer or investment adviser for at least six months, must invest, or unconditionally commit to fund, at least $250,000 in a Rule 506(c) offering, which commitment is callable in whole at any time, must make certain representations (pursuant to purchaser representations provided by SIFMA as part of the Memorandum) including, among other things, that the investment in the Rule 506(c) offering is less than 25% of the purchaser’s net worth (either individually or together with a spouse), and the broker-dealer or investment adviser must be unaware of any facts to indicate that the client is not an accredited investor and, in the case of a commitment, the broker-dealer or investment adviser has knowledge that the purchaser has fulfilled a call under a prior commitment.

The Memorandum also provides a method for broker-dealers and investment advisers to use in verifying legal entities (i.e., corporations, LLCs, etc.) as accredited investors. For a broker-dealer or investment adviser to utilize this method, a purchaser-entity must be named on the broker-dealer’s or investment adviser’s current list of clients that qualify as “institutional accounts” as defined in FINRA Rule 4512(c)(3)or as Qualified Institutional Buyers (which are required to have investible assets of at least $100 million), or the purchaser-entity must make an investment in the Rule 506(c) offering in excess of $5 million and must provide a written representation that it was not formed for the purpose of making that investment and that it has made at least one prior investment in securities (whether in a primary offering or in the secondary market).

If issuers begin to use Rule 506(c) offerings with increasing frequency, SIFMA’s guidance in the Memorandum may be an important guidepost for broker-dealers and investment advisers and other third parties (e.g., attorneys and accountants) in assisting issuers to comply with the “reasonable verification” requirement set forth in Rule 506(c). This guidance may also be useful to issuers and other market participants.

If Your Loss of a WKSI Status Has a Severe Impact on the Company or the Markets, the SEC May Grant a Waiver

On March 12, 2014, the SEC revised its 2011 statement on well-known seasoned issuer (WKSI) waivers.  In order to qualify as a WKSI, an issuer may not be an “ineligible issuer,” which can be, among other things, an issuer that has, or whose subsidiary has, been convicted of certain securities-related felony or misdemeanor, violated the anti-fraud provisions of the federal securities laws or that is the subject of a judicial or administrative decree or order prohibiting certain conduct or activities involving the anti-fraud provisions of the federal securities laws.  

In its revised statement, the SEC clarified the framework that the SEC will follow in determining whether to grant a waiver of ineligible issuer status.  In making a determination whether to grant a waiver, the Division of Corporation Finance will evaluate the issuer’s ability to produce reliable disclosure and will consider the following factors: 

  • the nature of the violation or conviction and whether it calls into question the ability of the issuer to produce reliable disclosure currently and in the future;
  • whether the conduct involved a criminal conviction or scienter based violation, as opposed to a civil or administrative non-scienter based violation;
  • who was responsible for the misconduct and whether it was known by the WKSI parent (in case of the misconduct at the subsidiary level) or whether personnel at the WKSI parent ignored warning signs regarding the misconduct;
  • whether the individuals responsible for or involved in the misconduct were officers or directors of the WKSI parent, or were lower level employees in the operation of a subsidiary;
  • the duration of the violative conduct (did it last over a period of years or was it an isolated instance);
  • what remedial measures the issuer has taken to address the violative conduct and whether those actions would likely prevent a recurrence of the misconduct and mitigate the possibility of future unreliable disclosure;
  • whether there were key changes in the personnel involved in the violative or criminal conduct; and
  • whether the issuer has taken steps to improve training or made improvements to internal controls and disclosure controls and procedures.

The loss of a WKSI status for a company may have a significant effect on its ability to raise capital, and, in addition to the foregoing factors, the SEC will consider: 

  • severity of the impact on the issuer if the waiver request is denied weighing any such impact against the facts and circumstances relating to the violative or criminal conduct; and
  • effects of the issuer’s loss of WKSI status on the markets as a whole and the investing public, in light of the issuer’s significance to the markets and its connectedness to other market participants.

The SEC does not consider any single factor to be dispositive, and the issuer should submit a request letter that explains, based on the framework outlined above, why a waiver should be granted.

SEC Proposes “Regulation A+” Amendments

The SEC has proposed regulations to amend Regulation A as required by the Jumpstart Our Business Startups Act (JOBS Act).   Title IV of the JOBS Act directed the SEC to write regulations providing for an exemption from Securities Act registration for public offerings of up to an aggregate of $50 million of equity, debt or convertible debt securities in a 12 month period.  This provision has been termed “Regulation A+” by some observers because it is designed to be an improvement upon the SEC’s Regulation A, which permits exempt public offerings of up to $5 million by non-SEC reporting companies.  Regulation A has been little used because, for one thing, the $5 million limit is too low. 

The SEC’s proposed rules would update and expand the Regulation A exemption by creating two tiers of Regulation A offerings:

  • Tier 1, which would consist of those offerings already covered by Regulation A – that is securities offerings of up to $5 million in a 12-month period, including up to $1.5 million for the account of selling security-holders.
  • Tier 2, which would consist of securities offerings of up to $50 million in a 12-month period, including up to $15 million for the account of selling security-holders.

For offerings up to $5 million, the company could elect whether to proceed under Tier 1 or 2.

Basic Requirements

Under Tier 1 and Tier 2, companies would be subject to basic requirements, including ones addressing issuer eligibility and disclosure that are drawn from the existing provisions of Regulation A.  The proposed rules also would update Regulation A to, among other things:

  • Require issuers to electronically file offering statements with the SEC.
  • Provide that an offering statement and any amendment can be qualified only by order of the SEC.
  • Permit companies to submit draft offering statements for nonpublic SEC review prior to filing.
  • Permit the use of “testing the waters” solicitation materials both before and after filing of the offering statement.
  • Modernize the qualification, communications, and offering process in Regulation A to reflect analogous provisions of the Securities Act registration process, including permitting issuers to satisfy their delivery requirements as to the final offering circular under an “access equals delivery” model when the final offering circular is filed and available on EDGAR.

 Additional Tier 2 Requirements

In addition to the basic requirements, companies conducting Tier 2 offerings would be subject to the following additional requirements:

  • Investors would be limited to purchasing no more than 10 percent of the greater of the investor’s annual income or net worth.
  • The financial statements included in the offering circular would be required to be audited.
  • The company would be required to file annual and semiannual ongoing reports and current event updates that are similar to the requirements for public company reporting.

Eligibility

Regulation A would be available to companies organized in and with their principal place of business in the United States or Canada, as is currently the case under Regulation A.

The exemption would not be available to companies that:

  • Are already SEC reporting companies and certain investment companies.
  • Have no specific business plan or purpose or have indicated their business plan is to engage in a merger or acquisition with an unidentified company.
  • Are seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas, or other mineral rights.
  • Have not filed the ongoing reports required by the proposed rules during the preceding two years.
  • Are or have been subject to a SEC order revoking the company’s registration under the Exchange Act during the preceding five years.
  • Are disqualified under the proposed “bad actor” disqualification rules.

Preemption of Blue Sky Law

In view of the range of investor protections provided under the proposal, state securities law requirements would be preempted for Tier 2 offerings. 

The SEC will seek public comment on the proposed rules for 60 days.  Let’s see whether the commenters give the proposed rules an “A+”?

2013 SEC Government-Business Forum on Small Business Capital Formation

The SEC will hold its 2013 SEC Government-Business Forum on Small Business Capital Formation on November 21, 2013. A major purpose of the Forum is to provide a platform to highlight perceived unnecessary impediments to small business capital formation and address whether they can be eliminated or reduced. Each Forum seeks to develop recommendations for government and private action to improve the environment for small business capital formation, consistent with other public policy goals, including investor protection. Participants in the Forum typically have included small business executives, venture capitalists, government officials, trade association representatives, lawyers, accountants, academics and small business advocates. In recent years, the format of the Forum typically has emphasized small interactive breakout groups developing recommendations for governmental action

This year’s topics include:

• Panel discussion: Evolving practices in the new world of Regulation D offerings;
• Panel discussion Crystal ball: Now that you raised the money, what’s next for the company and the markets;
• Breakout session: Development of recommendations for securities-based crowdfunding offerings;
• Breakout session: Exempt securities offerings; and
• Breakout session: Securities regulation of smaller public companies.

The panel sessions will be webcast live on the SEC’s home page at http://www.SEC.gov beginning at 9:00 a.m. The afternoon breakout groups will not be webcast.  We will post on the results of the Forum when available.

FINRA Enhances its Public Offering Review Process

 

Effective September 30th, FINRA instituted enhancements to its public offering review process.  Such enhancements include an immediate clearance process for certain shelf offerings, an expansion of its expedited review program for non-shelf offerings and the introduction of a new limited review process for certain non-shelf offerings of exchange-listed securities.

Immediate Clearance

 FINRA’s review improvements provide member firms with immediate clearance, 24 hours per day, 7 days a week, for shelf filings.  Immediate clearance is available for WKSI filings, new shelf registration statements, and shelf takedowns.  In order to obtain immediate clearance, member firms must:

  • provide background information related to the offering and make the representations required by the existing same-day clearance procedures;
  • undertake to provide all information necessary to complete the filing within three business days; and
  • provide the Fedwire number for the payment of the filing fee.

 Non-Shelf Offerings

 FINRA now has three review programs available for non-shelf filings: full review, expedited review and limited review.  All non-shelf filings will initially be considered to be full review unless a different request is subsequently made.

 Expedited Review.  Effective September 30th, FINRA expanded the expedited review program for non-shelf offerings.  FINRA will determine whether to grant an expedited review request based on the complexity of the proposed arrangements.  PIPEs, resale offerings distributed on a best efforts basis, non-traded investment programs and offerings in which a participating FINRA member firm has acquired unregistered securities during the review period will generally not be eligible for an expedited review. 

 Limited Review.  On September 30th, FINRA implemented a new limited review process for certain non-shelf offerings. The member firm must submit a request for FINRA to consider whether to grant a limited review. For a member firm to request a limited review, the offering must satisfy all of the following criteria:

  •  securities must be listed on a national securities exchange;
  • firm commitment or straight best efforts distribution methods must be used;
  • total underwriting compensation must be within allowable guidelines and may not include securities;
  • underwriting arrangements may not include prohibited terms as defined in FINRA Rule 5110(f)(2), such as indeterminate items of value;
  • FINRA members must be identified in the offering documents and filing system;
  • offering must be filed with the SEC; and
  • offering must not include a new or novel product or be one that poses complex regulatory issues.

 A member firm must also make six representations as part of its request for limited review, although four of such representations may be deferred past the initial request.

 

 

The SEC Proposed Extensive Additional Requirements for the General Solicitation of Investors Under Rule 506(c)

In addition to adopting the final rules governing general solicitation and advertising in connection with certain securities offerings where all purchasers are accredited investors, on July 10, 2013, the SEC also proposed new rules that in the SEC’s words are intended: 

to enhance the Commission’s ability to evaluate the development of market practices in Rule 506 offerings and to address concerns that may arise in connection with permitting issuers to engage in general solicitation and general advertising under new paragraph (c) of Rule 506.

All of the excitement all the hoopla over the past few days about the adoption of new general solicitation and advertising rules has been somewhat tempered by concern that these proposed rules will adversely impact the use of general solicitation in Rule 506(c) private placements under Regulation D.

Regulation D and Form D 

With respect to Regulation D and Form D, the proposals would, if adopted:

Add a new Rule 510T Requiring Issuers to Submit to the SEC General Solicitation Materials.  

New Rule 510T would require issuers, on a temporary basis, to submit (not “file” or “furnish”) to the SEC any written general solicitation materials used in a Rule 506(c) offering no later than the date the materials are first used in connection with the offering.  The SEC did not, however proposed that these materials, when filed with the SEC, be publicly available.  The rule would expire two years after its effective date.  The SEC believes that the collection of these materials will facilitate its assessment of market practices through which issuers solicit purchasers in Rule 506(c) offerings.  Prior to the effectiveness of Rule 510T, the SEC will make available an intake page on the SEC’s website to allow issuers, investors and other market participants to voluntarily submit any written general solicitation materials used in connection with a Rule 506(c) offering. 

Compliance with Rule 510T would not be a condition of the Rule 506(c) exemption.  Instead, Rule 507(a) would be amended to provide that Rule 506 would be unavailable for an issuer if the issuer, or any of its predecessors or affiliates, has been subject to any order, judgment or court decree enjoining such person for failing to comply with Rule 510T. 

Amend Rule 503 of Regulation D to Require:

  • For issuers that intend to engage in general solicitation pursuant to Rule 506(c), the filing of a Form D no later than 15 calendar days in advance of the first use of general solicitation.  Currently, Rule 503 requires that the Form D be filed within 15 after the first sale.
  • The filing of a Form D amendment within 30 calendar days after the termination of a Rule 506 offering.  Currently, Rule 503 does not require the filing of such a closing Form D. 

Amend Rule 507 to Disqualify Issuers from Using Rule 506 for New Offerings for Failing to Comply with Their Form D Filing Requirements.

The proposed rules automatically disqualify an issuer from using  Rule 506 in any new offering for one year if the issuer, or any predecessor or affiliate of the issuer, did not comply, within the last five years, with all of the Form D filing requirements in a Rule 506 offering.  The one year disqualification period would not start to run until the required Form D filings had been made and would not affect offerings of an issuer that are ongoing at the time of the filing non-compliance.   In addition, the five year look-back period would not extend back beyond the effective date of the new disqualification rule.  The rule would also provide that if a required Form D or amendment was filed within 30 days after its due date, it would not be considered late for purposes of the new disqualification rule.  The cure period will not be available if the issuer previously failed to comply with a Form D filing deadline in connection with the same offering. 

Currently, issuers are precluded from relying on Rule 506 in connection with a failure to file a Form D only if the issuer, any of its predecessors or affiliates have been subject to a court order enjoining such person for failure to comply with Rule 503, which requires the filing of a Form D.    

Add New Rule 509 Requiring Issuers to Include Legends in Certain Offering Materials. 

A new proposed Rule 509 would require issuers to include certain legends in any written communication that constitutes a general solicitation in any offering conducted in reliance on Rule 506(c) and require additional disclosures for private funds, such as private equity, venture capital and hedge funds in general. 

The generally applicable legends will look familiar to securities law practitioners and would include statements regarding sale only to accredited investors, reliance on an exemption from the registration requirements of the Securities Act, and transfer restrictions under applicable securities laws.

Private funds would be required to include additional legends indicating that the securities offered are not subject to the protection of the Investment Company Act of 1940 and additional disclosures in any written general solicitation materials that include performance data.   

Compliance with these additional disclosure requirements would not be a condition of the Rule 506(c) exemption.  Instead, Rule 507(a) would be amended to provide that Rule 506 would be unavailable if the issuer, or any of its predecessors or affiliates, has been subject to any order, judgment or court decree enjoining such person for failing to comply with Rule 509. 

Amend Form D to Require Additional Information Primarily in Connection with Offerings Conducted in Reliance on Rule 506, such as:

  • The issuer’s publicly accessible website address.
  • For offerings conducted under Rule 506(c), the name and address of any person directly or indirectly controlling the issuer.
  • Information about the size of the issuer (revenues or net asset value) where such information is otherwise publicly disclosed (currently, “decline to disclose” is an option on Form D with respect to this type of information).
  • Additional information about the number and types of accredited investors investing.
  • Additional information about the use of proceeds from offerings conducted under Rule 506.
  • If a registered broker-dealer was used in connection with the offering, whether any general solicitation materials were filed with FINRA.
  • In the case of pooled investment funds advised by investment advisers registered with, or reporting as exempt reporting advisers to, the SEC, the name and SEC file number for each investment adviser who functions directly or indirectly as a promoter of the issuer.
  • For Rule 506(c) offerings, the methods used to verify accredited investor status and the types of general solicitation/advertising used.

Rule 156 Amendments

In addition, the SEC also proposed to amend Rule 156 to apply the guidance in that rule to the sales literature of private funds.  Generally, Rule 156 presently provides guidance on the types of information in investment company sales literature that could be misleading for purposes of the federal securities laws.

NYSE Proposes to Move to Only Website Disclosure of Listing Application Materials and to Otherwise Streamline its Listing Application Process

It has been a long-standing practice of the NYSE to post on its website the forms of the documents required to be submitted in connection with the NYSE listing applications. On April 30, 2013, the NYSE filed proposed rule changes to its Listed Company Manual (Manual), which, if adopted, will result in the Manual sections containing the listing application materials being deleted, and updated listing application materials will be posted only on the NYSE’s website. 

Although the NYSE amends its Manual from time to time, forms of listing agreements contained in the Manual have not always been amended to reflect changes made to the NYSE listing documents.  Some provisions in the listing agreements contained in the Manual are obsolete. The NYSE proposes to remove from the Manual (i) each of the agreements set forth in Sections 901.01 through 901.05, (ii) the form of original listing application contained in Section 903.01, and (iii) the form of supplemental listing application contained in Section 903.02. 

In the event that in the future the NYSE makes any substantive changes to those documents that are being removed from the Manual, it will submit a rule filing to the SEC to obtain approval of such changes, except for typographical or stylistic changes. The NYSE also plans to maintain all historical versions of those documents on its website after changes have been made, so that it will be possible to review how each document has changed over time. 

In addition, the NYSE proposes to state certain requirements, which it has been imposing as a matter of practice, in the Manual to add transparency to the listing process.  For example, the NYSE proposes to include in the Manual a new Section 107.00, Financial Disclosure and Other Information Requirements, which will contain the following requirements, among others:

  • Section 107.03 (SEC Compliance): No security shall be approved for listing if the issuer has not for the 12 months immediately preceding the date of listing filed on a timely basis all periodic reports required to be filed with the SEC or Other Regulatory Authority or the security is suspended from trading by the SEC pursuant to Section 12(k) of the Exchange Act.
  •  Section 107.04 (Exchange Information Requests): The NYSE may request any information or documentation, public or non-public, deemed necessary to make a determination regarding a security’s initial listing, including, but not limited to, any material provided to or received from the SEC or Other Regulatory Authority. A company’s security may be denied listing if the company fails to provide such information within a reasonable period of time or if any communication to the NYSE contains a material misrepresentation or omits material information necessary to make the communication to the NYSE not misleading. 

The NYSE also proposes to no longer require the following supporting documents in connection with an original listing application (see Section 702.04):

  •  Stock Distribution Schedule (the stock distribution schedule requirement is obsolete because the NYSE obtains the distribution information it needs from the applicant’s public filings and from its transfer agent). 
  • Certificate of Transfer Agent/Certificate of Registrar (the information that the NYSE needs about the applicant’s outstanding shares is available in its prospectus or periodic SEC reports, as well as the report of the applicant’s outstanding shares that will be required to be delivered to the Exchange once a quarter after listing). 
  • Notice of Availability of Stock Certificates (all transactions in listed securities in the national market system are conducted electronically through DTCC). 
  • Prospectus (final prospectuses are publicly available on the SEC’s website). 
  • Financial Statements (financial statements are included in the applicant’s SEC filings which are publicly available on the SEC’s website).