On July 10, the SEC adopted final rules under Section 201(a) of
the Jumpstart Our Business Startups Act (the "JOBS Act")
removing the ban against general solicitation and general
advertising in private offerings made in reliance on Rule 144A and
Rule 506 of Regulation D under the Securities Act of 1933.
1 The new rules went into effect on September 23.
Amended Rule 144A. The amendments to Rule 144A
permit offers of securities to persons other than
qualified institutional buyers ("QIBs"), provided that
the securities are sold only to persons reasonably
believed to be QIBs. Put simply, offers may be made to the
public orally and in print by means of press releases, interviews,
email messages, newspaper "advertisements," and trade
magazines.
Amended Rule 506. The amendments to Rule 506
permit an issuer to use general solicitation or general
advertising, as long as all purchasers are accredited investors and
the issuer takes "reasonable steps" to verify that the
purchasers are accredited investors.
This Commentary focuses on the practical effect of the
elimination of the prohibition against general solicitation and
general advertising on Rule 144A offerings by foreign private
issuers ("FPIs")—a relaxation that FPIs and
international market participants have been lobbying for since the
1990s. In summary, given the continuing effect of the federal
anti-fraud rules and concerns with respect to state blue sky laws,
we do not expect marketing of international capital markets
transactions, other than broader dissemination of press releases
and pre-deal advertising, to materially change.
Executive Summary
Effective September 23, amendments to Rule 144A under the
Securities Act permit companies to engage in general solicitation
and general advertising in Rule 144A offerings, provided that
securities are sold only to "qualified institutional
buyers" and the offering otherwise complies with Rule 144A.
However, given the continuing effect of the federal anti-fraud
rules and concerns with respect to state blue sky laws, we do not
expect marketing of international capital markets transactions,
other than broader dissemination of press releases and pre-deal
advertising, to materially change.
Pre-Deal Marketing and Advertisement. General
solicitation is now permitted in connection with a Rule 144A
tranche, and pre-deal marketing can include non-QIBs in the United
States. Offering participants may now use mass emails (through
Bloomberg or otherwise), advertisements, articles, and interviews,
among others, which may be published in newspapers, magazines, on
the internet, or broadcast on television and radio. Rule 10b-5
potential liability remains a concern, however.
Press Releases. Because the new Rule 144A permits
general solicitation, issuers are now permitted to broadly
disseminate press releases free of the prior restrictions on the
type of information permitted under Rule 135c. We would expect some
tension between issuers who are no longer constrained by the
general solicitation prohibitions and underwriters who may urge
caution, given the analogous limitations of Rule 135c. Because Rule
10b-5 liability is still a concern, as a matter of prudence, press
releases should be limited and consistent with offering disclosure
documents.
Section 4(1-1/2) Offerings. Because general
solicitation and general advertising is still prohibited in Section
4(a)(2) transactions, Section 4(1-1/2) offerings should continue to
rely on old procedures and restrictions consistent with Section
4(a)(2) offerings.
Publication and Distribution of Pre-Deal
Research. Now more liberally permitted, but it is expected
that liability concerns still mitigate potential benefits of
publishing or distributing such material more broadly than current
practice.
Initial Purchase Agreements. Offering
participants may move to limit representations regarding general
solicitation and general advertising to sales only; however, blue
sky laws may not allow for such changes.
Overview of Rule 144A
Rule 144A is a safe harbor that permits a person (other than the
issuer) to resell securities without registration if the
transaction meets specified conditions. Under old Rule 144A, one of
the conditions was that the securities be offered or
sold only to persons the seller and any person acting on the
seller's behalf reasonably believe are QIBs. The JOBS Act
required the SEC to amend Rule 144A to permit offers to
persons other than QIBs, as long as the securities are
sold only to persons that the seller and any person acting
on behalf of the seller reasonably believe are QIBs.
Revised Rule 144A permits a seller to rely on Rule 144A even if
the securities are offered to non-QIBs, including by means
of general solicitation, provided that the securities are
sold only to persons that the seller and any person acting
on behalf of the seller reasonably believe are QIBs. The Rule 144A
exemption now will be available even where general solicitation is
actively used in the marketing process or has occurred
inadvertently.
The amendments do not add any additional standards with respect to
the manner or process used by a seller to determine whether a
purchaser is a QIB.
FPIs rely on Rule 144A for equity and debt securities offerings
made to investors in the United States, typically as part of a
global or other cross-border capital markets transaction. The new
rule raises a number of interesting questions in connection with
Rule 144A offerings by FPIs, which are discussed in detail
below.
Can General Solicitation be Used in Concurrent Rule 144A / Regulation S Offerings?
Yes. Regulation S is an independent safe harbor for offshore transactions. Although the SEC has not revised Regulation S, and the ban on "directed selling efforts" in the United States remains, the SEC reiterated its view that a global offering complying with Regulation S (including, presumably, the ban on "directed selling efforts") will not be "integrated" with a concurrent offering in the U.S. in accordance with the new rule. 2 Accordingly, the use of general solicitation in a Rule 144A offering should not be deemed to constitute directed selling efforts in the United States that would jeopardize a concurrent Regulation S offering.
In Practice, How Will Publicity Guidelines for Rule 144A Offerings Be Affected?
Restrictions on general solicitation typically have been
addressed by publicity restrictions imposed on the issuer at the
beginning of an international offering. "General solicitation
or general advertising," which was effectively prohibited
under the old rule, 3 could include any advertisement,
article, notice, or other communication published in any newspaper,
magazine, or similar media or broadcast over television, radio, or
the internet.
All of these activities historically have been scrutinized in
advance and monitored by legal counsel with an eye to their
possible effects on the availability of applicable
exemptions.
The new rule permits offering participants to communicate with
prospective investors in Rule 144A offerings with no limit as to
the method of communication or the number or type of investors
(QIBs or non-QIBs) contacted using the following methods:
- Mass emails (through Bloomberg or otherwise);
- Advertisements;
- Cold calls;
- Articles;
- Interviews and other communications;
which may be published
- In newspapers;
- In magazines;
- On the internet (including social media, such as Facebook, Twitter, etc.);
- On television broadcasts; or
- On radio broadcasts.
Ultimate sales, however, must be made to investors
reasonably believed to be QIBs.
It is important to note that because investors can still claim
they relied upon these types of communications in making their
investment decision to purchase securities, use of such materials
and communication media to solicit prospective investors remains
subject to the general anti-fraud provisions under the federal
securities laws, including Rule 10b-5. In addition, many foreign
jurisdictions have their own publicity rules and restrictions in
connection with an offering that must be observed.
In light of these liability concerns, as well as state blue sky
issues discussed below, Rule 144A offering participants should
continue to carefully consider the content, form, and distribution
of solicitation materials and public discussion regarding the
offering. These materials will continue to be reviewed by counsel
to ensure that they are consistent with the disclosure contained in
the offering memorandum. It seems likely that marketing in the U.S.
should not change significantly, and documentation for a Rule 144A
transaction will continue to be limited to an offering memorandum
or prospectus, a roadshow presentation, and any pricing
announcements. On the other hand, one can safely assume that issuer
press releases to Reuters, Bloomberg, and other press agencies
announcing the launch of deals will be more widely
disseminated.
Will General Solicitation Raise Issues Under State Blue Sky Laws?
Section 18 of the Securities Act preempts state "blue sky" laws with respect to offerings of "covered securities," which include
- All securities offered and sold in Rule 506 offerings; and
- Securities of reporting issuers offered and sold in Rule 144A transactions.
There is no corresponding preemption for Rule 144A offerings by
non-reporting issuers. Although state statutes generally exempt
offers and sales to sophisticated institutional investors by all
issuers, broad-reaching general solicitation in Rule 144A offerings
by non-reporting issuers to non-institutional
investors may require registration under most state blue sky
laws.
The SEC and state securities regulators have not yet indicated
whether or how this possible impediment to the use of new rules
will be addressed. Commentators to the JOBS Act suggested that the
SEC address this concern and provide for preemption of state blue
sky laws for all offers and sales made pursuant to Rule 144A (in
line with the preemption for all offers and sales under Rule 506).
The SEC has not yet addressed these comments. Although it is
unclear whether states will actively pursue enforcement actions in
such cases, until the issue is resolved, it remains advisable for
non-reporting issuers to refrain from broad-reaching
general solicitation.
Must an Issuer Conducting a Rule 144A Offering Comply with Rule 135c Under the Securities Act?
No. Because general solicitation is now permissible, issuers
conducting a Rule 144A offering may no longer be subject to the
stringent requirements of Rule 135c or other similar safe harbors
in connection with press releases.
Under Rule 135c of the Securities Act, an announcement that an
issuer makes regarding an unregistered offering is not deemed to be
an offer of securities for purposes of Section 5 of the Securities
Act if, among other things, the announcement contains certain
limited information (e.g., information limited to the name of the
issuer, the basic terms and size of the offering, the timing of the
offering, a brief statement of the manner and purpose of the
offering, and statements that the securities have not been
registered) regarding the offering and is not used for the purpose
of conditioning the market in the United States.
For Regulation S offerings with a Rule 144A tranche, the SEC has
clarified that general solicitation and general advertising in
connection with a Rule 144A offering will not be viewed as
"directed selling efforts" in connection with a
concurrent Regulation S offering. As a result, issuers are now
permitted to broadly disseminate a press release regarding a
proposed or completed Rule 144A offering free of the prior
restrictions on the types of permitted information under Rule 135c.
As noted above, however, the anti-fraud provisions of the federal
securities laws, including Rule 10b-5, are still a concern.
Because Rule 135c is a safe-harbor for the issuer, we
expect that underwriters and placement agents will require the
issuer to agree on communications in advance (for example, at a
minimum, that information must be consistent with disclosure
contained in the offering memorandum). Existing purchase agreement
provisions to that effect, and the related indemnity provisions,
are unlikely to change.
Is General Solicitation Permitted in Section 4(a)(2) and "4(1-1/2)" Offerings?
The new rules apply only to offerings conducted under Rule 506
and Rule 144A. Offerings conducted under Section 4(a)(2),
frequently used by foreign issuers in rights offerings, and under
the Section 4(1-1/2) doctrine, frequently used in block trades
where Rule 144A is not available, will still be subject to the
prohibition on general solicitation and advertising.
Some practitioners have suggested that general solicitation should
be permitted in a private resale under the doctrine referred to as
the "Section 4(1-1/2) exemption" (resales from one
purchaser in a private offering to another). It appears, however,
that the SEC's affirmative statement prohibiting public
solicitation in a Section 4(a)(2) offering applies to a Section
4(1-1/2) offering because a Section 4(1-1/2) offering is premised
principally on a private offering that initially must be permitted
by Section 4(a)(2). As a result, Section 4(1-1/2) offerings should
continue to rely on the procedures and restrictions consistent with
Section 4(a)(2) offerings.
Other practitioners have proposed that certain Section 4(a)(2)
transactions (so-called "Rule 144A direct" offerings)
should be properly viewed as Rule 144A transactions on the basis
that the economic risk is completely borne by the underwriters. In
such transactions, the securities are offered and sold directly by
the issuer, with the underwriters agreeing "to procure
purchasers for the shares, failing which the underwriters will
purchase such shares." This substance-over-form argument
concludes that such a "144A direct" offering should
qualify for the Rule 144A exemption from registration under Section
5, notwithstanding that it is not a true "resale" but, in
nominal form, a direct sale to the ultimate purchaser.
Variations in these "144A direct" and similar offerings
are made in certain other jurisdictions, where, although
procedurally similar to Rule 144A direct transactions, the economic
risk is not so clearly transferred to the underwriter.
Because there is no SEC guidance on this issue, any "144A
direct" transaction must be analyzed on a case-by-case basis
considering all facts and circumstances, including the timing of,
and language used in, the underwriting documentation, the legal
opinions, termination provisions, and market-outs to determine
whether such transaction looks and feels more like a Rule 144A
transaction or more closely resembles a classic 4(a)(2)
offering.
Can Participating Broker-Dealers Now Publish "Pre-Deal" Research in the United States in Advance of a Rule 144A Offering?
As a practical matter, most investment banks and their internal
compliance teams will continue to adhere to previous limitations on
such research (or cautiously adapt their practices to permit wider
dissemination of pre-deal research only upon a full vetting of the
content against the offering memorandum), given potential liability
concerns.
In recent years, in Rule 144A / Regulation S offerings by FPIs,
particularly where Rule 139—which, in certain circumstances,
permits publication and distribution of research by broker/dealers
distributing securities—is not available, 4 some
investment banks in certain markets seem to have relaxed research
black-out periods from 40 days down to 48 hours based on a narrow
distribution to QIBs only. In addition, technical arguments have
been made that pre-deal research should be characterized as
"investor education" and thus should fall outside of the
restrictions. Although no longer problematic under the Securities
Act, as a matter of prudence, investment banks appear to continue
to be concerned about liability, which may outweigh the potential
benefits of publishing such material or distributing it more
broadly than the current practice.
How Will Rule 144A Initial Purchase Agreements Change?
Rule 144A purchase agreements typically contain representations by the issuer and the initial purchaser that the securities covered by the agreement have not been and will not be (i) offered or sold in the United States to anyone not reasonably believed to be a QIB or (ii) offered or sold in the United States by any means of general solicitation or general advertising. Offering participants may move to limit the first representation to sales only and remove the second representation entirely. However, state blue sky laws and implications for non-reporting issuers should be considered, as discussed above.
Footnotes
1 Available at http://www.sec.gov/rules/final/2013/33-9415.pdf (the "Adopting Release").
2 See pages 56-57 of the Adopting Release.
3 Although old Rule 144A did not include an express prohibition against general solicitation, offers of securities under Rule 144A were limited to QIBs, which had the same practical effect.
4 Rule 139(a) states that a broker or dealer's publication or distribution of a research report about an issuer or any of its securities shall be deemed, for purposes of Section 5, "not to constitute an offer for sale or offer to sell a security that is the subject of an offering pursuant to a registration statement that the issuer proposes to file, or has filed, or that is effective, even if the broker or dealer is participating or will participate in the registered offering of the issuer's securities" (emphasis added) if the criteria set out in the rule is satisfied.
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