Sending Your Message: Communications Rules for Offerings · released factual business information will not be an offer and will not violate Section 5(c). •Defined as factual information

Sending Your Message: Communications Rules for Offerings

Teleconference

Wednesday, October 19, 2016

12:00 PM – 1:00 PM EDT

Presenters:

Marty Dunn, Partner, Morrison & Foerster LLP

1. Presentation

2. Practice Pointers on Navigating the Securities Act’s Prohibitionon General Solicitation and General Advertising

3. Frequently Asked Questions about Form 8-K

4. Frequently Asked Questions about Initial Public Offerings

5. Frequently Asked Questions about Regulation FD

6. Frequently Asked Questions about Communications Issues for Issuersand Financial Intermediaries

7. The Guide to Social Media and the Securities Laws

https://www.mofo.com/resources/events/161019-sending-your-message-communications-rules.html

https://www.mofo.com/people/marty-dunn.html

https://www.mofo.com/people/david-lynn.html

COMMUNICATIONS UNDER THE SECURITIES ACT OF 1933

October 19, 2016 Presented By

Marty Dunn

2 Morrison & Foerster LLP

COMMUNICATIONS UNDER THE SECURITIES ACT OF 1933


Section 5 – Securities Act of 1933 Illegal to engage in activities intended to stimulate interest in a securities offering prior to the filing of a registration statement containing the information required by the Securities Act.

• Section 5(c) – may not offer a security unless a registration statement has been filed.

• Section 5(a) – may not sell a security unless a registration statement relating to the security has been filed and declared effective.

• Section 5(b) – any “prospectus” relating to a security must comply with the requirements of Section 10 of the Securities Act.

• Section 2(a)(3) – an “offer” is “every attempt or offer to dispose of, or solicitations of offers to buy, a security or interest in a security for value.”


Section 5 “Gun Jumping” • The “pre-filing period” – the period from the time a company is first

“in registration” until the initial filing of a registration statement with the SEC.

• The “waiting period” – the period from the time a registration statement is filed with the SEC until it is declared effective.

• The “post-effective period” – the period from effectiveness until up to 25 days after effectiveness.

• Release 33-5180 – The SEC has indicated that a company is deemed to be “in registration” at least from the time it reaches an understanding with the managing underwriter of an offering.


Rule 163A • Exemption from Section 5(c) for communications made by or on

behalf of a company more than 30 days prior to filing a registration statement.

• May not reference a securities offering that is or will be the subject of a registration statement.

• Company must take reasonable steps to prevent further dissemination of the communication during the 30-day period immediately before the registration statement is filed.

• Applies only to communications by or on behalf of an issuer.


Rule 135 A limited announcement regarding a proposed public offering will not be an “offer” if it states that the offering will be made only by a prospectus and the notice contains no more than: • the name of the issuer; • the title, amount and basic terms of the securities; • the amount to be offered by any selling securityholders; • the anticipated timing of the offering; and • a brief statement of purpose of the offering without naming

underwriters.


Rule 169 Communications by or on behalf of a non-reporting issuer of regularly released factual business information will not be an offer and will not violate Section 5(c).

• Defined as factual information about the issuer, its business or financial developments or other aspects of its business; and advertisements of, or other information about, the issuer's products or services.

• Must be made by the same employees who historically have been responsible for providing such information to persons other than investors or potential investors.

• The information must be for the intended use of the company's customers and suppliers, other than in their capacities as investors in the company.


Rule 168 Communications issued by or on behalf of a reporting issuer of regularly released factual information will not be an offer and will not violate Section 5(c).

• Includes forward-looking information (unlike Rule 169).

• Company must have previously released or disseminated theinformation or the information must be released in the ordinarycourse of its business, and the timing, manner and form of the releasemust be consistent with similar past releases.

• Does not apply to a communication that also includes informationabout a registered offering or a communication that is disseminatedas part of the offering activities for a registered offering.


JOBS Act –Section 5(d) Testing the Waters With QIBs and IAIs for EGCs (Section 5(d))

• An “emerging growth company” (EGC), or any person authorized to act on behalf of an EGC, may “test the waters” by engaging in oral or written communications with potential investors that are qualified institutional buyers (QIBs) or institutions that are accredited investors (IAIs) to determine whether such investors might have an interest in a contemplated securities offering.


Rule 163 Communications, including certain offers to sell or buy securities, by issuers that qualify as "well-known seasoned issuers" (WKSIs) will be exempt from Section 5(c).

• Can be made by or on behalf of a WKSI, but may not be made by offering participants, such as prospective underwriters.

• Written communications are required to include a legend and are treated as issuer free writing prospectuses (FWPs).


Rule 134 Communications complying with Rule 134 will not be deemed offers.

• These communications may only contain, among other items enumerated in the rule, factual information about the legal identity and business location of the company and a brief indication of the general type of business of the company; and information with respect to the securities being offered, including the title, amount being offered, any listing, assigned or expected ratings, and the price, maturity, interest and yield (or bona fide estimates thereof).

• May also include the type of underwriting, names of underwriters, names of selling securityholders, and a brief description of the intended use of proceeds of the offering.

• Communication is required to include a legend unless accompanied or preceded by a Section 10-compliant prospectus or indicates where a Section 10-compliant prospectus may be obtained.


Free Writing Prospectuses Under Rule 433, a free writing prospectus (FWP) is a written communication that constitutes an offer to sell or a solicitation of an offer to buy securities that are or will be the subject of a registration statement.

• A non-reporting issuer is not permitted to use an FWP until a registration statement has been filed.

• May include information that is different from or supplemental to the information included in the registration statement, but the information may not conflict with the registration statement.

• Must comply with applicable prospectus delivery, SEC filing, and legend requirements.


GENERAL SOLICITATION


Regulation D • The JOBS Act included a measure directing SEC to relax the

prohibition against general solicitation and general advertising pursuant to Rule 502 under Regulation D of the Securities Act

• In July 2013, the SEC adopted final rules establishing that an issuer relying on Rule 506(c) may engage in general solicitation “provided that the sales are limited to accredited investors and an issuer takes reasonable steps to verify that all purchasers of the securities are accredited investors.”

• An issuer may rely on Rule 506(b) under the Securities Act and/or Section 4(a)(2) if it does not use general solicitation.

• The JOBS Act did not address the meaning of “general solicitation” under the Securities Act.


General Solicitation • A communication made by an issuer or its agent to an investor with

which either has a pre-existing, substantive relationship would not constitute a “general solicitation.”

• The SEC Staff has explained that a “pre-existing” relationship is one that the issuer has formed with a prospective offeree prior to the commencement of the securities offering or, alternatively, that was “established through either a registered broker-dealer or investment adviser prior to the registered broker-dealer’s or investment adviser’s participation in the offering.”

• A relationship is “substantive” where the issuer (or its agent) “has sufficient information to evaluate, and does, in fact, evaluate, a prospective offeree’s financial circumstances and sophistication, in determining his or her status as an accredited or sophisticated investor.”


General Solicitation • The SEC Staff has stated that there is no minimum waiting period

required to demonstrate the existence of a relationship. The issuer must establish a relationship prior to the commencement of an offering. Where a relationship is established through either a broker-dealer or investment adviser, “the relationship must be established prior to the time the registered broker-dealer or investment adviser began participating in the offering.”

• In Lamp Technologies, Inc., the SEC Staff determined that the posting of private fund investment information on a password-protected website managed by Lamp Technologies, Inc. did not constitute general solicitation.

• In Citizen VC, the SEC Staff found that the policies and procedures set forth by Citizen VC to ensure that there was a pre-existing, substantive relationship were sufficient for purposes of satisfying the requirements under Rule 502(c), notwithstanding the fact that there was no waiting period required before prospective investors could utilize Citizen VC’s website to make investments.


General Soliciation • The availability of the private placement exemption is not based on

the number of offerees; however, in assessing whether an issuer or its agent has engaged in general solicitation, the Commission and the SEC Staff have considered the breadth of the communications.

• The SEC Staff has stated that, generally, the “greater number of persons without financial experience, sophistication or any prior personal or business relationship with the issuer that are contacted by an issuer [(or its agent)] . . . through impersonal, non-selective means of communication, the more likely the communications are part of a general solicitation.”


General Solicitation • Other general solicitation issues:

• Cold calling;

• Use of print questionnaires;

• Use of electronic media and websites;

• Compilations of information regarding private offerings;

• Seminars, demo days, and venture fairs; and

• Angel investor networks.


General Solicitation • The SEC Staff has said that issuers may widely disseminate

information not involving an offer of securities and still comply with Rule 502(c), including “factual information” about the issuer that “does not condition the public mind or arouse public interest in a securities offering.”

• “Factual information” will be evaluated on a case-by-case basis, but typically should be limited to information about the issuer’s: (a) business; (b) financial condition; (c) products; and/or (d) services, as well as advertisements of such products or services, provided that such information is not presented in such a manner as to constitute an offer of the issuer’s securities.

• However, such information does not generally include any: (1) predictions; (2) projections; (3) forecasts; or (4) opinions concerning value.

• The meaning of “factual information” in the context of general solicitation can also be gleaned by analogizing to the safe harbors provided under Rule 168 and Rule 169 under the Securities Act.


MATERIALITY” AND THE “DUTY TO DISCLOSE”


Materiality • Information is material if there is a substantial likelihood that a

reasonable investor would consider it important in making an investment decision.

• “Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by a reasonable investor as having significantly altered the ‘total mix’ of the information available.”

• The concept of whether a fact is material or not material is a mixed question of law and fact, and the SEC has noted that the issuer is in the best position to know what is likely to be material to investors.

• Materiality is often judged with the benefit of hindsight, and the SEC has often looked to trading volume and price movements as evidence of materiality.


Materiality

• Even after the Sarbanes-Oxley Act, the principle survives that material information need not be disclosed currently unless there is a specific event or circumstance that affirmatively triggers a disclosure duty.

• The registrant should add to the 10-K and other Exchange Act filings such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading.

- Exchange Act Rule 12b-20; Instruction C(3) to Form 10-K


Materiality – The Court’s View • Richman v. Goldman Sachs Group, Inc., et al., 10 Civ 3461 (June 21,

2012, United States District Court for the Southern District of New York)

• Under the federal securities laws, there is no general obligation for issuers to disclose material information; rather, issuers are required to do so only where the federal securities laws specifically impose such a duty.

• “[W]hen a corporation chooses to speak—even where it lacks a duty to speak—it has a ‘duty to be both accurate and complete’.”

• “[A] corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact.”


Materiality – CorpFin’s View • “We also understand that materiality is not an easily applied litmus

test. If there any gray areas — and as disclosure lawyers I would suspect that you more frequently see shades of gray, rather than black and white — the company is likely to include the disclosure in its filing. And why wouldn’t you? Why would you take the risk of omitting disclosure that might be material? But are too many items in the obviously immaterial category being included?”

- “Disclosure Effectiveness: Remarks Before the American Bar Association Business Law Section Spring Meeting” – Keith F. Higgins, Director, Division of Corporation Finance, April 11, 2014


REGULATION FD AND ON-GOING DISCLOSURE


Regulation FD – Background • Regulation FD (for “Fair Disclosure”) was adopted on August 15, 2000.

• Adopted to address the problem of selective disclosure of material

information by companies, in which “a privileged few gain an informational edge – and the ability to use that edge to profit – from their superior access to corporate insiders, rather than from their skill, acumen, or diligence.”

• Primary goal of Regulation FD is to allow all investors to have equal access to a company’s material disclosures at the same time.

• Regulation FD fundamentally reshaped the ways in which public companies conducted conference calls, group investor meetings and “one-on-one” meetings with analysts and investors.


Where Does Regulation FD Fit? Periodic Reports: Filed with SEC; require “line-item” disclosures – :

• Form 10-K Annual Reports; and

• Form 10-Q Quarterly Reports.

Current Reports: Filed with SEC; requires reporting of specified events and permits voluntarily reporting of other events –

• Form 8-K.

Regulation FD: Does not call for specific subject matter; instead, if a company provides material non-public information to someone, the company generally must provide that information to everyone.


Basic Rule What Does Regulation FD Actually Require?

Whenever

• a public company, or any person acting on its behalf,

• discloses material non-public information to certain enumerated persons,

then

• the company must disclose that information, either

• simultaneously (in the case of intentional disclosures) or

• promptly (in the case of unintentional disclosures),

• using a reasonable method of broad public disclosure.


Scope of Regulation FD What is “non-public information”?

• Information is considered “non-public” until it has been disseminated in a manner making it available to investors generally.

• For information to be made public, “it must be disseminated in a manner calculated to reach the securities marketplace in general through recognized channels of distribution, and public investors must be afforded a reasonable waiting period to react to the information.”


Scope of Regulation FD Who are the “enumerated persons” covered by Regulation FD?

Regulation FD only covers disclosures to certain enumerated persons:

• Securities market professionals such as brokers, dealers, investment advisors, institutional investment managers and sell-side or buy-side analysts

• Shareholders who it is reasonably foreseeable would trade on the basis of the information

Regulation FD does not cover disclosures to:

• customers, suppliers, strategic partners and government regulators in ordinary course business communications

• attorneys, investment bankers, accountants and others who owe a duty of confidence to the company

• public media


Scope of Regulation FD Exempted Communications

Regulation FD does not apply to disclosures in the following categories:

• Communications to a person who owes the company a duty of trust or confidence, such as legal counsel, financial advisers and other so-called “temporary insiders”

• Communications to any person who expressly agrees to maintain the information in confidence

• Communications in connection with a capital raising transaction registered under the Securities Act of 1933 (i.e., a “public offering” by the Company)


Scope of Regulation FD Methods of Public Disclosure to Satisfy Regulation FD

A required disclosure under Regulation FD may be made by either of two methods:

• Public filing under the Securities Exchange Act of 1934, such as by means of a Form 8-K, which has two topics that are used most frequently for this purpose:

• Item 7.01 “Regulation FD Disclosure”

• Item 8.01 “Other Matters”

• A method or combination of methods of public disclosure reasonably designed to provide broad, non-exclusionary distribution of the information to the public, which may include some or all of the following:

• Press release distributed through a widely circulated news or news wire service, such as Dow Jones, Bloomberg, Business Wire, PR Newswire or Reuters

• News conference to which the public is granted access and for which advance notice is given

• Simultaneous webcast of a news conference or analyst conference call

• Posting of the information on the company’s website – with conditions

• Making available to the public a replay of the company’s news conference or conference call

• Social media – Subject to conditions


Scope of Regulation FD Using Company’s Website to Satisfy the Public Disclosure Requirement

Prior to a potentially selective disclosure: three considerations in determining whether information previously disclosed solely on the company’s website qualifies as “public disclosure”:

• Is the company’s website a recognized channel of distribution?

• Is information posted on the website in a manner that makes it generally available to investors and the securities marketplace?

• Has the information been posted for a reasonable period of time (a “reasonable waiting period”) so that it has been absorbed by investors?

After a selective disclosure: four considerations in determining whether a website posting following a selective disclosure qualifies as “public disclosure”:

• Same first two factors as those listed above for consideration prior to disclosure.

• Are the company’s website postings “reasonably designed to provide broad, non-exclusionary distribution of the information to the public”?

• Do the company’s website postings meet the “simultaneous” and “prompt” timing requirements of Regulation FD?


Scope of Regulation FD “Simultaneous” Public Disclosure for Intentional Selective Disclosures

• Selective disclosure is “intentional” when the individual making the disclosure knows, or is reckless in not knowing, that the information he or she is communicating is both material and non-public.

• Thus, even unplanned, off-the-cuff remarks that include information that the speaker knows to be, or is reckless in not knowing is, material and non-public to select analysts has made an intentional selective disclosure.

• Absent advance preparation to enable simultaneous public disclosure, it is very difficult for a company to avoid a violation of Regulation FD for unplanned intentional selective disclosures.


Scope of Regulation FD “Prompt” Public Disclosure for Unintentional Selective Disclosures

• Selective disclosure is “unintentional” when the individual making the disclosure did not know, and was not reckless in not knowing, that the information he or she was communicating was both material and non-public.

• Regulation FD defines “promptly” as “as soon as reasonably practicable” but in no event after the later of:

• 24 hours, or

• the start of the next day’s trading on the NYSE, in both cases after a senior company official learns of the disclosure.


Social Media Netflix – SEC “Section 21(a) Report”

• Issuers should examine whether they are using a “recognized channel of distribution” for communicating with their investors.

• Appropriate notice must be given to investors of the specific channels a company will use.

• Corporate websites should identify any social media channels a company intends to use for the dissemination of material, non-public information, to give investors and the markets the opportunity to subscribe, join, register or review them. The corporate website should clearly indicate who the company has authorized as distributors of information and that no other company employees are authorized to speak for the company.

• Disclosure of material, non-public information on the personal social media site of an individual corporate officer (without advance notice to investors that the site may be used for this purpose) is unlikely to qualify as a method “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” within the meaning of Regulation FD.

• Division of Corporation Finance follow-up statements – also important to consider whether the company has actually used the channel to communicate material information to investors.


Best Practices Design procedures to satisfactorily effect broad, non-exclusionary distribution of information to the public. SEC expressly approved the following procedures:

• “First, issue a press release, distributed through regular channels, containing the material information;

• Second, provide adequate notice, by a press release and/or website posting, of a scheduled conference call to discuss the material information, giving investors both the time and date of the conference call, and instructions on how to access the call; and

• Third, hold the conference call in an open manner, permitting investors to listen in either by telephonic means or through Internet web casting.”


Best Practices Providing Earnings Guidance

• SEC has paid particular attention to the practice of providing guidance (and subsequent confirmation of guidance) to analysts.

• Companies take on a “high degree of risk under Regulation FD” when engaging in private discussions with analysts seeking guidance or affirmation of prior guidance.


Best Practices Dealing With Analysts

• No earnings guidance without simultaneous public disclosure. Do not give earnings guidance (or other material guidance) to analysts one-on-one, unless the same guidance is announced simultaneously to the public.

• Affirmation of prior guidance without simultaneous public disclosure has serious risks.

• Reiterating guidance may have the same effect as providing guidance originally – provides material non-public information to analyst.

• SEC will interpret broadly language that may be deemed to confirm guidance.

• Many companies elect not to discuss guidance outside of methods that fall within the definition of “public disclosure” and observe strict “no comment” policies regarding confirmation of guidance.

• Many companies also impose “quiet periods” until earnings are released.

The Jumpstart Our Business Startups Act (the “JOBS Act”) included a measure directing the Securities and Exchange Commission (the “SEC” or “Commission”) to relax the prohibition against general solicitation and general advertising pursuant to Rule 502(c) (“Rule 502(c)”) under Regulation D (“Reg D”) of the Securities Act of 1933, as amended (the “Securities Act”), for certain Rule 506 offerings. In July 2013, the SEC adopted final rules establishing that an issuer relying on Rule 506(c) may engage in general solicitation “provided that the sales are limited to accredited investors and an issuer takes reasonable steps to verify that all purchasers of the securities are accredited investors.”1 Section 4(a)(2) of the Securities Act (“Section 4(a)(2)”) provides an exemption from the registration requirements under Section 5 of the Securities Act for a transaction undertaken by an issuer that does not involve any public offering. An issuer may rely on Rule 506(b) under the Securities Act and/or Section 4(a)(2) if it does not use general solicitation. The JOBS Act did not address the meaning of “general solicitation” under the Securities Act. However, since the new rules required issuers and other market participants to consider whether in connection with a proposed offering they would rely on Section 4(a)(2)/Rule 506(b) or on the new Rule 506(c), renewed attention was placed on the types of communications that may constitute a “general solicitation.” The SEC has not explicitly defined the terms “general solicitation” or “general advertising” under Reg D. However, Rule 502(c) lists several examples of general solicitation and general advertising, including (1) “any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio”2 and (2) “any seminar or meetings whose attendees have been invited by any general solicitation or general advertising.”3 These are communications that are not targeted or directed to a specific individual or to a particular audience, but rather broad-based communications that may reach potential investors not known to the issuer or its financial intermediary. Over time, the SEC Staff has provided guidance, mainly through no-action letters and more recently through Compliance and Disclosure Interpretations (“C&DIs”), regarding the types of communications that would be viewed as a “general solicitation.” Below we summarize the guidance. A. General solicitation

Pre-Existing, Substantive Relationships A communication made by an issuer or its agent to an investor with which either has a pre-existing, substantive relationship would not constitute a “general solicitation.”4 The Meaning of “Pre-Existing.” The SEC Staff has explained that a “pre-existing” relationship is one that the issuer has formed with a prospective offeree prior to the commencement of the securities offering or, alternatively, that was “established through either a registered broker-dealer or investment adviser prior to the registered broker-dealer’s or investment adviser’s participation in the offering.”5 In E.F. Hutton & Co., the SEC Staff explained that whether a relationship was pre-existing hinged largely on whether there was “sufficient time between establishment of the relationship and an offer so that the offer is not considered made by general solicitation or advertising.”6 E.F. Hutton & Co. (“E.F. Hutton”), an investment bank, intended to send to certain prospective offerees pre-offering materials and/or private offering memoranda in accordance with specific investor selection procedures that it had developed.7 These prospective offerees were those with whom E.F. Hutton had established a prior business relationship or whom had indicated in writing that they desired to form such a relationship. The SEC Staff found that E.F. Hutton had failed to address whether its relationships with the proposed offerees were pre-existing, because it was unclear whether the relationships were the result of general solicitation in connection with a current offering.8 Similarly, in Webster Management Assured Return Equity Management Group Trust, the SEC Staff

1 Securities and Exchange Commission, “Eliminating the Prohibition on General Solicitation and General Advertising in Certain Offerings,” SEC Open Meeting (July 10, 2013), available at https://www.sec.gov/news/press/2013/2013-124-item1.htm. 2 17 C.F.R. § 230.502(c)(1). 3 17 C.F.R. § 230.502(c)(2). 4 See SEC Division of Corporation Finance Compliance and Disclosure Interpretations, Securities Act Rules (updated Aug. 6, 2015), at Question 256.26. See also E.F. Hutton & Company, SEC No-Action Letter (Dec. 3, 1985) (“In determining what constitutes a general solicitation the [SEC Staff] has underscored the existence and substance of prior relationships between the issuer or its agents and those being solicited”) (referred to herein as “E.F. Hutton & Co.”). 5 C&DI, supra note 4 at Question 256.29. 6 E.F. Hutton, supra note 4. 7 Id. 8 Id.

Practice Pointers on Navigating the Securities Act’s Prohibition on General

Solicitation and General Advertising

found that because a selling agent had contacted potential customers on behalf of a trust, customers with whom neither the selling agent nor the trust had formed any relationship prior to the commencement of the trust’s securities offering, the arrangement constituted a general solicitation.9 The Meaning of “Substantive.” A relationship is “substantive” where the issuer (or its agent) “has sufficient information to evaluate, and does, in fact, evaluate, a prospective offeree’s financial circumstances and sophistication, in determining his or her status as an accredited or sophisticated investor.”10 Self-certification by a person regarding his or her status as an accredited or sophisticated investor, alone, is not sufficient to establish a substantive relationship.11 In Citizen VC, Inc., the SEC Staff asserted that the “quality of the relationship between the issuer (or its agent) and an investor” is the critical factor for evaluating whether a substantive relationship exists.12 The SEC Staff indicated that the quality of the relationship depends on whether the issuer (or its agent) has sufficient information to evaluate a prospective offeree’s financial circumstances and sophistication. The SEC Staff found that Citizen VC, Inc. (“Citizen VC”) was able to establish a substantive relationship with prospective investors through the implementation of its policies and procedures, including the completion of a generic online “accredited investor” questionnaire (i.e., a self-certification of accreditation) and a subsequent “relationship establishment period,” both of which were designed specifically to evaluate the prospective investor’s sophistication and ability to understand the nature and risks of the potential offering.13 In E.F. Hutton & Co., the SEC Staff found that a substantive relationship had been partially created between E.F. Hutton and prospective investors, to whom E.F. Hutton intended to mail pre-offering materials and/or private offering memoranda related to real property investments. E.F. Hutton had put in place procedures that would ensure that the offering materials were sent only to prospective offerees with whom Hutton had established a prior business relationship in the past or had indicated (in writing) that they desired to enter into such a business relationship.14 The SEC Staff determined that E.F. Hutton had failed to establish the existence of a substantive relationship with investors that had merely indicated in response to a questionnaire (the “Suitability Questionnaire”) and new client intake form (the “New Account Form”) that they desired to form such a relationship. While the information obtained from the Suitability Questionnaires and New Account Forms was relevant for evaluating the sophistication and financial circumstances of each client, the form relied entirely on the responses of the individual investor and, therefore, constituted self-certification. Establishing a Pre-Existing, Substantive Relationship. The SEC Staff has stated that there is no minimum waiting period required to demonstrate the existence of a relationship. The issuer must establish a relationship prior to the commencement of an offering. Where a relationship is established through either a broker-dealer or investment adviser, “the relationship must be established prior to the time the registered broker-dealer or investment adviser began participating in the offering.”15 Often private funds conduct “continuous offerings,” and, in these cases, the pre-existing, substantive relationship would be established prior to the offering made to each investor, rather than the first offering made to the first investor. In Lamp Technologies, Inc., the SEC Staff determined that the posting of private fund investment information on a password-protected website managed by Lamp Technologies, Inc. (“Lamp Technologies”) did not constitute general solicitation.16 Subscribers could only gain access to the private fund information on the website after (1) completing a generic questionnaire that would enable Lamp Technologies to form a reasonable basis on which to decide whether the prospective subscriber was an accredited investor and (2) paying a subscription fee to use the website. After satisfying these two requirements, a subscriber would receive a password granting him or her access to the information posted on the website. A subscriber would not be permitted to invest in any posted fund on the website for 30 days following the subscriber’s qualification in order to ensure that the subscriber did not take part in an offering that was commenced prior to the establishment of a substantive, pre-existing relationship. In reaching its conclusion that the website did not constitute general solicitation, the SEC Staff noted that the 30-day waiting period would ensure that subscribers “[did] not join to invest in any particular private fund.”17 In Citizen VC, the SEC Staff found that the policies and procedures set forth by Citizen VC to ensure that there was a pre-existing, substantive relationship were sufficient for purposes of satisfying the requirements under Rule 502(c), notwithstanding the fact that there was no waiting period required before prospective investors could utilize Citizen VC’s website to make investments.18 However, the SEC

9 Webster Management Assured Return Equity Management Group Trust, SEC No-Action Letter (Nov. 11, 1986). 10 C&DI, supra note 4 at Question 256.31. 11 Id. 12 Citizen VC, Inc., SEC No-Action Letter (Aug. 6, 2015). 13 Id. For further information on the policies and procedures implemented by Citizen VC, please see the section titled “Use of Questionnaires and Electronic Media” below. 14 E.F. Hutton, supra note 4. 15 Id. 16 See Lamp Technologies, Inc., SEC No-Action Letter (May 29, 1997) (referred to herein as “Lamp Technologies”). 17 Id. 18 See Citizen VC, supra note 12.

Staff noted that a prospective investor would only be presented with an investment opportunity after the investor had gone through Citizen VC’s extensive vetting process.19 In H.B. Shaine & Co., Inc., the SEC Staff determined that the distribution of a generic questionnaire to potential accredited and sophisticated investors by H.B. Shaine & Co., a registered broker-dealer (“H.B. Shaine”), for purposes of evaluating the prospective investors’ ability to participate in future exempt offerings was neither general solicitation nor general advertising. The SEC Staff’s conclusion was based partly on the fact that sufficient time would have passed between the completion of H.B. Shaine’s questionnaire and the contemplation, or commencement, of any potential offering.20 Who May Establish a Pre-Existing, Substantive Relationship? The existence of a pre-existing, substantive relationship often rests on whether appropriate procedures have been established by broker-dealers in connection with their customers.21 As the SEC Staff has explained, this is due to the fact that “traditional broker-dealer relationships require that a broker-dealer deal fairly with, and make suitable recommendations to, customers and thus, implies that a substantive relationship exists between the broker-dealer and its customers.”22 Likewise, an investment adviser, as a fiduciary, would need to “make a reasonable determination that the investment advice provided is suitable for the client based on the client’s financial situation and investment objective, such that a substantive relationship could exist.”23 The SEC Staff, however, has affirmed that other third parties could establish a pre-existing, substantive relationship sufficient to avoid general solicitation.24 For example, the SEC Staff determined in Woodtrails – Seattle, Ltd. that an issuer, Woodtrails – Seattle, Ltd. (“Woodtrails”), had developed pre-existing, substantive business relationships with its prospective offerees, because (1) such relationships were established within the last three years, and (2) the nature of those relationships was evidenced by (i) a determination (in part) by the general partner, at the time of the original investment, that the investors met specific suitability standards and (ii) the belief by Woodtrails that each of the proposed offerees was sophisticated and fully capable of evaluating the risks and merits of a potential investment.25 While an issuer, as opposed to a broker-dealer or investment adviser, may establish a pre-existing, substantive relationship with a prospective investor, the SEC Staff has noted that “it is likely more difficult for an issuer to establish a pre-existing, substantive relationship, especially when contemplating or engaged in an offering over the Internet.”26 Therefore, an issuer, in the context of an Internet-based offering, would need to consider whether it has sufficient information about particular offerees and use that information appropriately to evaluate the financial circumstances and sophistication of the prospective offerees prior to commencing the offering. The Nature of the Communications The Number of Offerees. The availability of the private placement exemption is not based on the number of offerees; however, in assessing whether an issuer or its agent has engaged in general solicitation, the Commission and the SEC Staff have considered the breadth of the communications.27 The SEC Staff has stated that, generally, the “greater number of persons without financial experience, sophistication or any prior personal or business relationship with the issuer that are contacted by an issuer [(or its agent)] . . . through impersonal, non-selective means of communication, the more likely the communications are part of a general solicitation.”28 In Woodtrails – Seattle, Ltd., the SEC Staff determined that Woodtrails did not generally solicit when it proposed to mail a written offer to approximately 330 persons who had previously invested in other limited partnerships sponsored by Woodtrails’ general partner. Likewise, in Michigan Growth Capital Symposium, the SEC Staff determined that a symposium, sponsored by the University of Michigan’s School of Business for the purpose of providing Michigan firms with efficient access to national private equity financing, did not involve general solicitation. In its letter to the SEC Staff, the Michigan Growth Capital Symposium noted that, like the 330 prospective investors in Woodtrails – Seattle, Ltd., “the number of invitees [to the Symposium] would not appear on its face to cause a problem, given the characteristics of the attendees, their varied purposes, and sophistication and qualification of potential investors, and

19 Id. 20 H.B. Shaine & Co., Inc., SEC No-Action Letter (May 1, 1987) (referred to herein as “H.B. Shaine & Co.”). 21 C&DI, supra note 4 at Question 256.32. 22 Id. 23 C&DI, supra note 4 at Question 256.28. 24 See Securities Act Release No. 33-7856 (Apr. 28, 2000). 25 See Woodtrails – Seattle, Ltd., SEC No-Action Letter (Aug. 9, 1982) (referred to herein as “Woodtrails – Seattle”). 26 C&DI, supra note 4 at Question 256.32. 27 See Securities Act Release No. 33-6339, n. 30 (Aug. 7, 1981) (“. . . depending on the actual circumstances, offering[s] made to such large numbers of purchasers may involve a violation of the prohibitions against general solicitation and general advertising”). See also SEC, Staff Report, Implications of the Growth of Hedge Funds, at 15 n.44 (Sept. 2003), available at https://www.sec.gov/news/studies/hedgefunds0903.pdf (repeating the same caution, originally noted in the Regulation D proposing release, that offerings made to large numbers of purchasers may involve a violation of the prohibitions on general solicitation and general advertising). 28 C&DI, supra note 4 at Question 256.27.

the unique nature of the presentations.”29 Cold Calling. The SEC Staff has offered guidance on whether “cold calling” will constitute general solicitation, irrespective of whether a pre-existing, substantive relationship has been established. For example, in Mobile Biopsy, LLC, the SEC Staff determined that a series of “cold” communications, in which Mobile Biopsy, LLC (“Mobile Biopsy”), and its affiliated limited liability companies would contact all physicians in North Carolina for the purpose of offering securities in a proposed venture, constituted general solicitation.30 While Mobile Biopsy asserted that limiting contact to only surgeons and radiologists “who have an interest in treating breast cancer,” as well as “the practice groups and medical facilities with which such doctors are associated,” was a permitted “targeted approach” under Rule 502(c), the SEC Staff nevertheless viewed the solicitation as being directed generally toward a large group of investors.31 Similarly, in General Solicitation Under Rule 502(c) of SEC Regulation D, the SEC Staff explained that it would not grant no-action relief under Rule 502(c) in the case of a “cold mass mailing” to broker-dealers, investment advisers, accountants, and attorneys of a brochure summarizing a private placement memorandum in connection with a potential Rule 505 or 506 offering.32 Use of Questionnaires and Electronic Media As discussed below, both the Commission and the SEC Staff have affirmed that in certain circumstances, generic print questionnaires and forms of electronic media (e.g., websites) may be used to assess investor suitability prior to presenting an investment opportunity. Print Questionnaires. The SEC Staff has offered guidance as to whether the use of generic questionnaires that target particular types of investors will constitute general solicitation. For example, in H.B. Shaine & Co., Inc., the SEC Staff noted that the distribution of generic questionnaires by H.B. Shaine to prospective accredited and sophisticated investors for the purpose of evaluating their suitability for participating in Rule 505 and Rule 506 offerings did not violate Rule 502(c)’s prohibition on general solicitation.33 The questionnaire used by H.B. Shaine was updated annually and collected specific information regarding a prospective investor’s employment history, business experience, business or professional education, investment experience, income, and net worth, as well as whether the prospective investor had the “ability to evaluate the merits and risk of venture capital investments.”34 However, instead of merely allowing a prospective investor to self-certify as a suitable investor, H.B. Shaine evaluated each of the responses to determine the prospective investor’s potential as an accredited investor. Likewise, in Bateman Eichler, Hill Richards, Inc., the SEC Staff found that the mailing of a letter and suitability questionnaire (to evaluate accreditation and sophistication) by Bateman Eichler, a broker-dealer, to a limited mailing list of professionals and businesspeople on a monthly basis did not violate Rule 502(c).35 Bateman Eichler would follow up with each investor to obtain additional personal and financial information based on the responses provided in the investor’s suitability questionnaire. A respondent who satisfactorily completed the “follow-up stage” would then be placed on a list of prospective investors for future exempt offers. The SEC Staff in Bateman Eichler based its determination on the fact that (1) the questionnaire would be generic in nature and would not make reference to any specific investment currently offered or contemplated for offering by Bateman Eichler and (2) that Bateman Eichler would implement procedures designed to ensure that persons solicited were not offered any securities that were offered or contemplated for offering at the time of the solicitation. However, in AgriStar Global Networks, Ltd., the SEC Staff did not grant no-action relief to AgriStar Global Networks, Ltd. (“AgriStar”), in connection with AgriStar’s plan to establish a database of accredited investors.36 AgriStar intended to distribute generic questionnaires to certain U.S. farms and their owners (or operators) in order to solicit information about investors’ sophistication (e.g., previous investment experience, net worth, and annual income) and status as accredited investors. Such information would then be placed in a database maintained by AgriStar for future offerings. The questionnaire itself would not specifically refer to any private offerings to be made by AgriStar in the future, and AgriStar would ensure a sufficient waiting period prior to providing any potential qualified investor with any information relating to a proposed offering of AgriStar securities.37 Unlike in H.B. Shaine & Co. and Bateman Eichler, which involved similar questionnaires, AgriStar was operating in its capacity as an issuer and not a broker-dealer. 29 Michigan Growth Capital Symposium, SEC No-Action Letter (May 4, 1995). But see Mineral Lands Research & Marketing Corporation, SEC No-Action Letter (Dec. 4, 1985) (where the SEC Staff did not make a determination as to whether the fact that a class of offerees was limited to only 600 existing clients was material to determining if general solicitation had occurred). 30 Mobile Biopsy, LLC, SEC No-Action Letter (Aug. 11, 1999) (referred to herein as “Mobile Biopsy”). 31 Id. 32General Solicitation Under Rule 502(c) of SEC Regulation D, SEC No-Action Letter (Jan. 16, 1990). 33 H.B. Shaine & Co., supra note 20. 34 Id. 35 Bateman Eichler, Hill Richards, Inc., SEC No-Action Letter (Dec. 3, 1985) (referred to herein as “Bateman Eichler”). 36 AgriStar Global Networks, Ltd., SEC No-Action Letter (Feb. 9, 2004) (referred to herein as “AgriStar”). 37 Id.

Electronic Media and Websites. Both the Commission and the SEC Staff have clarified when use of electronic media and the Internet will constitute a general solicitation. In October 1995, the Commission explained that an offer conducted through an issuer’s unrestricted, publicly available website would violate Rule 502(c), even if the website required various forms of information from a prospective investor prior to displaying any offering materials.38 This was reaffirmed by the SEC Staff in August 2015.39 However, in IPONET, the SEC Staff found that W.J. Gallagher & Company, Inc. (“Gallagher”), a registered broker-dealer, and its affiliate, IPONET, did not engage in general solicitation when Gallagher invited prospective investors to complete a questionnaire on IPONET’s website for the purpose of building a customer base and database of accredited and sophisticated investors.40 The SEC Staff noted that its conclusion was based on the fact that:

• the invitation to complete the questionnaire and the questionnaire itself would be generic in nature and would not reference any specific transactions posted or to be posted on the password-protected page of IPONET;

• IPONET’s password-protected page would be available to a particular investor only after Gallagher made the determination that the particular potential investor was accredited or sophisticated; and

• a prospective investor could purchase securities only in transactions that were posted on the password-protected page of IPONET after the investor’s qualification with IPONET.

In May 2000, however, the SEC Staff limited the scope of IPONET, noting that certain third-party service providers (that were neither registered broker-dealers nor affiliated with broker-dealers) had deviated substantially from the facts in IPONET by establishing websites that generally invite prospective investors to qualify as accredited or sophisticated as a prelude to participation; they also failed to require that prospective investors complete questionnaires needed to form a reasonable belief regarding their accreditation or sophistication.41 Accordingly, the SEC Staff asserted that “these web sites, particularly those allowing for self-accreditation, raise significant concerns as to whether the offerings that they facilitate involve general solicitations.”42 Notwithstanding these concerns, the SEC Staff again found in Citizen VC that a website could be used to both evaluate the suitability of prospective investors and provide investors with investment opportunities without contravening Rule 502(c).43 Citizen VC intended to implement policies and procedures that would enable Citizen VC to thoroughly evaluate the sophistication of any potential investor before enabling him or her to use its website for investment opportunities. The policies and procedures included both an online questionnaire–which served the purpose of self-certification of accreditation–and a “relationship establishment period.” As part of the relationship establishment period, Citizen VC would undertake several actions to establish a substantive relationship, including obtaining details related to the investor’s prior investment experience and sophistication, and evaluating an investor’s suitability and accuracy of information provided through the use of third-party credit reporting services. Accordingly, Citizen VC establishes that a website that solely requires self-certification of accreditation or sophistication will likely not satisfy the requirements under Rule 502(c). Instead, an issuer (or its agent) must also implement policies that ensure a comprehensive review of the accreditation and qualifications of any potential investor prior to making any offering through the use of a website or other form of electronic media. Compilation of Information Related to Private Offerings The SEC Staff has, on several occasions, articulated its views on whether the distribution of a compilation of information related to private issuers and offerings, including in the form of a newsletter, guide, magazine, or written analysis, constitutes general solicitation. In Richard Daniels, the SEC Staff found that the dissemination of a newsletter on a subscription basis, which set forth information derived entirely from public records filed in the office of the Arizona Secretary of State concerning Arizona limited partnerships, would not violate Rule 502(c). Richard Daniels, the publisher of the newsletter, intended the newsletter to provide pertinent information contained in each certificate of limited partnership filed during the previous month, including: (i) the partnership name; (ii) names and addresses of general and limited partners; (iii) the type of partnership business; and (iv) the amount of initial and deferred capital contributions, as well as a summary of the previous month’s limited partnership activity in Arizona (e.g., the total number of limited partnerships formed and total capital raised). In reaching its conclusion, the SEC Staff noted that: (1) all Arizona limited partnerships would be included in the newsletter; (2) no analysis would be conducted of any issuer or any offering; and (3) neither the issuers listed in the newsletter nor any person acting on the issuers’ behalf would be responsible for the preparation of or payment for the materials included in the publication.44

38 See Securities Act Release No. 33-7233 (Oct. 6, 1995). 39 C&DI, supra note 4 at Question 256.23 (“. . . the use of an unrestricted, publicly available website constitutes a general solicitation and is not consistent with the prohibition on general solicitation and advertising in Rule 502(c) if the website contains an offer of securities”). 40 IPONET, SEC No-Action Letter (July 26, 1996) (referred to herein as “IPONET”). 41 See Securities Act Release No. 33-7856 (May 4, 2000). 42 Id. 43 See Citizen VC, supra note 12. 44 Richard Daniels, SEC No-Action Letter (Dec. 19, 1984) (referred to herein as “Richard Daniels”).

In Nancy Blasberg, the SEC Staff determined that the distribution of a guide, which set forth information concerning outstanding securities of selected companies–derived mainly from public resources (e.g., public research materials and public reports) and information on issuing companies provided in response to requests made to such issuing companies–would not violate Rule 502(c). The guide included the general “terms and features of most outstanding private-placed or closely-held preferred stocks of utility, financial and transportation companies.”45 The SEC Staff based its conclusion largely on the fact that the guide would only “contain certain limited information [on issuers]” and “in no case would [the guide’s creator] be in the employ of, or acting as agent for, any issuer contained in the guide.”46 However, in Tax Investment Information Corp., the SEC Staff found that the Tax Investment Information Corporation’s (“TIIC”) distribution of a circular, the Tax Investment Letter, to practicing accountants and attorneys regarding private placement offerings in Louisiana constituted general solicitation.47 Unlike in Richard Daniels and Nancy Blasberg, the SEC Staff found that TIIC’s review and analysis of private placements in the Tax Investment Letter did not equate to the mere “assimilation of data and calculations.”48 On the contrary, TIIC’s written analysis would specifically provide “background data on the principals involved in the offering, the marketability of the investment and any other additional comments felt pertinent to the economic and/or tax ramifications of the investment.”49 The SEC Staff reached a similar conclusion in J.D. Manning, Inc., in which J.D. Manning, Inc. (“J.D. Manning”) planned to publish a periodic newsletter containing a list and description of close-held businesses that may have expected to make exempt private securities offerings to raise capital in the future.50 Businesses choosing to participate in the newsletter would prepare materials for inclusion and pay for its publication. Subscribers of the newsletter would consist primarily of prospective investors and support service firms (e.g., accountants, attorneys, financial institutions, etc.). J.D. Manning would solicit subscribers through either the use of print media or personal sales/speaking engagements. The SEC Staff especially noted that the newsletter constituted general solicitation because it would contain “the estimated amount of capital which may be raised [by participating businesses] within 12 months following publication.”51 Therefore, although none of the participating businesses were in the process of offering securities at the time of publication, these businesses could still raise capital shortly thereafter, which made the publication a general solicitation. The SEC Staff has at times also found that it was unable to make a determination as to whether a publication containing a compilation of information related to certain private offerings violated Rule 502(c). For example, in Oil and Gas Investor, the SEC Staff found that it was unable to determine whether Oil and Gas Investor magazine, a publication that would contain factual information relating to offerings, registered and unregistered, of securities in oil and gas drilling programs, constituted general solicitation.52 The magazine would only contain “bare-bones factual information relating to available [oil drilling] programs, both public and private” (e.g., unit price, minimum subscriptions, aggregate amount of the offerings, and terms of the offerings), based on the magazine publisher’s review of SEC filings and direct inquiries of companies known to sponsor oil and gas programs.53 The publisher attempted to distinguish the magazine from Tax Investment Information Corp., because, unlike the Tax Investment Letter, Oil and Gas Investor magazine “[could not] be used to induce others to make an investment since it [did] not contain a recommendation or purpose to set forth an evaluation upon which to base an investment decision.”54 However, the SEC Staff concluded that it was unable to make a determination under Rule 502(c) because there were unanswered questions regarding “the exact language of particular published material” and the issuers’ role, if any, “regarding the publication of information concerning the offering of its securities.”55 Seminars, Demo Days, and Venture Fairs The Commission and the SEC Staff have also offered guidance regarding an issuer’s participation in a “seminar” and whether this would constitute a general solicitation. Prior to 2013, the SEC Staff’s interpretation of what constituted a permissible “seminar” rested largely on its 1995 determination in Michigan Growth Capital Symposium.56 In Michigan Growth Capital Symposium, the SEC Staff was asked to determine whether a symposium, co-sponsored by the University of Michigan and the Office for the Study of Private Equity Finance (“OSPEF”) of its School of Business, which functioned as a vehicle to provide Michigan firms with efficient access to the national private equity finance markets, was engaged in general solicitation. Only private companies that were selected by the director of the OSPEF could present at the symposium. The SEC Staff found that the symposium did not violate Rule 502(c) because: (1) the symposium was publicized through targeted mailing to “known accredited investors, limited generic advertising in the Venture Journal and by word of mouth by prior attendees”; (2) the symposium did not arrange any prior contacts between presenter firms and attendees, no specific financing details were presented by any company, and no private placement materials were distributed; and (3) neither the symposium nor the director of the OSPEF (i) provided any other services, beyond limited consulting services, to any participating

45 Nancy Blasberg, SEC No-Action Letter (July 12, 1986) (referred to herein as “Nancy Blasberg”). 46 Id. 47 Tax Investment Information Corp., SEC No-Action Letter (Dec. 19, 1984). 48 Id. 49 Id. 50 J.D. Manning, Inc., SEC No-Action Letter (Feb. 27, 1986). 51 Id. 52 Oil and Gas Investor, SEC No-Action Letter (Sept. 9, 1983). 53 Id. 54 Id. 55 Id. 56 Michigan Growth Capital Symposium, supra note 29.

company or (ii) received any compensation from presenters or attendees of the symposium, including any conditional fees or brokerage-type commissions (except for fees associated with the conduct of the symposium). In August 2015, the SEC Staff explained that an issuer’s presentation may not constitute general solicitation if attendance at the demo day or venture fair is limited to persons with whom the issuer or the organizer has pre-existing, substantive relationships or who have been contacted through a personal network of individuals with experience investing in private offerings. 57 Angel Investor Networks The SEC Staff also addressed whether an issuer’s interactions with an “angel investor network” would constitute a general solicitation. For example, sophisticated individuals, such as angel investors, share information about offerings through their network, and members who have a relationship with a particular issuer may introduce that issuer to other members of the network.58 However, even where an issuer is unsure as to the level of sophistication of a particular offeree who is part of such a network, the SEC Staff noted that an issuer who interacts with members of the network through this type of referral may be able to rely on those members’ network to establish a reasonable belief that other offerees in the network have the necessary financial experience and sophistication. Nevertheless, whether an issuer’s interaction with angel investor networks constitutes general solicitation will still be evaluated on a case-by-case basis. B. General Advertisements

The SEC Staff has additionally provided helpful guidance as to when an advertisement constitutes “general advertising.” In Gerald F. Gerstenfeld, the SEC Staff found that a syndicator’s intention to publish an advertisement in the Wall Street Journal–for the purposes of indicating that the syndicator was selling securities in private placements and inviting members of the public to call or write to the syndicator for additional information–would constitute a general advertisement if published while the syndicator was in the process of offering and selling securities.59 The general advertisement in Gerald F. Gerstenfeld was not limited to a targeted group of sophisticated investors, but instead would have been shown to the general public without limitation. The SEC Staff additionally noted that the advertisement would even constitute a prohibited general advertisement even if securities were not being sold at the time of the advertisement’s publication, as long as the syndicator expected in the near future to offer and sell securities. In Alma Securities Corporation, the SEC Staff assessed whether “tombstone” advertisements that merely announce the completion of private placements constitute general advertising.60 While the SEC Staff did not express a definitive view, it did nevertheless provide several factors to consider. The SEC Staff affirmed that the critical determining factor is whether the tombstone advertisement is used to offer or sell securities.61 An advertisement would likely violate Rule 502(c) where a sponsor or issuer conducts an ongoing program of private or limited offerings, and the tombstone announcements for the completion of each individual offering could be used to solicit investors to the program as a whole.62 Conversely, the publication of a tombstone announcement in connection with an isolated offering where the advertisement would have no immediate or direct bearing on contemporaneous or subsequent offers or sales of securities would likely not constitute a general advertisement.63 In Aspen Grove, the SEC Staff found the proposed use of a promotional brochure, as well as a magazine advertisement by Aspen Grove, a limited partnership formed for the purpose of boarding, breeding, breaking, and training thoroughbred horses, constituted general solicitation and general advertising.64 Aspen Grove intended to solicit interests in the limited partnership through (1) the mailing of a brochure to members of the Thoroughbred Owners and Breeders Association, (2) the distribution of brochures at a local sale for horse owners, and (3) the placement of an advertisement in The Blood Horse, a trade journal for readers specifically interested in race horses.65 The SEC Staff found that the advertisement in The Blood Horse constituted a general advertisement because the journal was visible, without limitation, to any member of the public. Accordingly, whether a communication made by a newspaper, news service, or other third party constitutes general advertising will largely depend on the involvement of the issuer (or its agent) and the timing of an offering. Where an issuer (or its agent) neither sponsors nor participates in an advertisement (i.e., by offering information to be provided in the communication), and there is no concurrent or contemplated offering, the communication will likely not constitute general advertising. Moreover, an advertisement that constitutes an ordinary-course business communication (e.g., factual business information or an announcement of new products and services) will likely fall outside of the prohibition on general advertising.66 Even where an SEC-reporting issuer is contemplating an

57 C&DI, supra note 4 at Question 256.33. 58 Id. at Question 256.27. 59 Gerald F. Gerstenfeld, SEC No-Action Letter (Dec. 3, 1985). 60 Alma Securities Corporation, SEC No-Action Letter (Aug. 2, 1982). 61 Id. 62 Id. 63 Id. 64 Aspen Grove, SEC No-Action Letter (Dec. 8, 1982). 65 Id. 66 See Section C, infra, for a discussion on “factual information.”

unregistered offering, the SEC has carved out a safe harbor under Rule 135c under the Securities Act, which enables the issuer to publish a notice (e.g., a news release or other written communication) concerning the offering to the public.67

C. Factual Information

In August 2015, the SEC Staff reaffirmed that issuers may widely disseminate information not involving an offer of securities and still comply with Rule 502(c), including “factual information” about the issuer that “does not condition the public mind or arouse public interest in a securities offering.”68 The SEC Staff explained that “factual information” will be evaluated on a case-by-case basis, but typically should be limited to general information about the issuer’s: (a) business; (b) financial condition; (c) products; and/or (d) services, as well as advertisements of such products or services, provided that such information is not presented in such a manner as to constitute an offer of the issuer’s securities.69 However, such information does not generally include any: (1) predictions; (2) projections; (3) forecasts; or (4) opinions concerning value.70 The meaning of “factual information” in the context of general solicitation can also be gleaned by analogizing to the safe harbors provided under Rule 16871 and Rule 16972 under the Securities Act. The SEC has established that both SEC-reporting and non-SEC reporting companies may, under Rule 168 and Rule 169, respectively, communicate “factual business information” (e.g., factual information about the issuer and its financial developments and advertisements or information about the issuer’s products) and “forward-looking information” (e.g., projections of the issuer’s revenues, income (loss), earnings (loss) per share, and dividends) to investors without being deemed an offer under Section 5 under the Securities Act, provided that certain requirements are satisfied.73 Most notably, both rules contain a “regularly released” element, specifying that the “timing, manner, and form in which the [factual business or forward-looking] information is released or disseminated [must be] consistent in material respects with similar past releases or disseminations.”74 While the Commission has acknowledged that the safe harbors under Rule 168 and Rule 169 do not establish or require any minimum time period to be deemed “regularly released,” the SEC has noted that one prior release or dissemination could be sufficient to establish a track record.75

Contacts

Ze’-ev Eiger New York (212) 468-8222 [email protected]

Anna Pinedo New York (212) 468-8179 [email protected]

67 See 17 C.F.R. § 230.135c(a)-(c). 68 C&DI, supra note 4 at Question 256.24. 69 C&DI, supra note 4 at Question 256.25. 70 Id. See also SEC Release No. 33-5180, 1971 WL 120474, at *2 (Aug. 20, 1971) (“Further, care should be exercised so that, for example, predictions, projections, forecasts, estimates and opinions concerning value are not given with respect to such things, among others, as sales and earnings and value of the issuer’s securities.”). 71 See 17 C.F.R. § 230.168. 72 See 17 C.F.R. § 230.169. 73 See generally 17 C.F.R. § 230.168(a)-(d); 17 C.F.R. § 230.169(a)-(d). 74 See id. 75 See Securities Offering Reform, Release No. 33-8591 (July 19, 2015), at 64, available at https://www.sec.gov/rules/final/33-8591.pdf.

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F R E Q U E N T L Y A S K E D Q U E S T I O N S

A B O U T F O R M 8 - K

General Description and Summary of 8-K Items

What is Form 8-K?

Form 8-K is the form on which public companies report,

on a current basis, the occurrence of significant

corporate events. A reportable event is a transaction or

occurrence of major significance. The Securities and

Exchange Commission (the “SEC”) periodically

expands the list of items requiring disclosure on

Form 8-K and alters the time within which a Form 8-K

must be filed.

Who must file Form 8-K?

All U.S. “reporting” companies are responsible for filing

Forms 8-K. Foreign issuers that report in the United

States use a Form 6-K, which has different

requirements.

Under what circumstances must a Form 8-K be filed?

Form 8-K identifies events that require the filing of a

Form 8-K and provides detailed instructions for filing.

The following is a list of the events that trigger a filing,

along with the corresponding Section and Item

references from Form 8-K:

Section 1 Registrant’s Business and Operations

Item 1.01 Entry into a Material Definitive Agreement.

“Material” agreements are those that give rise

to obligations that are material to and

enforceable against the company, or rights that

are material to the company and enforceable

by the company against one or more parties to

the agreement.

Many agreements requiring board or

shareholder approval would be filed under

this Item.

This includes “definitive” agreements but not

non-binding term sheets or letters of intent.

Filing the agreement itself as an exhibit is

encouraged but not required. If the agreement

is not filed as an exhibit to the Form 8-K, it will

be required to be filed with the company’s next

periodic report (e.g., its Form 10-Q or

Form 10-K, whichever comes first).

Material employment agreements are usually

reported under Item 5.02.

2

Item 1.02 Termination of a Material Definitive

Agreement.

No Form 8-K needs to be filed if the

agreement, even if material, is terminated by

its terms.

Item 1.03 Bankruptcy or Receivership.

Section 2 Financial Information

Item 2.01 Completion of Acquisition or Disposition of

Assets.

See the related financial statement

requirements under Regulation S-X (historical

and/or pro forma financials may be required to

be filed).

Item 2.02 Results of Operations and Financial

Condition.

An issuer typically provides its earnings press

releases pursuant to this item.

The material included under Item 2.02

generally should be “furnished,” rather than

“filed” (see below for the significance of this

distinction).

Item 2.03 Creation of a Direct Financial Obligation or

an Obligation Under an Off-balance Sheet

Arrangement of a Registrant.

Item 2.04 Triggering Events That Accelerate or

Increase a Direct Financial Obligation or an

Obligation Under an Off-balance Sheet Arrangement.

This item would typically include instances

where a company is no longer in compliance

with a covenant under a loan facility or similar

agreement.

Item 2.05 Costs Associated with Exit or Disposal

Activities.

This is the item a company would use to

disclose material write-offs or restructuring

costs.

This item requires an estimate of the dollar

amounts of (i) each major cost, (ii) total costs,

and (iii) cash expenditures (the estimate

portion of the disclosure can be delayed until

four business days after estimates are known).

Item 2.06 Material Impairments.

This item is used to report any material charge

for impairment to one or more of a registrant’s

assets, including, without limitation,

impairments of securities or goodwill, required

under generally accepted accounting principles

applicable to the registrant.

The company should disclose (i) the date of the

conclusion that a material charge is required;

(ii) a description of the impaired asset or

assets; (iii) the facts and circumstances leading

to the conclusion that the charge for

impairment is required; (iv) the registrant’s

estimate of the amount or range of amounts of

the impairment charge; and (v) the registrant’s

estimate of the amount or range of amounts of

the impairment charge that will result in future

cash expenditures.

If the company is unable to estimate the

amount of the charge or of future expenditures

related to the charge at the time of the Form

8-K, it should file an amended report on Form

8-K under this Item 2.06 within four business

3

days after it makes a determination of such an

estimate or range of estimates.

If the determination is made in connection

with the preparation, review or audit of

financial statements required to be included in

the company’s next quarterly or annual report

under the Exchange Act, the company is

permitted to make the disclosure in that

periodic report, so long as the report is filed on

a timely basis.

Section 3 Securities and Trading Markets

Item 3.01 Notice of Delisting or Failure to Satisfy a

Continued Listing Rule or Standard; Transfer of

Listing.

A company would use this item to disclose

certain events related to its listing on a

securities exchange (e.g., The New York Stock

Exchange).

Includes the receipt of a notice regarding

material non-compliance with the listing rules.

No filing is required if the delisting is the

result of a conversion or redemption of a

security.

The issuer would file twice: first upon receipt

of the first notice from the securities exchange

and again upon effectiveness of delisting.

The filing date is calculated from receipt of

notice.

Item 3.02 Unregistered Sales of Equity Securities.

If the company sells equity securities in a

transaction that is not registered under the

Securities Act, it would use this item to

disclose (i) the date of the sale; (ii) the title and

amount of securities sold; (iii) the

consideration paid for the securities; (iv) which

exemption from registration the company has

used; and (v) if the securities are exchangeable

or exercisable for equity securities of the

company, the terms of exchange or exercise.

The obligation to make a disclosure under this

item is triggered when the company enters into

an agreement enforceable against the

company, whether or not subject to conditions,

under which the equity securities are to be

sold. If there is no such agreement, the

company should file the Form 8-K within four

business days after the closing of the

transaction.

The company does not need to file a Form 8-K

if the equity securities sold, in the aggregate

since its last Form 8-K (if filed under this Item

3.02) or its last periodic report, whichever is

more recent, constitute less than 1% of the

number of shares outstanding of the class of

equity securities sold. This threshold is 5% for

smaller reporting companies.

Item 3.03 Material Modification to Rights of Security

Holders.

Includes amendments, changes or additions to

preferred stock preferences, limitations on

dividends, or the issuance of senior securities

affecting junior securities.

Section 4 Matters Related to Accountants and

Financial Statements

Item 4.01 Changes in Registrant’s Certifying

Accountant.

4

This item is to be used if the company’s

independent accountant resigns (or indicates

that it declines to stand for re-appointment) or

is dismissed.

It requires the company to describe the

circumstances of the accountant’s departure

and to make certain statements concerning the

work of the company’s accountant during the

previous two fiscal years (these are contained

in Regulation S-K under the Exchange Act,

Item 304(a)(i)).

Note that the resignation or dismissal of an

independent accountant is reportable separate

from the engagement of a new independent

accountant. On some occasions, two reports

on Form 8-K are required for a single change in

accountants, the first on the resignation or

dismissal of the former accountant and the

second when the new accountant is engaged.

Information required in the second Form 8-K

need not be provided to the extent that it has

been reported previously in the first Form 8-K.

Item 4.02 Non-reliance on Previously Issued

Financial Statements or a Related Audit Report or

Completed Interim Review.

Results when management reaches the

conclusion that the company’s previously

issued financial statements should not be

relied upon, or the company’s receipt of a

notice from its independent accountant that

the independent accountant is withdrawing a

previously issued audit report, or informing

the company that it may not rely on a

previously issued audit report.

Section 5 Corporate Governance and Management

Item 5.01 Changes in Control of Registrant.

If, the company’s board of directors becomes

aware that a change in control of the company

has occurred, the company should use this

item to disclose (i) the identity of the person(s)

who acquired such control; (ii) the date and a

description of the transaction(s) that resulted

in the change in control; (iii) the basis of the

control, including the percentage of voting

securities of the registrant now beneficially

owned directly or indirectly by the person(s)

who acquired control; (iv) the amount of the

consideration used by such person(s); (v) the

source(s) of funds used by the person(s).

This item should also be used to describe any

arrangements that the company becomes

aware of, including any pledge by any person

of securities of the company or any of its

parents, the operation of which may at a

subsequent date result in a change in control of

the company.

Item 5.02 Departure of Directors or Certain Officers;

Election of Directors; Appointment of Certain

Officers; Compensatory Arrangements of Certain

Officers.

Results from any of the following situations:

the resignation or refusal to stand for

reelection by directors due to a

disagreement;

the election or appointment of new

directors (other than at an annual or

special meeting of shareholders);

5

the departure of any director for any

reason;

the retirement, resignation, or

termination of a company’s principal

executive officer, president, principal

financial or accounting officer,

principal operating officer, or person

performing a similar function to any

such officers (“Senior Executive

Officers”); and

the appointment of any Senior

Executive Officer and the entry into

(or amendment of) a compensatory

arrangement with a principal

executive officer, principal financial

officer, or named executive officer.

Item 5.03 Amendments to Articles of Incorporation

or Bylaws; Change in Fiscal Year.

Item 5.04 Temporary Suspension of Trading Under

Registrant’s Employee Benefit Plans.

Item 5.05 Amendments to the Registrant’s Code of

Ethics, or Waiver of a Provision of the Code of Ethics.

Item 5.06 Change in Shell Company Status.

Item 5.07 Submission of Matters to a Vote of Security

Holders.

Section 6 Asset-backed Securities

The items in this Section 6 apply only to asset-backed

securities.

Item 6.01 ABS Informational and Computational

Material.

Item 6.02 Change of Servicer or Trustee.

Item 6.03 Change in Credit Enhancement or Other

External Support.

Item 6.04 Failure to Make a Required Distribution.

Item 6.05 Securities Act Updating Disclosure.

Section 7 Regulation FD

Item 7.01 Regulation FD Disclosure.

The material included under Item 7.01 should

be “furnished,” rather than “filed” (see below

for the significance of this distinction).

Section 8 Other Events

Item 8.01 Other Events.

The item used for optional disclosure of any

event that the issuer deems of importance to

security-holders not otherwise called for by

another Form 8-K Item.

Unlike most Form 8-K filings, there is no

requirement that an Item 8.01 8-K be filed

within four business days of the triggering

event (see below for a further discussion of the

relevant timing requirements).

Commonly used for new product or other

press releases and other miscellaneous non-

categorizable events.

An issuer will often use an Item 8.01 filing to

update its shelf registration statement with

more current information.

Section 9 Financial Statements and Exhibits

Item 9.01 Financial Statements and Exhibits.

Filing Requirements

If an event is reportable under more than one Item of

Form 8-K, must two Forms 8-K be filed?

No. The issuer may include multiple items in a single

Form 8-K, and any exhibit may be cross-referenced

6

within the same Form 8-K. Common instances when

this is necessary include:

Unregistered offerings of securities (Items 1.01

and 3.02)

Acquisitions (Item 1.01 and Item 2.01)

Changes to securities (Item 3.03 and Item 5.03)

Appointments of officers (Item 5.02(c) and

Item 1.01)

Additions of directors (Item 5.02(d) and Item

5.03)

What are the time limits within which a Form 8-K must

be filed?

Subject to certain exceptions described below, a

Form 8-K must generally be filed within four business

days of the triggering event.

What are the exceptions to the four-day time limit?

Regulation FD filings must be (i) simultaneous

with the release of the material that is the

subject of the filing (if such material is

intentionally released to the public) or (ii) the

next trading day (if the release was

unintentional);

Voluntary disclosures (Item 8.01) have no

deadline;

Filing of earnings press releases (Item 2.02(b))

must be completed before any associated

analyst conference call;

It is permissible to delay the filing of a Form

8-K related to the announcement of new

officers until another public announcement of

the appointment (e.g., press release, trade

conference, etc.);

The filing of a Form 8-K related to an issuer’s

receipt of an auditor’s restatement letter (Item

4.02) must be completed within two business

days; and

The financial statements of an acquired

business (Item 9.01) must be filed no later than

71 calendar days after the date that the initial

report on Form 8-K must be filed (four

business days plus 71 calendar days).

What are the penalties for non-compliance with these

requirements?

The penalties for non-compliance can be severe, and

include the company’s loss of the right to use Form S-3

for both primary and secondary offerings (however,

failure to file within the required time period with

respect to events subject to Items 1.01, 1.02, 2.03-2.06,

4.02(a), or 5.20(e) will not affect an issuer’s right to use

Form S-3).

No failure to file under the following Items shall be

deemed a violation of Section 10 of the Exchange Act

and Rule 10b-5: 1.01, 1.02, 2.03-2.06, 4.02(a), 5.02(e), or

6.03.

In addition, SEC guidance makes clear that the failure

to properly file a Form 8-K may be considered prima

facie evidence of a lack of sufficient disclosure controls

under the Sarbanes-Oxley Act of 2002 (“Sarbanes-

Oxley”).

7

Should issuers interpret all Form 8-K Items as applying

the triggering event to the issuer and its subsidiaries,

other than Items that obviously apply only at the

issuer level, such as changes in directors and principal

officers?

Yes. Triggering events apply to issuers and

subsidiaries. For example, entry by a subsidiary into a

non-ordinary course definitive agreement that is

material to the issuer is reportable under Item 1.01.

If an agreement that was not material at the time the

issuer entered into it becomes material at a later date,

must the issuer file a Form 8-K at the time the

agreement becomes material?

No. If an agreement becomes material to the issuer but

was not material to the issuer when it was entered into,

or amended, the issuer need not file a Form 8-K under

Item 1.01, unless the agreement is material to the issuer

at the time of an amendment to that agreement. In any

event, the issuer must file the agreement as an exhibit to

the periodic report relating to the reporting period in

which the agreement became material if, at any time

during that period, the agreement was material to the

issuer.

What if a material definitive agreement has an advance

notice provision in order to terminate, and the

counterparty delivers to the issuer written advance

notice of termination. Is an Item 1.02 Form 8-K

required?

Yes. Once notice of termination pursuant to the terms

of the agreement has been received, the Form 8-K is

required. See Instruction 2 to Item 1.02.

If an issuer decides not to nominate a director for

reelection at its next annual meeting, is a Form 8-K

required?

No. That situation is not covered under the phrase “is

removed.” However, if the director, upon receiving

notice from the issuer that it does not intend to

nominate him or her for reelection, then resigns his or

her position as a director, then a Form 8-K would be

required pursuant to Item 5.02. If the director tells the

issuer that he or she refuses to stand for reelection, a

Form 8-K is required because the director has

communicated a “refusal to stand for reelection,”

whether or not in response to an offer by the issuer to be

nominated.

If the company removes all of the duties and

responsibilities of its principal operating officer and

reassigns them to other personnel in the organization,

but the person remains employed by the issuer and

retains the title, is the issuer required to file a Form 8-K

under Item 5.02 to report the principal operating

officer’s termination?

Yes. The term “termination” includes situations where

an officer identified in Item 5.02 has been demoted or

has had his or her duties and responsibilities removed

such that he or she no longer functions in the position of

that officer.

Does the restatement of an issuer’s articles of

incorporation, without any substantive amendments to

those articles, trigger a Form 8-K filing requirement?

No. A Form 8-K is not required to be filed when the

issuer is merely restating its articles of incorporation,

without making any substantive changes. However, we

recommend that issuers refile their complete articles of

8

incorporation, if restated, in their next periodic report

for ease of reference by investors.

What is the difference between Items that are “filed”

and those that are “furnished”?

Section 18 of the Exchange Act imposes liability for

material misstatements or omissions contained in

reports and other information filed with the SEC. By

contrast, reports and other information that are

“furnished” to the SEC (to the extent expressly

permitted under applicable SEC rules) do not attract

liability under Section 18. Note, however, that other

liability provisions under the Exchange Act may apply

that are not dependent on the filing of documents with

the SEC but may otherwise be triggered by disclosure

made by the company to the public. See, e.g., Section

10(b) of the Exchange Act and Rule 10b-5.

Are the company’s chief executive officer and/or the

chief financial officer required to provide a certification

with respect to the Form 8-K’s accuracy?

No. Sections 302 and 906 of Sarbanes Oxley require an

issuer's principal executive and financial officers each to

certify the financial and other information contained in

the issuer's periodic reports, which are its quarterly and

annual reports. No such certification is required even if

the Form 8-K contains financial statements.

What is the purpose of the four checkboxes on the cover

of Form 8-K?

The cover page of Form 8-K allows the company to

“check” one or more boxes on the front cover of Form

8-K to indicate that the Form 8-K is being used to satisfy

other specified filing requirements.

If the company checks the first box, it is indicating that

the 8-K is being used to file “written communications

pursuant to Rule 425 under the Securities Act.” This

rule governs communications made with respect to a

business combination (e.g., a merger of two public

companies). For example, if Company A agrees to

purchase the common stock of Company B with shares

of its own (Company A) stock, then any communication

it transmits (a letter to employee shareholders of

Company B, for instance) would be considered a

prospectus (under Rule 165 under the Securities Act)

and must be filed with the SEC. Form 8-K may be used

for this purpose. Company A would file the

shareholder letter as an exhibit to a Form 8-K, and check

the appropriate box on the cover.

The second box indicates that the Form 8-K contains

“soliciting material pursuant to Rule 14a-12 under the

Exchange Act.” Under the proxy rules, a person may

not solicit proxies from a shareholder without providing

a preliminary or definitive proxy statement prior to or

concurrently with the solicitation. Rule 14a-12 is one of

the most prevalent exceptions to these rules. Rule

14a-12 provides that solicitations are allowed as long as

any written solicitation contains specified information

and is filed with the SEC on the first day on which it is

used. So Form 8-K can be used to satisfy this

requirement as well.

The third or fourth boxes would be checked if the

Form 8-K contains “pre-commencement

communications pursuant to Rule 14d-2(b) under the

Exchange Act” or “pre-commencement communications

pursuant to Rule 13e-4(c) under the Exchange Act.”

Under certain circumstances, a tender offeror may

communicate with offerees prior to the commencement

of a tender offer. One requirement is that the

9

communication be filed with the SEC, including on

Form 8-K.

How does a company that has undergone a

transformative transaction such as a reverse merger use

Form 8-K to inform investors of the changes?

Sometimes, as in a reverse merger, a public company

goes through a transformative transaction such that its

prior public disclosure no longer reflects the company’s

circumstances. In such a case, the company would

prepare a Form 8-K that provides investors with

comprehensive information about the company’s new

business, risks, management, beneficial owners, etc.

The information typically provided is the information

called for by SEC Form 10, which is the disclosure form

used by companies that are required to register under

the Exchange Act without a related public offering

under the Securities Act of 1933.

____________________

By Edward M. Welch, Of Counsel,

Morrison & Foerster LLP

© Morrison & Foerster LLP, 2016


A B O U T I N I T I A L P U B L I C O F F E R I N G S

I N I T I A L P U B L I C O F F E R I N G S ( “ I P O S ” ) A R E C O M P L E X , T I M E -

C O N S U M I N G A N D I M P L I C A T E M A N Y D I F F E R E N T A R E A S O F T H E

L A W A N D M A R K E T P R A C T I C E S . T H E F O L L O W I N G F A Q S A D D R E S S

I M P O R T A N T I S S U E S B U T A R E N O T L I K E L Y T O A N S W E R A L L O F

Y O U R Q U E S T I O N S .

Understanding IPOs

What is an IPO?

An “IPO” is the initial public offering by a company of

its securities, most often its common stock. In the

United States, these offerings are generally registered

under the Securities Act of 1933, as amended (the

“Securities Act”), and the shares are often but not

always listed on a national securities exchange such as

the New York Stock Exchange (the “NYSE”), the NYSE

MKT or one of the NASDAQ markets (“NASDAQ” and,

collectively, the “exchanges”). The process of “going

public” is complex and expensive. Upon the completion

of an IPO, a company becomes a “public company,”

subject to all of the regulations applicable to public

companies, including those of the Securities Exchange

Act of 1934, as amended (the “Exchange Act”).

What are advantages of going public?

The most obvious reason to go public is to raise

capital. Unlike a private offering, there are no

restrictions imposed on a company with

respect to offerees or how many securities it

may sell. The funds received from the

securities sold in an IPO may be used for

common company purposes, such as working

capital, research and development, retiring

existing indebtedness and acquiring other

companies or businesses.

Going public creates a public market for a

company’s securities. Liquidity is important

for existing and future investors, and provides

an exit strategy for venture and hedge fund

investors.

Following an IPO, a company should have

greater access to capital in the future. Once a

public market is created, a company may be

able to use its equity in lieu of cash or more

costly debt financings.

Public companies have greater visibility. The

media has greater economic incentive to cover

a public company than a private company

because of the number of investors seeking

information about their investment.

2

Going public allows a company’s employees to

share in its growth and success through stock

options and other equity-based compensation

structures that benefit from a more liquid stock

with an independently determined fair market

value. A public company may also use its

equity to attract and retain management and

key personnel.

What are disadvantages of going public?

The IPO process is expensive. The legal,

accounting and printing costs are significant

and these costs will have to be paid regardless

of whether an IPO is successful.

Once an IPO is completed, a company will

incur higher costs as a public company,

including the significant compliance

requirements of the Sarbanes-Oxley Act of

2002 (“Sarbanes-Oxley”) and the Dodd-Frank

Wall Street Reform and Consumer Protection

Act of 2010 (“Dodd-Frank”).

There is much more public scrutiny of a

company after an IPO. Once a company is

public, certain information must be disclosed,

such as compensation, financial information

and material agreements.

How does the JOBS Act change the IPO process?

Since at least the dotcom bust of the early 2000s and

accelerating after the passages of Sarbanes-Oxley and

Dodd-Frank, business leaders and commentators have

observed that the regulatory requirements to be met in

order to finance companies in the United States have

become overly burdensome and discourage

entrepreneurship. In the aftermath of the financial crisis

of 2008, national attention shifted to job creation and the

backlash against over-regulation brought about by

Dodd-Frank. In April 2012, the Jumpstart Our Business

Startups Act (the “JOBS Act”) was enacted, which

reflects many of the legislative initiatives that had been

discussed for several years. The JOBS Act adopted the

following provisions that affect capital formation:

An “IPO on-ramp” for a new category of

issuer, “emerging growth companies,” that

offers a number of benefits, including

confidential SEC Staff review of draft IPO

registration statements, scaled disclosure

requirements, no restrictions on “test-the-

waters” communications with qualified

institutional buyers (“QIBs”) and institutional

accredited investors before and after filing a

registration statement, and fewer restrictions

on research (including research by

participating underwriters) around the time of

an offering (all of which will be discussed in

greater detail below).

An amendment to the Securities Act

(informally referred to as Regulation A+)

permitting companies to conduct offerings to

raise up to $50 million in any 12-month period

through a “mini-registration” process similar

to that provided for under Regulation A.

Higher securityholder triggering thresholds for

reporting obligations under the Exchange Act.

Removal of the prohibition against general

solicitation and general advertising in certain

private placements.

A new exemption under the Securities Act for

crowdfunding offerings.

3

The JOBS Act offers an issuer new possibilities for

structuring its capital raise.

What types of companies go public?

Any company seeking greater access to capital may

decide to go public. Companies with revenues and

profits or a shorter path to profitability are more likely

to have successful IPOs than companies without

revenues or that are in a development stage, particularly

in difficult economic environments. A company

seeking increased visibility and liquidity may also

decide to go public. Depending on its size and business,

a public company may have from two to twenty

analysts covering its stock.

Research and development-based companies,

including pharmaceutical and technology companies,

with strong valuations but little current revenue may

decide to go public to fund long-term, costly R&D.

Later-stage R&D companies and companies with near-

term milestones may also decide to access the public

markets through an IPO.

There are a number of kinds of companies that do not

yet have an operating history but may seek to go public

in order to pursue their strategic plans, including:

Real estate investment trusts (“REITs”), including

mortgage REITs, are formed to take advantage

of opportunities to purchase distressed or

undervalued mortgage-related securities and

equity REITs that seek to acquire specific kinds

of real estate.

Special purpose acquisition vehicles (“SPACs”), a

more recent type of blind pool offering, are

shell or blank-check companies that have no

operations but go public with the intention of

merging with or acquiring a company with the

proceeds of the IPO, subject to shareholder

approval.

Business development companies (“BDCs”) are

entities that go public to fill the perceived need

for capital for smaller businesses.

What is an “emerging growth company” or “EGC?”

The JOBS Act establishes a new process and disclosures

for IPOs by a new class of companies referred to as

“emerging growth companies” or “EGCs.” An EGC is

an issuer (including a foreign private issuer) with total

annual gross revenues of less than $1 billion (subject to

inflationary adjustment by the SEC every five years)

during its most recently completed fiscal year.1 The

SEC Staff has stated in its General Applicability FAQs

that asset-backed issuers and registered investment

companies do not qualify as EGCs; however, BDCs can

qualify as EGCs.

How long can an issuer maintain EGC status?

Status as an EGC is maintained until the earliest of:

the last day of the fiscal year in which the

issuer’s total annual gross revenues are $1

billion or more;

1 In its Frequently Asked Questions of General Applicability on

Title I of the JOBS Act (issued on April 16, 2012, updated on

May 3, 2012 and September 28, 2012, and collectively referred

to herein as the “General Applicability FAQs”), the SEC Staff

specified that the phrase “total annual gross revenues” means

total revenues of the issuer (or a predecessor of the issuer, if the

predecessor’s financial statements are presented in the

registration statement for the most recent fiscal year), as

presented on the income statement in accordance with U.S.

generally accepted accounting principles (“GAAP”). If a

foreign private issuer is using International Financial Reporting

Standards (“IFRS”) as issued by the International Accounting

Standards Board as its basis for presentation, then the IFRS

revenue number is used for this test. Because an issuer must

determine its EGC status based on revenues as expressed in

U.S. dollars, the SEC Staff indicates that a foreign private

issuer’s conversion of revenues should be based on the

exchange rate as of the last day of the fiscal year.

4

the last day of the issuer’s fiscal year following

the fifth anniversary of the date of the first sale

of common equity securities of the issuer

pursuant to an effective registration statement

under the Securities Act (for a debt-only issuer

that never sells common equity pursuant to a

Securities Act registration statement, this five-

year period will not run);

any date on which the issuer has, during the

prior three-year period, issued more than $1

billion in non-convertible debt; or

the date on which the issuer becomes a “Large

Accelerated Filer,” as defined in the SEC’s

rules.

If an EGC loses its status as an emerging growth

company, the status cannot be reestablished.

With regard to the $1 billion debt issuance test, the

SEC Staff clarified in the General Applicability FAQs

that the three-year period covers any rolling three-year

period and is not limited to completed calendar or fiscal

years. The SEC Staff also noted that it reads “non-

convertible debt” to mean any non-convertible security

that constitutes indebtedness (whether issued in a

registered offering or not), thereby excluding bank debt

or credit facilities. The debt test references debt

“issued,” as opposed to “issued and outstanding,” so

that any debt issued to refinance existing indebtedness

over the course of the three-year period could be

counted multiple times. However, the SEC Staff also

indicated in the General Applicability FAQs that it will

not object if an issuer does not double count the

principal amount from a private placement and the

principal amount from the related Exxon Capital

exchange offer, as it views the subsequent exchange

offer as completing the capital-raising transaction.

What happens if an EGC loses its status as an EGC

during its IPO?

The Fixing America’s Surface Transportation Act (the

“FAST Act”) amends Section 6(e)(1) of the Securities Act

in order to provide a grace period permitting an issuer

that qualified as an EGC at the time it made its first

confidential submission of its IPO registration statement

and subsequently during the IPO process ceases to be

an EGC to continue to be treated as an EGC through the

earlier of: the date on which the issuer consummates its

IPO pursuant to that registration statement, or the end

of the one-year period beginning on the date the

company ceases to be an EGC.

When should a company go public?

There is no right answer or right time. It depends on a

company’s need for cash or liquidity to pursue its

strategic plans. There is a market consensus that there

is a “window” when companies, often particular types

of companies, can effect IPOs. Whether the window is

open or closed depends on overall economic conditions

and investor appetite for risk. For example, in the

dotcom boom of the late 1990s, many technology

companies had ideas but no revenues and certainly no

profits. SPACs became popular in the 2000s because,

unlike blind pools before them, public investors in the

SPACs had rights to approve the proposed acquisitions

and the IPO proceeds had to be returned if a suitable

investment was not found within a specified period,

usually two years. After the dotcom bust and since the

current economic downturn, investors are looking for

companies with more revenues and actual profits or a

relatively quick path to profitability.

5

What is the IPO process?

The public offering process is divided into three

periods:

Pre-filing. The pre-filing period is the period

from the determination to proceed with a

public offering to the filing of a registration

statement with the SEC. This is also generally

called the “quiet period,” and a company is

usually subject to limitations on its public

communications. See “What is the quiet period?”

and “What are “testing-the-waters”

communications by or on behalf of an EGC?”

Waiting or pre-effective. The waiting or pre-

effective period is the period from the date of

the filing of the registration statement to its

“effective date.” During this period, a

company may make oral offers and certain

written offers, but may not enter binding

agreements to sell the offered security. See

“What is the waiting period?”

Pricing and post-effective. The post-effective

period is the period from the date the

registration statement has been “declared

effective” by the SEC to the completion of the

offering. See “What happens after the SEC has

completed its review?”

IPO Team

Who is involved in an IPO?

Going public requires retaining the proper external

advisors. An IPO team will include a lead underwriter

and potentially co-managing underwriters, an

independent auditing firm with significant public

company experience, outside legal counsel, a transfer

agent and a financial printer. A company may also

want to hire a public relations firm.

A company should also have an internal IPO team in

place. Key members of this internal team will include

the company’s president, CEO, CFO, general counsel,

controller and an investor relations or public relations

manager.

What does the managing underwriter do?

A company will identify one or more lead underwriters

that will be responsible for the offering process. A

company chooses an underwriter based on its industry

expertise, including the knowledge and following of its

research analysts, the breadth of its distribution

capacity, and its overall reputation. The company

should know the answers to the following questions, at

a minimum:

Does the investment bank have strong research

in its industry?

Is its distribution network mainly institutional

or retail?

Is its strength domestic, or does it have foreign

distribution capacity?

Depending on the size of the offering, a company may

want to include a number of co-managers in order to

balance the lead underwriters’ respective strengths and

weaknesses.

A company should keep in mind that underwriters

have at least two conflicting responsibilities—to sell the

IPO shares on behalf of the company and to recommend

to potential investors that the purchase of the IPO

shares is a suitable and worthy investment. In order to

better understand the company—and to provide a

defense in case the underwriters are sued in connection

6

with the IPO (see “Who may also be liable under the

Securities Act?”)—the underwriters and their counsel are

likely to spend a substantial amount of time performing

business, financial and legal “due diligence” in

connection with the IPO, and making sure that the

prospectus and any other offering materials are

consistent with the information provided.

The underwriters will market the IPO shares, set the

price (in consultation with the company) at which the

shares will be offered to the public and, in a “firm

commitment” underwriting, purchase the shares from

the company and then re-sell them to investors. In

order to ensure an orderly market for the IPO shares,

after the shares are priced and sold, the underwriters

are permitted in many circumstances to engage in

certain stabilizing transactions to support the stock. See

“What actions may underwriters take after pricing?”

What do the co-managers do?

Co-managers are underwriters who agree to purchase a

substantial portion of a company’s shares and who are

involved in drafting the prospectus and marketing the

offering. Companies typically choose co-managers that

have distribution capabilities or analyst coverage that is

complimentary to those of the managing underwriter.

What do the auditors/accountants do?

Accountants prepare and audit the financial statements

of a company or other entities or properties that must be

included in an IPO registration statement. Other

services provided by the accountants during the

offering process include assisting a company in

preparing the other financial portions of the prospectus,

such as the summary financial information, selected

financial information, capitalization and dilution tables,

and any required pro forma financial statements, and

working with the company to identify any problems

associated with providing the required financial

statements in order to seek necessary accommodation

from the SEC. The accountants will also provide a

“comfort letter” to the underwriters. See “What financial

information is included in the registration statement?” and

“What is a ‘comfort letter’”?.

What does legal counsel do?

A company’s in-house and outside legal counsel play

important roles in completing the IPO. A company’s

counsel:

has principal responsibility for preparing the

registration statement, prospectus, stock

exchange application and any confidential

treatment requests;

communicates with the SEC and the stock

exchanges on a company’s behalf, responding

to any comments they may have;

negotiates an underwriting agreement with the

underwriters and their counsel; and

prepares various other documents, including

stock option plans, a company’s post-IPO

certificate of incorporation and bylaws,

committee charters, board minutes relating to

the IPO and any required consents, waivers

and legal opinions.

Underwriters’ counsel undertakes legal due diligence

during the offering process and reviews the registration

statement and prospectus with the company, its counsel

and the underwriters. Underwriters’ counsel also:

negotiates the underwriting agreement with a

company and its counsel;

7

negotiates the “comfort letter” with a

company’s accountants; and

submits the underwriting agreement,

registration statement and other offering

documents for review to the Financial Industry

Regulatory Authority (“FINRA”).

Company’s counsel and underwriters’ counsel will

also coordinate the closing of the transaction.

What role do research analysts play?

Generally, research analysts will cover the company

once it becomes public, increasing the company’s

visibility. The JOBS Act permits a broker-dealer to

publish or distribute a research report about an EGC

that proposes to register an offering under the Securities

Act or has a registration statement pending, and the

research report will not be deemed an “offer” under the

Securities Act, even if the broker-dealer will participate

or is participating in the offering. Since the dotcom bust

of the early 2000s, the courts, the SEC and FINRA have

imposed significant restrictions on the role of the

research analyst and research’s relationship with

investment bankers. The JOBS Act now prohibits any

self-regulatory organization (“SRO”), such as FINRA,

and the SEC from adopting any rule or regulation that

would restrict a broker-dealer from participating in

certain meetings relating to EGCs. Further, no SRO or

the SEC may adopt or maintain any rule or regulation

prohibiting a broker-dealer from publishing or

distributing a research report or making a public

appearance with respect to the securities of an EGC

following an offering or in a period prior to expiration

of a lock-up (see “What is contained in the underwriting

agreement?”). The JOBS Act also removes restrictions on

who within an investment bank can arrange for

communications between research analysts and

prospective investors in connection with an EGC IPO,

permitting investment bankers to be involved in those

arrangements. Further, a research analyst is permitted

to engage in communications with an EGC’s

management when other employees of the investment

bank, including the investment bankers, are present. 2

As the JOBS Act is so recent, there is as yet no common

practice in this area, but historically financial

intermediaries have moved cautiously, and there is

anecdotal evidence that there is only limited pre-IPO

test-the-waters communications.

Depending on its size and type of business, a company

can expect to have between two and twenty analysts

covering its stock although smaller companies may not

have any analyst coverage. The analysts will regularly

publish recommendations with respect to the company

based on their analyses of the company’s financial

condition and results of operations. Analyst

coverage/publicity may result in introducing the

company to potential customers and business partners,

as well as reinforcing the company’s advertising and

product-branding initiatives.

What does the financial printer do?

A company’s financial printer will print and distribute

drafts of the prospectus to the working group as well as

providing copies of the prospectus to the underwriters

for distribution to investors. The printer will also file

(or confidentially submit) the registration statement and

prospectus with the SEC through the SEC’s EDGAR

system. While the company should seek a financial

2 See “Frequently Asked Questions about Separation of

Research and Investment Banking” at

http://www.mofo.com/files/Uploads/Images/Frequently-

Asked-Questions-about-Separation-of-Research-and-

Investment-Banking.pdf.

http://www.mofo.com/files/Uploads/Images/Frequently-Asked-Questions-about-Separation-of-Research-and-Investment-Banking.pdf



8

printer with conference facilities, endless days at the

printer are no longer common as they were in the past

because of the use of email, specialized websites and

video and audio conference calls.

What does the transfer agent do?

A transfer agent coordinates the issuance and tracking

of the company’s stock certificates. Unlike a private

company, a public company’s outstanding stock can be

traded many times during each business day. The agent

also maintains a list of the individuals and entities to

whom the shares are issued and some agents provide

additional services that are useful to public companies,

such as administering certain aspects of stock option

plans and acting as inspectors of election at shareholder

meetings.

What other professionals are involved?

A company may hire a public relations firm for the IPO.

The public relations firm will help to ensure that the

company’s communications with the general public as

well as its target market during the offering period are

consistent with the SEC’s rules, while continuing to

generate interest in the company and its business. In

preparing for an IPO, the company should discuss with

the public relations firm the nature of the

communications planned during the offering period

and identify any items that might constitute gun

jumping. See “Pre-IPO Disclosures.”

Pre-Filing Matters

What corporate steps should be taken to prepare for an

IPO?

Most companies must make legal and operational

changes before proceeding with an IPO and begin those

changes well before the organizational meeting. A

company cannot wait to see if its IPO is likely to be

successful prior to implementing most of those changes.

Many corporate governance matters, federal

securities law requirements (including

Sarbanes-Oxley) as well as applicable exchange

requirements must be met when the IPO

registration statement is filed, or a company

must commit to satisfy them within a set time

period. A company’s certificate of

incorporation and bylaws will likely need

amendment as well. However, many

corporate governance requirements are not

applicable to foreign private issuers although

home country requirements are often required

to be disclosed.

A company proposing to list securities on an

exchange should review that exchange’s

financial listing requirements as well as its

governance requirements before determining

which exchange to choose.

A company should consider adopting anti-

takeover defenses, such as a staggered board of

directors or a shareholders rights plan. The

underwriters should be involved in these

discussions so that the company avoids

adopting any anti-takeover measure that might

negatively affect the marketing of the offering.

9

The company should analyze its capitalization

to determine whether it will be appropriate

after the IPO. For example, because of the risk

of “market overhang” (the concern that a large

number of shares may flood the public market

and depress the market price of the shares),

most underwriters advise companies to try to

cause the conversion or exercise of outstanding

convertible preferred stock, warrants and

convertible debt into common stock prior to

the IPO if the original documentation does not

already require conversion or exercise. The

underwriters may also advise the company

whether a stock split or reverse stock split is

appropriate in order for the company’s stock to

trade at an attractive price for its industry and

size after the IPO.

A company must also address other corporate

governance matters, including:

board structure;

recruiting directors;

board and management committees

and member criteria;

whether to retain additional senior

management;

identifying, disclosing and/or

terminating related party

transactions; and

directors’ and officers’ liability

insurance.

Should a company review its compensation policies and

principles prior to the IPO?

A company should undertake a thorough review of its

compensation scheme for its directors and officers,

particularly its use of equity compensation.

Systematizing compensation practices.

Compensation decisions should be made more

systematically—doing so may require:

establishing an independent

compensation committee of the board

of directors, as required by Dodd-

Frank and the exchanges;

using formal market information to

set compensation; and

establishing a regular equity

compensation grant cycle.

Confirming accounting and tax treatment. A

company should be sure that the Internal

Revenue Code (“Code”) Section 409A

valuation used to establish stock value for

stock option purposes is consistent with that

used for financial accounting purposes. The

company should also consider whether to limit

option grants as the IPO effective date

approaches because option grants close to an

IPO may raise “cheap stock” issues. See “What

is ‘cheap stock’?”

Reviewing securities law compliance. A company

should confirm that equity grants were made

in compliance with federal and state securities

rules, including the limits of Rule 701 under

the Securities Act, to avoid rescission or other

compliance concerns.

10

Adopting plans. Public companies are usually

required by the exchanges to obtain

shareholder approval for new compensation

plans and material amendments. In order to

obtain favorable “incentive stock option”

(“ISO”) treatment under U.S. federal tax laws,

the option plan must be approved by a

company’s shareholders. An issuer will have

greater flexibility to adopt compensation plans

prior to its IPO. An issuer should adopt the

plans it thinks it may need during its first few

years as a public company (including an equity

incentive plan, employee stock purchase plans,

and Code Section 162(m) “grandfathered”

bonus plans), and reserve sufficient shares for

future grants.

Adoption of policies and clawback arrangements.

Particularly in light of the requirements of

Dodd-Frank, a company should review or

establish policies with respect to clawbacks of

executive compensation, severance and post-

employment benefits (“golden parachutes”)

upon the occurrence of certain events.

What is the organizational meeting?

The IPO process usually starts moving rapidly

beginning with an organizational meeting attended by

representatives of the company, its accountants and

counsel, the underwriters and their counsel. The

meeting generally includes discussion of the timeline

for the offering, the general terms of the offering and the

responsibilities of the various parties. Also discussed is

the timing of the audited financial statements to be

included in the prospectus and any accounting matters

or policies that may be of concern. The participants will

also discuss reasons for potential timing delays—for

example, significant acquisitions or the need for

financial statements relating to acquisitions or the need

to retain additional executive officers.

The organizational meeting may also include

presentations by the company’s management, some

initial due diligence questions by the underwriters and

their counsel and a general discussion of the scope and

level of comfort that the accountants will be asked to

provide with respect to the financial information

included in the prospectus.

What do Sarbanes-Oxley and Dodd-Frank require?

The requirements of Sarbanes-Oxley, as augmented by

Dodd-Frank, include:

a prohibition on most loans to officers and

executive directors;

limitations on the use of non-GAAP financial

measures;

disclosure of material off-balance sheet

arrangements;

“material correcting adjustments” identified by

the company’s accountants must be reflected in

all periodic reports containing GAAP financial

statements;

potential compensation disgorgement upon a

restatement of financial results attributable to

misconduct;

auditor independence;

certifications by the company’s CEO and CFO

of each periodic report containing financial

statements;

11

adoption of a code of business conduct and

ethics for directors, officers and employees;

whistleblower protections for employees who

come forward with information relating to

violations of federal securities laws;

the creation of audit, nominating and

compensation committees that comply with

certain independence requirements; note that

the independence requirements for

compensation committees were strengthened

by Dodd-Frank; and

shareholder approval of equity compensation

plans.

When does Sarbanes-Oxley apply?

Certain provisions of Sarbanes-Oxley become applicable

immediately upon the filing of the registration

statement by a company, even before the registration

statement is declared effective, and other provisions of

Sarbanes-Oxley apply to a company as soon as its

registration statement becomes effective. Accordingly,

the company must familiarize itself with Sarbanes-

Oxley requirements early in the offering process and

take necessary steps to comply prior to filing the

registration statement or prior to effectiveness.

However, the company will not have to comply with

the requirements of Section 404 of Sarbanes-Oxley

regarding internal control over financial reporting until

the second fiscal year following its IPO (and potentially

after the fifth fiscal year for an EGC).

What is the “due diligence” process?

Underwriters have a defense to Securities Act liability if

they exercise “due diligence,” which is the practice of

reviewing information about an issuer in an effort to

mitigate liability and reputational risk. After the

organizational meeting and during the quiet period, the

underwriters and their counsel will likely spend a

substantial amount of time performing business,

financial and legal due diligence in connection with the

IPO. The process is usually started with a “due

diligence request” prepared by the underwriters and

their counsel. The company’s key management

personnel will generally make a series of presentations

covering the company’s business and industry, market

opportunities, and financial matters. The underwriters

will use these presentations as an opportunity to ask

questions and establish a basis for their “due diligence”

defense. The presentations will also aid the company

and the underwriters in determining how the

prospectus will describe the company, its business,

strategies and objectives and risk factors, and provide

information for drafting the underwriting agreement.

The company’s directors and officers will be provided

with a directors’ and officers’, or “D&O,” questionnaire

to complete. The purpose of the questionnaire is to

identify any facts about those individuals, and the

relationships that they have with the company, its

affiliates or business partners, that must be disclosed in

the prospectus. The D&O questionnaire usually tracks

the specific SEC and FINRA disclosure requirements. In

some cases, holders of more than 5% of the company’s

equity will also be asked to execute a D&O

questionnaire.

Typical areas of concern include:

Business, including management presentations

and discussions, customer and supplier calls or

meetings, trips to company facilities, in-depth

review of financial positions and results and

12

general discussions with the company’s

accountants;

Accounting, including audits, changes in

accounting policies, critical accounting policies

and tax issues, cheap stock issues, capital

structure and comfort letters and the level of

comfort to be provided;

Legal, including outstanding and even closed

claims and litigation, loan agreement

restrictions, third-party consents, FINRA

issues, intellectual property, labor,

environmental, regulatory or other issues and

legal opinions; and

Management and corporate governance, including

composition of the board, director

independence, senior management team

changes, related party transactions and board

actions relating to the IPO.

What is “insider trading”?

Federal securities laws impose significant restrictions,

and may impose civil and criminal liability, on the

company’s personnel who trade securities on the basis

of material non-public information. While this is not a

significant issue until a company completes its IPO,

when the company’s securities begin to trade in the

public market, there likely will be risk that the

company’s officers, directors and employees will have

confidential information that, if used, could enable them

to make profitable trades in those securities.

Even though this type of insider trading would violate

the employee’s legal obligations, and not necessarily the

company’s obligations, insider trading violations are the

type of publicity that all companies seek to avoid.

Accordingly, it is an important part of the offering

process for a company to adopt an insider trading

policy. A typical policy will bar trading in the

company’s securities (and the securities of any other

company with which the company does business)

during any period in which the individuals covered by

the policy possess material non-public information

about the issuer, and most policies impose mandatory

restrictions (“blackout periods”) during the period

between the time that the company begins to compile its

financial results for a quarter and one or two business

days after the release of the financial information to the

public in the form of an earnings release.

What third-party consents are needed?

Prior to an IPO, a company may have entered into

agreements that impose restrictions on its ability to

complete the IPO, including

Shareholder agreements that may require

consents to share issuances or that require the

company to register the shareholders’ shares as

part of the IPO (“registration rights”);

Loan or credit agreements that restrict share

issuances or the use of proceeds from the

offering; or

Operating agreements with significant

business partners that contain broad “change

of control” provisions that may be triggered by

the IPO.

A company, with the help of its counsel, should

review all of its agreements to identify these provisions

and negotiate for necessary consents or waivers with the

other parties involved so that they do not jeopardize the

timing of the IPO. Companies will want to avoid any

last minute hold-up by a shareholder, creditor or

supplier or customer that could delay the offering or

13

require the issuer to pay a consent fee or make other

concessions.

Reviewing Management Structure

Are independent board members required?

A company must comply with significant corporate

governance requirements imposed by federal securities

laws and regulations and the regulations of the

applicable exchanges, including with regard to the

oversight responsibilities of the board of directors and

its committees. A critical matter is the composition of

the board itself. All exchanges require that, except

under certain limited circumstances, a majority of the

directors be “independent,” as defined by both federal

securities laws and regulations and exchange

regulations. In addition, boards should include

individuals with appropriate financial expertise and

industry experience, as well as an understanding of risk

management issues and public company experience. In

addition, the exchanges require that the independent

directors have regularly scheduled executive sessions.

A company should begin its search for suitable

directors early in the IPO process even if it will not

appoint the directors until after the IPO is completed.

The company can turn to its large investors as well as its

counsel and underwriters for references regarding

potential directors and also designate a committee of the

board to undertake the director search.

What board committees are required?

The exchanges all require listed companies to have an

audit committee, consisting only of at least three

independent directors who meet certain standards. At

least one of the audit committee members must be a

“financial expert.” The passage of Sarbanes-Oxley in

2002 resulted in a significant enhancement of the

independence and expertise requirements for audit

committees. At the same time, the SEC and the

exchanges began to exert pressure to ensure that

compensation and nominating or corporate governance

committees become more independent. The NYSE also

requires a compensation committee and a

nominating/corporate governance committee consisting

only of independent directors. NASDAQ also now

requires, subject to certain phase-in rules, a

compensation committee of independent directors but

does not require a nominating committee. The functions

of a nominating committee can be performed either by a

committee consisting solely of independent directors or

by a majority of the company’s independent directors

operating in executive session. Pursuant to Dodd-Frank

and the SEC’s implementing rules, exchanges must

require that listed companies’ compensation

committees, among other things, be composed entirely

of independent directors.

Do board committees need charters?

Yes, under the rules of the exchanges, the audit,

compensation and nominating/corporate governance

committee charters must contain specific responsibilities

and provisions, including the committee’s purpose,

member qualifications, appointment and removal,

board reporting and performance evaluations. If any of

the responsibilities of these committees are delegated to

another committee, the other committee must be

comprised entirely of independent directors and must

have its own charter. In addition, the NYSE and best

practices require that the company make its charters

available on or through its website, and disclose in its

proxy statement (or annual report on Form 10-K if it

14

does not file a proxy statement) that the charters are

available on or through its website, including the

address.

Does a company need to hire new senior management?

The need to hire new senior management is a company-

specific determination. Some companies contemplating

an IPO may feel the need to have chief executive officers

who have public company experience but who may not

necessarily have the industry experience. In many

ways, it may even be more critical that the company

have a chief financial officer with public company

experience as the financial reporting requirements are

extensive and unrelenting. Often, underwriters will

identify new or replacement officers that the

underwriters believe will make the company more

attractive to investors. Because finding such officers is

time-consuming and expensive, it is best for the

company to identify the management gap as early in the

process as possible.

Well before its IPO, an issuer should begin to

approach executive compensation like a public

company. The IPO registration statement requires the

same enhanced executive compensation disclosures that

public companies provide in their annual proxy

statements, including a discussion of compensation

philosophy, an analysis of how compensation programs

implement that philosophy and a discussion of the

effects of risk-taking on compensation decisions. An

EGC will have reduced compensation disclosure

requirements. See “What disclosures may an EGC omit?”

Listing

What are the benefits of listing on an exchange?

Listing the stock on an exchange is one of the most

important steps a company can take to achieve liquidity.

Certain kinds of investors may only invest in exchange-

listed issuers. Liquidity and an active market should

help establish a widely recognized value for the

company’s stock, which will help the company use its

stock instead of cash for acquisitions and other

significant transactions. Listing on an exchange cannot

guarantee liquidity or investor interest and there are

many companies that have liquid markets even though

they are traded in the over-the-counter (“OTC”) markets

such as OTCQX and OTCPink. However, particularly

since the rise of the alternative trading markets, such as

“dark pools,” it is usually beneficial for a company to

list on an exchange.

What are exchange requirements to list a stock?

Exchange listing requirements may be generally

described as “quantitative requirements” and

“qualitative requirements.” Quantitative requirements

are financial criteria for listing and include a minimum

number of shareholders of the company, a minimum

market capitalization, a minimum share price and

financial tests. Qualitative requirements are standards

relating to the company’s business and corporate

governance, including the nature of the company’s

business, the market for its products, its regulatory

history, as well as the election and composition of the

board of directors and audit committee, issuance of

earning statements and the company’s shareholder

approval requirements. Especially since the passage of

Sarbanes-Oxley and Dodd-Frank, there has been

15

significant convergence of the exchanges’ corporate

governance requirements, some of which are already

discussed in these FAQs.

What is the listing process?

To list its securities on an exchange, a company must

meet the quantitative and qualitative requirements and

submit an application to the exchange. The NYSE and

the NYSE MKT require that the company participate in

a confidential pre-application eligibility review in order

to determine whether the company meets its listing

criteria. NASDAQ offers a similar preliminary listing

eligibility review. In order for shares to be listed on the

exchange, in addition to filing a registration statement

for the IPO itself under the Securities Act, the issuer

must also file a registration statement under the

Exchange Act that acts as the continuing registration

statement for the company after the IPO is completed.

If the exchange listing is in conjunction with the IPO,

the Exchange Act registration statement is a brief filing

consisting primarily of cross-references to the Securities

Act IPO registration statement. The exchange will

review the application and supporting documentation

and once the listing is approved, the shares will be

admitted for trading after the Exchange Act and, if

applicable, Securities Act registration statements have

been declared effective by the SEC and the shares have

been offered and sold if there is a concurrent IPO. A

company cannot state in its preliminary prospectus that

its shares have been approved for listing, subject to

official notice of issuance, unless it has actually received

such approval. As listing is often critical to the success

of an IPO, it is best practice to get such approval before

the preliminary prospectus has been printed.

Underwriting Arrangements

What kinds of underwriting arrangements are possible?

In a typical IPO, the underwriters will have a “firm

commitment” to buy the shares once they sign the

underwriting agreement, meaning they will purchase

all of the offered shares if the conditions specified in the

underwriting agreement are satisfied. However, other

underwriting arrangements exist, including a “best-

efforts” underwriting, in which the underwriters agree

to use their best efforts to sell the stock as the company’s

agents. If purchasers are not found, the stock will not

be sold. A best-efforts underwriting may provide that

no shares will be sold unless purchasers can be found

for all of the offered shares but other arrangements

provide that shares may be sold as long as a specified

minimum is reached (sometimes known as a “min-max

best efforts offering”). The SEC imposes certain escrow

and other requirements on a mini-max best efforts

offering. The nature of the underwriters’ commitment

will also affect the ability of the underwriters to engage

in certain stabilizing transactions to support the stock

price following the IPO.

How much will the underwriters’ compensation be?

The underwriters will be paid a fixed percentage of the

total dollar amount of securities sold, usually about 7%.

The percentage varies depending on a number of

factors, such as the size of the company, its profitability,

its industry, etc., but cannot exceed 10%. See “What is

FINRA and what are its requirements?” While the

underwriters will not receive their fee unless the IPO is

successful, when they are paid, their fees are substantial.

16

What is an auction IPO?

In a traditional underwriting, the underwriters set the

initial offering price based on their understanding of

non-binding indications of interest from potential

investors. In an auction, also sometimes called a “Dutch

auction,” potential investors put in bids for the shares at

the prices they deem appropriate. The shares are then

sold at the highest price that results in all of the offered

shares being sold. Unlike a traditional auction where

the price starts out low and rises, in a Dutch auction, the

price starts out high and decreases until all shares are

allotted to investors, and all investors pay that lowest

price. The Google IPO in 2004 is the most famous

example of a Dutch auction IPO. They are still rare

occurrences.

What is contained in the underwriting agreement?

An underwriting agreement is the agreement pursuant

to which a company agrees to sell, and the underwriters

agree to buy, shares and then sell them to the public.

Until this agreement is signed, the underwriters do not

have an enforceable obligation to acquire the offered

shares (in a firm commitment offering) or to use their

best efforts to place the shares (in a best efforts offering).

The underwriting agreement is executed after the

offering price is agreed upon, which is typically shortly

after the Securities Act registration statement is declared

effective by the SEC.

In addition to being a securities purchase agreement,

an underwriting agreement may serve to protect the

underwriters from liability under the Securities Act in

connection with an offering. Part of underwriters’ due

diligence is making sure that the representations of the

issuer in the underwriting agreement are true and

accurate. In addition, the underwriters’ defenses are

bolstered by the receipt of opinions of counsel about

specific matters relating to the company as well as

“comfort letters” from the company’s auditors and in

some circumstances, receipt of similar letters from other

experts such as engineers and oil and gas experts.

The most important provisions of an underwriting

agreement are:

Description of the nature of the underwriters’

obligation. The opening paragraphs describe

the offering, whether the underwriters have a

firm commitment or best efforts obligation and

the underwriters’ compensation.

Representations and warranties. The company

makes statements about its business, finances

and assets, the offered stock and the accuracy

of the registration statement.

Conditions to closing. Conditions usually

include the continued effectiveness of the

registration statement and the absence of

material adverse changes.

Required deliverables. The company will need to

provide opinions of counsel and other experts,

certificates confirming the accuracy of the

representations and warranties, the initial

accountants’ comfort letter delivered at the

time of pricing the offering and the bring-

down letter delivered at closing and other

closing documents.

Division of expenses. The underwriting

agreement will specify which expenses of the

offering are paid by the company.

Lock-ups. The underwriting agreement will

prohibit the company as well as directors and

executive officers from selling equity, except

17

for certain limited purposes, during a period of

up to 180 days following the IPO without the

managing underwriter’s consent. This “lock-

up” will also often extend to all or certainly the

largest shareholders of the issuer. The

exceptions from the lock-up provisions can be

highly negotiated.

Indemnification. The indemnification section is

probably the most important part of the

underwriting agreement other than the

payment provisions. Arguably, the balance of

the agreement is a due diligence exercise

designed to ensure that the company provides

sufficient information to the underwriters to

satisfy the underwriters’ liability obligations

under the Securities Act. In the

indemnification section, the company (and

sometimes, the primary shareholder) agrees to

indemnify and be responsible for the

underwriters’ damages and expenses in the

event of any litigation or other proceedings

regarding the accuracy of the registration

statement and prospectus. The

indemnification section will also provide that

the underwriters will be liable to the company

for misstatements in the prospectus

attributable to the underwriters, which

information is typically limited to the

underwriters’ names and the stabilization and

similar disclosures. Each underwriter has its

own form of indemnification provision and, in

light of the importance of this section,

underwriters are usually reluctant to make

changes to that provision. It should be noted

that the SEC has a long-standing position that

indemnification for Securities Act liabilities is

unenforceable and against public policy.

What are lock-up agreements?

To provide for an orderly market and to prevent

existing shareholders who may have owned the shares

long enough to have freely tradable shares from

dumping their shares into the market immediately after

the IPO (and indicating a lack of trust in the future of

the company), underwriters will require the company as

well as directors, executive officers and large

shareholders (and sometimes all pre-IPO shareholders)

to agree not to sell their shares of common stock, except

under certain limited circumstances, for a period of up

to 180 days following the IPO, effectively “locking up”

such shares. Exceptions to the lock-up include

issuances of shares in acquisitions and in compensation-

based grants. Shareholders may be permitted to

exercise existing options (but not to sell the underlying

shares), transfer shares to family trusts, and sometimes

to make specified private sales, provided that the

acquiror also agrees to be bound by the lock-up

restrictions. Lock-up exceptions can be highly

negotiated.

What is FINRA and what are its requirements?

FINRA is the largest non-governmental regulator for all

securities firms doing business in the United States. It

was created in July 2007 through the consolidation of

the National Association of Securities Dealers and the

member regulation, enforcement, and arbitration

functions of the NYSE. FINRA determines whether the

terms of the “underwriting compensation” and

arrangements relating to “public offerings” are “unfair

and unreasonable.”

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Underwriters’ counsel will submit the underwriting

agreement, the registration statement, and other

offering documents for review to FINRA. FINRA

reviews the terms of the offering and the underwriting

arrangements to determine whether they are “fair and

reasonable.” FINRA will focus on the compensation to

be paid to the underwriters, which could also include

certain items of value received in the six months before

the IPO. An IPO cannot proceed until the underwriting

arrangement terms have been approved by FINRA.

Can a company go public without an underwriter?

There are two ways a company can go public without

an underwriter: (i) through a Form 10 filing and (ii) by

self-underwriting.

A registration statement on Form 10 registers a

company’s stock pursuant to Section 12(b) or (g) of the

Exchange Act, so that the company can become a

reporting company under the Exchange Act. It requires

many of the same disclosures as would be required in

an IPO under the Securities Act that typically uses a

registration statement Form S-1, including risk factors,

financial information and statements and descriptions

of the company’s business and its management.

Technology and the Internet have made self-

underwriting a more feasible prospect for even small

companies. Through the Internet, companies can reach

a wider audience of investors without an underwriter.

Some companies have even conducted auction IPOs, in

which the company solicits bids through a website.

Three considerations for companies considering going

public without an underwriter are:

Locating investors: If the offering is of a

significant size, it may be difficult for a

company to find enough investors for its

shares.

Independent scrutiny: In addition to the

discipline of responding to underwriters’

comments based on their diligence,

underwriters may have a better and broader

understanding of the company’s industry and

markets and will have access to more

investors, particularly institutional investors.

Research coverage: An IPO without

underwriters may not have any or sufficient

research coverage after the offering, often

resulting in an inactive, and therefore, illiquid,

post-offering market.

Financial Information

What financial information is included in the

registration statement?

The SEC requires the following information in the

prospectus of an issuer:

Audited balance sheets as of the end of the

issuer’s last two fiscal years;

Audited statements of operations, statements

of cash flows, statements of comprehensive

income and statements of changes in

shareholders’ equity of the company’s last

three fiscal years, or two years in the case of an

EGC;

Depending on the length of time from the end

of the last fiscal year and the date of filing, an

unaudited balance sheet for the most recent

fiscal interim period and statements of

operations, statements of cash flows and

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statements of changes in shareholders’ equity

for the interim period and for the

corresponding period of the prior fiscal year;

and

Selected historical financial data for the last

five fiscal years (or since the company’s

incorporation, if the company has not been in

existence for five fiscal years) and for the

period since the end of the last full fiscal year

and the corresponding period of the prior fiscal

year; while the JOBS Act was unclear, the

General Applicability FAQs clarify that an

EGC may limit the selected historical financial

data in its IPO prospectus to the same number

of years as the audited financial statements

presented in the registration statement.

These statements must be prepared in accordance

with U.S. GAAP, and they will be the source of

information for “Management’s Discussion and

Analysis of Financial Condition and Results of

Operations” (“MD&A”).

In addition, a prospectus may contain audited and

unaudited financial statements relating to acquisition of

assets and companies as well as pro forma financial

information indicating what the issuer’s financial

statements would look like following the acquisition.

Can an EGC omit any other financial information in its

confidential submissions?

The FAST Act also amended the financial information

requirement for EGCs. As a result of the FAST Act

amendments, an EGC may omit historical financial

information for certain periods otherwise required by

Regulation S-X at the time of filing or confidential

submission, if the EGC reasonably believes the

information will not be required to be included at the

time of the contemplated offering. By way of example,

this change would allow an EGC to omit 2013 financial

statements in a December 2015 filing if it does not

intend to consummate the offering until its year-end

2015 audited financial statements are available (at which

point 2014 and 2015 financial statements will be

included in the registration statement). In December

2015, the SEC staff provided guidance on this change,

clarifying that the accommodation applies to all

historical financial information required to be presented

pursuant to Regulation S-X, including, for example,

financial statements for an acquired company. The SEC

staff also explained in its guidance that an EGC cannot

use this accommodation to exclude the most recent

interim period required by Regulation S-X, even if that

period will be replaced with a longer interim or annual

period in the final registration statement (e.g., for a

January 2016 filing where an EGC expects to

consummate the offering after its year-end 2015 audited

financial statements are available, it can omit 2013 as

noted above but cannot omit the nine-month periods

ended September 30, 2015 and September 30, 2014).

What are auditors’ consents and why are they

necessary?

The SEC requires that auditors consent in writing to the

inclusion of their audit reports in the prospectus. Under

the Securities Act, auditors have liability as experts.

Further, a positive audit report is viewed by the market

as critical to an IPO. Therefore, in order to ensure that

the auditors have reviewed the prospectus that includes

their audit report and to protect the auditors from

companies falsely including audit reports in the

auditors’ names, the SEC requires the company to

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include an executed auditor’s consent as an exhibit to its

filed registration statement.

Does the SEC comment on the financial statements?

The SEC will review and comment on the financial

statements and the MD&A. The SEC’s areas of

particular concern are:

revenue recognition;

business combinations;

segment reporting;

financial instruments;

impairments of all kinds;

deferred tax valuation allowances; and

compliance with debt covenants, fair value and

loan losses.

Companies and their auditors should review their

accounting policies and potential areas of concern

before filing the registration statement. The SEC

encourages discussions with its accounting Staff of

accounting concerns early in the preparation process,

thus avoiding potential problems once the registration

statement is filed and publicly available.

What is “cheap stock”?

Many offerings involve grants of options to officers,

directors and employees before the IPO process begins.

The impact of any option grant on the company’s

financial statements in the prospectus and in

subsequent SEC filings should be discussed with the

company’s accountants, underwriters and counsel

before any action is taken as these grants raise

accounting issues that can result in less attractive

financial results. In addition, under IRS regulations,

stock options that are not priced at their fair market

value as of the date of the grant may subject the option

holder to an excise tax on this component of

compensation.

“Cheap stock” describes options granted to employees

of a pre-IPO company during the 18-24 months prior to

the IPO where the exercise price is deemed (in

hindsight) to be considerably lower than the fair market

value of the shares at grant date. If the SEC determines

(during the comment process) that the company has

issued cheap stock, the company must incur a

compensation expense that will have a negative impact

on earnings. The earnings impact may result in a

significant one-time charge at the time of the IPO as well

as going-forward expenses incurred over the option

vesting period. In addition, absent certain limitations

on exercisability, an option granted with an exercise

price that is less than 100% of the fair market value of

the underlying stock on the grant date will subject the

option holder to an additional 20% tax pursuant to Code

Section 409A.

The dilemma that a private company faces is that it is

unable to predict with any certainty the eventual IPO

price. A good-faith pre-IPO fair market value analysis

can yield different conclusions when compared to a fair

market value analysis conducted by the SEC in

hindsight based on a known IPO price range. There is

some industry confusion as to the acceptable method for

calculating the fair market value of non-publicly traded

shares and how much deviation from this value is

permitted by the SEC. A company will often address

this “cheap stock” concern by retaining an independent

appraiser to value its stock options. However, it now

appears that most companies are using one of the safe-

harbor methods for valuing shares prescribed in the

Section 409A regulations.

21

What is a “comfort letter?”

During the waiting period, underwriters’ counsel and

the company’s independent auditor will negotiate the

auditor’s “comfort letter.” In the “comfort letter,” the

auditor affirms (1) its independence from the issuer, and

(2) the compliance of the financial statements with

applicable accounting requirements and SEC

regulations. The auditor will also note period-to-period

changes in certain financial items. These statements

follow prescribed forms and are usually not the subject

of significant negotiation. The underwriters will also

usually require that the auditor undertake certain

“agreed-upon” procedures in which the auditor

compares financial information in the prospectus

(outside of the financial statements) to the issuer’s

accounting records to confirm its accuracy. These

procedures can be the subject of significant negotiation

as certain information for which the underwriters seek

comparison may not be in the issuer’s accounting

records. These are called “comfort letters” as they offer

cold comfort because of the number of caveats and

exceptions taken by the auditors, including use of

negative assurance language (for example, “nothing has

come to our attention that the relevant information is

not true”). There may be more than one comfort letter if

the financial statements included in the registration

statement are audited by more than one auditor, and the

allocation of agreed-upon procedures between the

different auditors may also require negotiation.

Agreed-upon procedures may also uncover errors in the

prospectus. Therefore, it is best practice to finalize the

agreed-upon procedures prior to printing the

preliminary prospectus for any road show.

Pre-IPO Disclosures

Why are there limitations on corporate public

statements?

Section 5(c) of the Securities Act prohibits offers of a

security before a registration statement is filed. Section

5(b)(1) prohibits written offers other than by means of a

prospectus that meets the requirements of Section 10 of

the Securities Act, such as a preliminary prospectus.

The bans are designed to prohibit inappropriate

marketing, conditioning or “hyping,” of the security

before all investors have access to publicly available

information about the company so that they can make

informed investment decisions. Generally, a company

contemplating an IPO does not have much publicly

available corporate information and none of that

information has been subject to regulatory review.

Until 2005, the Section 5 bans were quite prohibitive,

created significant uncertainty about the effects of

ordinary business communications and did not address

the explosion of new communication technologies since

the 1930s. In 2005, in order to modernize the offering

process, the SEC adopted the “Securities Offering

Reform,” which included adding a number of

communication safe harbors from enforcement of

Section 5.

What is the quiet period?

Section 5(c) of the Securities Act prohibits offers or sales

of a security before a registration statement has been

filed. The pre-filing period begins when a company and

the underwriters agree to proceed with a public

offering.

From the first all-hands organizational meeting

forward, all statements concerning the company should

22

be reviewed by the company’s counsel to ensure

compliance with applicable rules. Communications by

an issuer more than 30 days prior to filing a registration

statement are permitted as long as they do not reference

the securities offering. Statements made within 30 days

of filing a registration statement that could be

considered an attempt to pre-sell the public offering

may be considered an illegal prospectus, creating a

“gun jumping” violation. This might result in the SEC

delaying the public offering or requiring prospectus

disclosures of these potential securities law violations.

See “What is ‘gun jumping’?” Press interviews,

participation in investment banker-sponsored

conferences and new advertising campaigns are

generally discouraged during this period.

In general, at least four to six weeks will pass between

the distribution of a first draft of the registration

statement and its filing with or confidential submission

to the SEC. To a large extent, the length of the pre-filing

period will be determined by the amount of time

required to obtain the required financial statements to

be included in the registration statement.

What are “testing-the-waters” communications by or

on behalf of an EGC?

The JOBS Act provides an EGC, or any other person,

such as its underwriter, that it authorizes to act on its

behalf, with the flexibility to engage in oral or written

communications with QIBs and institutional accredited

investors in order to gauge their interest in a proposed

offering, whether prior to (irrespective of the 30-day

safe harbor) or following the first filing of any

registration statement, subject to the requirement that

no security may be sold unless accompanied or

preceded by a Section 10(a) prospectus. An EGC may

utilize the testing-the-waters provision with respect to

any registered offerings that it conducts while

qualifying for EGC status. There are no form or content

restrictions on these communications, and there is no

requirement to file written communications with the

SEC. In their comment letters on registration

statements, the SEC Staff typically requests to see any

written test-the-waters materials, which can also

provide it with guidance about information that should

be included in the prospectus.

What is the waiting period?

The SEC targets 30 calendar days from the registration

statement filing or confidential submission date to

respond with comments. It is not unusual for the first

SEC comment letter to contain a significant number of

comments that the issuer must respond to both in a

letter and by amending the registration statement. After

the SEC has provided its initial set of comments, it is

much easier to determine when the registration process

is likely to be completed and the offering can be made.

In most cases, the underwriters do not begin the formal

offering process and distribute a preliminary prospectus

until the SEC has reviewed at least the first filing and all

material changes suggested by the SEC Staff have been

addressed.

Marketing generally begins during the waiting period

although an EGC can make test-the-waters

communications even before filing the registration

statement. Section 5(b)(1) of the Securities Act requires

that written offers must include the information

required by Section 10. The only written sales materials

that may be distributed during this period are the

preliminary prospectus and additional materials known

as “free writing prospectuses,” which must satisfy

23

specified SEC requirements. See “What is a free writing

prospectus?” While Section 5(a) of the Securities Act

prohibits binding commitments during the period

before the registration statement becomes effective, the

underwriters will receive indications of interest from

potential purchasers that should allow the underwriters

to determine the final price and number of shares to be

offered. Once SEC comments are resolved, or it is clear

that there are no material open issues, the issuer and

underwriters will undertake a two- to three-week “road

show,” during which company management will meet

with prospective investors. Once SEC comments are

cleared and the underwriters have assembled

indications of interest for the offered securities, the

company and its counsel will request that the SEC

declare the registration statement “effective” at a certain

date and time, usually after the close of business of the

U.S. securities markets on the date scheduled for pricing

the offering. For more information, see “Marketing the

IPO.”

What is “gun jumping”?

“Gun jumping” refers to written or oral offers made

before the filing of the registration statement and

written offers made after the filing of the registration

statement other than by means of a Section 10

prospectus, a free writing prospectus or a

communication falling within a safe harbor from the

gun jumping provisions. While gun jumping can be a

serious concern, the 2005 safe harbors created by

Securities Offering Reform have provided considerable

guidance to companies about this issue. Further, the

ability of EGCs to test-the-waters prior to filing,

together with the elimination of the ban on general

solicitation in connection with certain private

placements also effected by the JOBS Act (see “How does

the JOBS Act change the IPO process?”), have also

significantly reduced concerns about gun jumping.

There are several safe harbors from the gun jumping

provisions applicable to IPOs, including:

Rule 134 – Communications Not Deemed a

Prospectus. Rule 134 provides a safe harbor for

certain limited information about an offering

such as the name and address of the issuer, the

title and amount of the securities being offered,

a brief indication of the issuer’s business and

the names of the underwriters.

Rule 135 – Notice of Proposed Registered Offerings.

Rule 135 provides a safe harbor for even more

limited notices of proposed offerings that do

not include the names of the underwriters.

Rule 163A – Exemption from Section 5(c) of the

Act for Certain Communications Made by or on

Behalf of Issuers More than 30 days Before a

Registration Statement is Filed. Rule 163A

provides a safe harbor for all issuers, provided

that the communication is made more than 30

days before the filing of a registration

statement and does not reference the securities

offering that is or will be the subject of a

registration statement.

Rule 169 – Exemption from Sections 2(a)(10) and

5(c) of the Act for Certain Communications of

Regularly Released Factual Business Information.

Rule 169 provides a safe harbor for

communications by all issuers containing

regularly released factual information.

The consequence of gun jumping is that investors

would have the right to rescind the transaction for the

return of their original investment. In addition, the SEC

24

may demand a delay of the offering and additional

disclosure regarding potential liability as a result of the

violation.

What is the effect on marketing of an EGC’s or foreign

private issuer’s right to submit its IPO registration

statement confidentially?

As discussed below (see “Can an issuer submit its draft

IPO registration statement for confidential review by the

SEC?”), an EGC may submit its draft registration

statement to the SEC on a confidential basis and have it

reviewed without public scrutiny. However, the EGC

must publicly file the registration statement and any

revisions thereto at least 15 days before it begins a “road

show” (see “What are road shows and what materials are

permitted in a road show?”). The JOBS Act required that

an EGC publicly file 21 days prior to commencement of

its roadshow; however, the FAST Act amended this

requirement and reduced the 21-day period to a 15-day

period. Certain foreign issuers may also submit a draft

registration statement confidentially before filing

publicly, although they do not have the obligation to file

at least 15 days before a road show unless they are filing

as EGCs.3 Further, the JOBS Act does not amend

Section 5(b)(1) of the Securities Act, which requires that

written offers must include the information required by

Section 10. Therefore, in order to make written offers,

an EGC or a foreign private issuer must first file (not

just submit) its registration statement with the SEC and

have a preliminary prospectus available, irrespective of

the expected commencement of the road show.

3 See “Frequently Asked Questions about Foreign Private

Issuers” at http://www.mofo.com/files/Uploads/Images/

100521FAQForeignPrivate.pdf.

Filing Requirements

What must be filed with the SEC?

The company must file a registration statement with the

SEC. The registration statement will usually be on Form

S-1 (or Form F-1, if it is a foreign private issuer). Real

estate companies, including REITs, will file on Form

S-11, which requires specific real estate-related

disclosures, and BDCs file on Form N-2 (which is also a

form under the Investment Company Act of 1940),

which requires detailed information about their

investment strategies and policies and investments. The

registration statement consists of two parts. Part I is the

prospectus, which contains information about the

company’s business and financial condition, including

the company’s audited financial statements. Part II

includes information that is not required to be included

in the prospectus that is delivered to investors, such as

information about the offering expenses and fees,

indemnification of officers and directors and a

description of recent sales of the company’s

unregistered securities. Part II also contains the

company’s legal undertakings and the exhibits to the


Separately from the Form S-1, the company typically

must file a registration statement on Form 8-A to

register its common stock under the Exchange Act. The

Form 8-A is required because the company will be

subject to the Exchange Act’s reporting requirements

after the IPO. The Form 8-A is a simple, typically one-

page registration statement and is filed via the EDGAR

system.

http://www.mofo.com/files/Uploads/Images/%20100521FAQForeignPrivate.pdf


25

What is included in a prospectus?

A prospectus describes the offering terms, the

anticipated use of proceeds, the company, its industry,

business, management and ownership, and its results of

operations and financial condition. Although it is

principally a disclosure document, the prospectus is

also crucial to the selling process.

SEC regulations require certain disclosures in a

prospectus. The principal sections of the prospectus are

identified below (“smaller reporting companies” (as

defined by the SEC), EGCs and foreign private issuers

have less detailed disclosure obligations, particularly

with respect to executive compensation):

Summary. The summary is a short overview of

the more important aspects of the offering and

the company. The summary will cover the

type of security offered, a brief description of

the company, the amount of securities offered,

the trading market for the securities and the

use of the proceeds. Generally, the summary

section should not exceed three pages.

Financial Statements. The prospectus will

include audited financial statements of the

company, including balance sheets for each of

the last two completed fiscal years and income

statements for each of the last three (two for an

EGC) completed fiscal years. The prospectus

must also include unaudited financial

statements for any interim periods subsequent

to the last completed fiscal year.

MD&A. The MD&A section describes the

company’s liquidity, capital resources and

results of operation. It also includes a

discussion of known trends and uncertainties

that may have a material impact on the

company’s operating performance, liquidity or

capital resources. The SEC has identified three

principal objectives of the MD&A section:

(i) to provide a narrative explanation of the

company’s financial statements enabling

investors to view the company through

management’s eyes; (ii) to enhance the overall

financial disclosure and provide context within

which the company’s financial information

should be analyzed; and (iii) to provide

information about the quality of, and potential

variability of, the company’s earnings and cash

flow, so that investors can assess the

company’s future performance.

Risk Factors. The risk factors section usually

includes three types of risks: risks pertaining

to the offering; risks pertaining to the issuer;

and risks pertaining to the issuer’s industry.

The SEC requires that the risk factors section

include only risks specific to the company.

Business. The business section describes the

company’s business, including its products

and services, key suppliers, customers,

marketing arrangements and intellectual

property.

Management. Officers and directors must be

identified in the management section and brief

biographical descriptions must be included.

Executive Compensation. The company must

disclose the executive compensation of its five

highest paid executive officers, which must

include the CEO and CFO. Most of this

disclosure is presented in tabular format. The

executive compensation section must also

include directors’ compensation and employee

26

benefit plans. The SEC requires a

compensation disclosure and analysis

(“CD&A”) in which the company discloses the

company’s executive and board compensation

matters. An EGC will have reduced

compensation disclosure requirements. See

“What disclosures may an EGC omit?”

Related Party Transactions. This section must

include any material business transaction

between the issuer and its executive officers,

directors, significant shareholders and other

key personnel.

Security Ownership. This section includes a

tabular presentation of the company’s officers’

and directors’ beneficial share ownership as

well as the beneficial ownership of each holder

of more than 5% of the company’s outstanding

stock.

Plan of Distribution. The plan of distribution

section describes the underwriting

arrangements, including the underwriters’

plans for distributing the shares in the offering.

Counsel and Experts. These two sections

identify counsel to the company and the

underwriters and the accountants who have

audited the company’s financial statements.

“Experts” will also identify anyone else who

has “expertized” any information in the

prospectus.

A good prospectus sets forth the “investment

proposition.” As a disclosure document, the prospectus

functions as an “insurance policy” of sorts in that it is

intended to limit the issuer’s and underwriters’

potential liability to IPO purchasers. If the prospectus

contains all SEC-required information, includes robust

risk factors that explain the risks that the company

faces, and has no material misstatements or omissions,

investors will not be able to recover their losses in a

lawsuit if the price of the stock drops following the IPO.

A prospectus should not include “puffery” or overly

optimistic or unsupported statements about the

company’s future performance. Rather, it should

contain a balanced discussion of the company’s

business, along with a detailed discussion of risks and

operating and financial trends that may affect its results

of operations and prospects.

SEC rules set forth a substantial number of specific

disclosures required to be made in a prospectus. In

addition, federal securities laws, particularly Rule 10b-5

under the Exchange Act, require that documents used to

sell a security contain all of the information material to

an investment decision and do not omit any information

necessary to avoid misleading potential investors.

Federal securities laws do not define materiality; the

basic standard for determining whether information is

material is whether a reasonable investor would

consider the particular information important in making

an investment decision. That simple statement is often

difficult to apply in practice. An issuer should be

prepared for the time-consuming drafting process,

during which the issuer, investment bankers, and their

respective counsel work together to craft the prospectus

disclosure.

What disclosures may an EGC omit?

The JOBS Act created an “on-ramp” of scaled disclosure

requirements for EGCs. Generally, an EGC has

flexibility to choose the scaled disclosures with which it

will comply, except with respect to the timing of

compliance with new or revised accounting standards.

27

Financial Statements and MD&A. An EGC is

required to present only two years of audited

financial statements in its initial public offering

registration statement. An EGC may also limit

its MD&A to cover only those audited periods

presented in the audited financial statements.

The SEC will also not object if an EGC

presenting two years of audited financial

statements limits the selected financial data

included in its initial public offering

registration statement to only two years. As

noted earlier, the FAST Act amended the

financial information requirement for EGC

submissions and filings. An EGC should

consider, together with its advisors, whether it

makes strategic sense to include additional

years of financial information.

Executive Compensation. An EGC may comply

with the executive compensation disclosures

applicable to a “smaller reporting company,”

which means that an EGC need provide only a

Summary Compensation Table (with three

rather than five named executive officers and

limited to two fiscal years of information), an

Outstanding Equity Awards Table, and a

Director Compensation Table, along with some

narrative disclosures to augment those tables.

EGCs are not required to provide a

Compensation Discussion and Analysis, or

disclosures about payments upon termination

of employment or change in control.

Compliance with New or Revised Accounting

Standards. An EGC may elect an extended

transition to compliance with new or revised

accounting standards. However, if an EGC

chooses to comply with such standards to the

same extent that a non-EGC is required to

comply with such standards, the EGC must

(1) make such choice at the time it is first

required to file a registration statement,

periodic report, or other report under the

Exchange Act and notify the SEC of such

choice; (2) comply with all such standards to

the same extent that a non-EGC is required to

comply with such standards; and (3) continue

to comply with such standards to the same

extent that a non-EGC is required to comply

with such standards for as long as the

company remains an EGC.

EGC Status. The SEC Staff has explained in the

General Applicability FAQs that an EGC must

identify itself as an EGC on the cover page of

its prospectus. In addition, SEC Staff

comments on EGC registration statements

have requested the following disclosures: (i) a

description of how and when a company may

lose EGC status; (ii) a brief description of the

various exemptions available to an EGC, such

as exemptions from Sarbanes-Oxley Section

404(b) and the Say-on-Pay/Say-on-Golden

Parachute provisions; and (iii) the EGC’s

election for extended transition to new or

revised accounting standards. The SEC Staff

requests that if the EGC has elected to opt out

of the extended transition period for new or

revised accounting standards, then it must

include a statement that the election is

irrevocable. If the EGC has elected to use the

extended transition period, then risk factor

disclosure must explain that this election

28

allows an EGC to delay the adoption of new or

revised accounting standards that have

different effective dates for public and private

companies until those standards apply to

private companies. The SEC Staff requests that

the EGC state in the risk factors that, as a result

of this election, the EGC’s financial statements

may not be comparable to issuers that comply

with public issuer effective dates. A similar

statement is also requested in the EGC’s critical

accounting policy disclosures in MD&A.

What is included in the registration statement?

A registration statement contains the prospectus, which

is the primary selling document, as well as other

required information, written undertakings of the issuer

and the signatures of the issuer and at least a majority of

the issuer’s directors. It also contains exhibits, including

basic corporate documents and material contracts. U.S.

companies generally file a Form S-1 registration

statement. Most non-Canadian foreign private issuers

use a Form F-1 registration statement, although other

forms may be available. There are special forms

available to certain Canadian companies.

How is the registration statement filed and what is

EDGAR?

A registration statement is filed electronically with the

SEC through its Electronic Data Gathering, Analysis and

Retrieval (EDGAR) system. Before the company can file

via the EDGAR system, it must create an account with

the SEC by obtaining a Central Index Key (“CIK”)

number and associated security codes. The CIK number

is a unique number assigned to individuals and

companies who file reports with the SEC. Once the

company files the registration statement via the EDGAR

system, it becomes publicly available.

Can an issuer submit its draft IPO registration

statement for confidential review by the SEC?

Two types of issuers may confidentially submit their

IPO registration statements for confidential review –

EGCs and certain foreign private issuers.4 The JOBS Act

permits an EGC to submit its initial public offering

registration statement confidentially for nonpublic

review by the SEC staff, provided that the initial

confidential submission and all amendments are

publicly filed with the SEC no later than 15 days prior to

the issuer’s commencement of a “road show” (as

defined in Securities Act Rule 433(h)(4)). The SEC Staff

will also require EGCs to submit via the EDGAR system

all of the responses to Staff comment letters on the

confidential draft registration statements at the time the

registration statement is first filed. The SEC Staff also

asks that the draft registration statement be

accompanied by a transmittal letter confirming the

issuer’s status as an EGC. The Staff expects that any

registration statement submitted for confidential review

will be substantially complete at the time of initial

submission, including a signed audit report and the

required exhibits (however, the registration statement

itself is not required to be signed or to include the

consent of auditors and other experts). The SEC Staff

4 See “Frequently Asked Questions about Foreign Private

Issuers” at http://www.mofo.com/files/Uploads/Images/

100521FAQForeignPrivate.pdf for a discussion of the

circumstances under which a foreign private issuer that is not

an EGC may submit its draft registration statement

confidentially.



29

has noted that it will defer review of any draft

registration statement that is materially deficient.5

Can any other information or agreement be kept

confidential?

In addition to a registration statement, a company is

required to file certain exhibits with the registration

statement, including its certificate of incorporation,

bylaws, material agreements (including the

underwriting agreement) and consents of experts. Since

information filed via the EDGAR system with the SEC

will be publicly available, if the company wants to keep

any information confidential, it must request

confidential treatment of the information from the SEC

and file redacted versions of the exhibits with the SEC.

Requests for confidential treatment may involve trade

secrets or commercial or financial information that

could harm the company competitively if disclosed to

the public. However, the SEC will not grant

confidential treatment requests if it believes the

information is necessary to protect investors. As a

result, requests should be as narrow as possible. The

confidential treatment request process can be lengthy

and initial requests should be submitted with or as soon

as possible after the initial filing of the registration

statement as the SEC will not declare the registration

statement for the IPO effective if there is an outstanding

confidential treatment request.

What is the SEC review process?

The SEC’s review of the registration statement is an

integral part of the IPO process. Once a registration

statement is filed, a team of SEC Staff members is

5 See Frequently Asked Questions of Confidential Submission

Process for Emerging Growth Companies, issued by the SEC

Staff on April 10, 2012.

assigned to review the filing. The team consists of

accountants and lawyers, including examiners and

supervisors. The SEC’s objective is to assess the

company’s compliance with its registration and

disclosure rules. The SEC review process should not be

viewed as a “black box” where filings go in and

comments come out—rather, as with much of the IPO

process, the comment process is a collaborative effort.

The SEC’s principal focus during the review process is

on disclosure; although the nature of some comments

shade into substantive review. In addition to assessing

compliance with applicable requirements, the SEC

considers the disclosures through the eyes of an investor

in order to determine the type of information that

would be considered material to an investor. The SEC’s

review is not limited to just the registration statement.

The SEC Staff will closely review websites, databases,

and magazine and newspaper articles, looking in

particular for information that they think should be in

the prospectus or that contradicts information included

in the prospectus.

The review process is time-consuming. While there

was a time when the review process could be completed

in roughly two months, now, given the length of many

prospectuses and the complexity of the disclosure, it can

take three to five months. The review depends on the

complexity of the company’s business and the nature of

the issues raised in the review process. Initial

comments on Form S-1 are provided in about 30 days—

depending on the SEC’s workload and the complexity

of the filing, the receipt of first-round comments may

take longer. The SEC’s initial comment letter typically

includes about 15 to 30 comments, with a majority of the

comments generally addressing accounting issues. The

company and counsel will prepare a complete and often

30

lengthy response. In some instances, the company may

not agree with the SEC Staff’s comments, and may

choose to schedule calls to discuss the matter with the

SEC Staff. The company will file (or confidentially

submit) an amendment revising the prospectus, and

provide the response letter along with any additional

information. The SEC Staff generally tries to address

response letters and amendments within 10 days, but

timing varies considerably. This timing is the same

whether the registration statement is filed publicly or

submitted confidentially.

The SEC makes comment letters and responses from

prior reviews available on its website, so it is possible to

determine the most typical comments raised during the

IPO process and, if appropriate, to address them in the

first filing. Overall, the SEC Staff looks for a balanced,

clear presentation of the information required in the

registration statement. Some of the most frequent

comments raised by the SEC Staff on disclosure, other

than on the financial statements, focus on whether the

risk factors are specific to a company and devoid of

mitigating language, whether the MD&A addresses

known trends and events that affect the company’s

financial statements, operations and liquidity, and

whether the description of the company’s market

position is supportable by third-party data. The SEC

will even review artwork based on the theory that “a

picture is worth a thousand words.”

What is the difference between registration under the

Securities Act and registration under the Exchange Act?

It has been said that if the Exchange Act had been

passed first, the Securities Act would never have been

enacted. Both acts seek to protect investors in “public”

companies and make sure that public investors have the

material information they need to make an informed

investment in public companies. The Securities Act

generally addresses offerings of particular kinds of

securities and requires disclosure for a particular

offering or, once a company is public, perhaps a number

of offerings. The Exchange Act addresses whether a

company should be seen as “public” because of its

intention to list its securities on an exchange or because

of the size of its ownership base and the amount of its

assets, and requires periodic and ongoing public

disclosure about the company. Companies may become

subject to the Exchange Act without a “public” offering.

While SEC forms refer to securities registered under the

Exchange Act, it is really a company that is registered

not its securities.

Marketing the IPO

Can an issuer make offers before filing a registration

statement?

No. Once a company decides to go public, it is “in

registration” and the quiet period begins. See “What is

the quiet period?” However, communications made by

the company more than 30 days before the filing of the

registration statement will not be deemed to be attempts

to condition the market if they do not reference the

offering. Similarly, testing-the-waters communications

by or on behalf of EGCs will not be treated as an illegal

conditioning of the market.

Can an issuer make offers during the SEC review

process?

Yes. During the SEC review process, an issuer can make

offers to the public through distribution of a

preliminary prospectus, free writing prospectuses and

31

live oral presentations. Thus, an EGC cannot make

offers to the public until it files the registration

statement publicly. Generally, a preliminary

prospectus, while available on the EDGAR system, will

not be distributed to investors until after the initial filing

has been revised to address any significant issues raised

in the SEC’s comments.

What are road shows and what materials are permitted

in a road show?

“Road shows” or “dog and pony shows” are

presentations where the company’s representatives

(usually the CEO, CFO and possibly an investor

relations professional) and the underwriters meet with

potential significant investors to market the offering.

For an IPO, the road show will begin after the

preliminary prospectus has been printed and

distributed. Depending on the size of the offering and

the company’s business, the road show may include

meetings in cities outside the United States. The road

show typically takes two to three weeks. The offering

will be priced following the completion of the road

show and the effective date of the registration

statement.

Can an issuer hold an electronic road show?

Yes. Securities Offering Reform allows greater use of

the Internet to distribute electronic road shows. A

preliminary prospectus must be made available to

investors before or at the same time when the investors

access the electronic road show.

What is a free writing prospectus?

In the 2005 Securities Offering Reform, the SEC adopted

the concept of a “free writing prospectus.” Rule 405

defines a free writing prospectus as any written

communication that constitutes an offer to sell or a

solicitation of an offer to buy securities relating to a

registered offering that is used after the registration

statement is filed (there is more latitude for certain

issuers that are already public) that is made by means

other than an actual prospectus or preliminary

prospectus meeting SEC requirements and certain other

written communications. While free writing

prospectuses are often used in debt transactions to

describe the specific terms of the debt securities, they

are less often used in IPOs. However, they do have a

very useful IPO function. Prior to 2005, if there were a

material change in the offering, the deal team—issuer,

underwriters and counsel—would debate whether the

change was so material that oral advice of the change

was insufficient and a revised prospectus needed to be

prepared, filed and circulated to investors (called a

“recirculation”). Since 2005, the deal team has the

ability to provide a simple updating document to

potential investors no later than the time when the

investors have to make their investment decision (and

file it within the time required by SEC rules). The free

writing prospectus does not have a required format and

will reflect transaction needs. Not all information

released by an issuer needs to be in the form of a free

writing prospectus, and the deal team may need to

determine the value of filing specific information.

Can an IPO issuer use free writing prospectuses?

Yes. A company may use free writing prospectuses in

addition to a preliminary prospectus as long as the

preliminary prospectus precedes or accompanies the

free writing prospectus. In addition, certain free writing

prospectuses must be filed with the SEC and contain a

required legend. Underwriters may also use free

writing prospectuses, and the underwriting agreement

32

for an IPO will contain mutual restrictions on the use of

issuer free writing prospectuses and underwriter free

writing prospectuses. BDCs and other investment

companies may not use free writing prospectuses.

However, they may file similar information as sales

material or a term sheet pursuant to Rule 497 under the

Securities Act.

What is a “family and friends” or “directed share”

program?

In connection with an IPO, an issuer may want the

option to “direct” shares to directors, officers,

employees and their relatives, or specific other

designated people, such as vendors or strategic

partners. Directed share (or “family and friends”)

programs (“DSPs”) set aside stock for this purpose,

usually 5-10% of the total shares offered in the IPO.

Participants pay the initial public offering price. Shares

not sold pursuant to the DSP, usually within the first 24

hours after pricing, are then sold by the underwriters in

the IPO. Generally, directed shares are freely tradable

securities and are not subject to the underwriter’s lock-

up agreement, although the shares may be locked up for

some shorter period. Each underwriter has its own

program format. There are, however, guidelines that

must be followed. The DSP is not a separate offering by

the company but is part of the plan of distribution of the

IPO shares and must be sold pursuant to the IPO

prospectus.

Does an issuer need to disclose ownership by

shareholders and/or management?

In addition to information about the issuer itself, federal

securities laws are concerned with trading by

“affiliates” of the issuer and public disclosure of affiliate

ownership of the issuer’s securities. The SEC has a

simple definition of affiliate that is often hard to

understand and apply to specific situations. An affiliate

is any entity or person that, directly or indirectly,

controls or is controlled by or under common control

with the specified entity. While there is much written

about affiliates, Congress in Section 16 of the Exchange

Act has determined that directors, officers and holders

of 10% or more of the issuer’s equity securities are

persons likely to be affiliates. Therefore, under the

Exchange Act, directors, officers and 10% shareholders

must report their holdings of a company’s securities as

well as their purchases and sales. The initial statement

of ownership is on Form 3, which must be filed with the

SEC on or prior to the effective date of the registration

statement. Subsequent changes in ownership are filed

on Form 4, or for certain transactions, on Form 5, all of

which are available on the EDGAR system. In addition,

under Section 13 of the Exchange Act and its rules,

certain existing holders who will own 5% or more of the

post-offering shares will be required to file a short-form

Schedule 13G within 45 days after the end of the

calendar year, since the holder will not have “acquired”

securities triggering the long-form Schedule 13D;

however, any subsequent transactions in the securities

may require an amendment using Schedule 13D.

Pricing

What happens after the SEC has completed its review?

Once a registration statement has been declared

effective and an offering has been priced, the issuer and

the managing underwriters execute the underwriting

agreement and the auditor delivers the executed

comfort letter. This occurs after pricing and before the

opening of trading on the following day. The company

33

then files a final prospectus with the SEC that contains

the final offering information. On the third or fourth

business day following the pricing transaction (T+3 or

T+4), the closing occurs, the shares are issued, and the

issuer receives the proceeds. The closing completes the

offering process. Then, for the next 25 days, aftermarket

sales of shares by dealers must be accompanied by a

final prospectus or a notice with respect to its

availability. If during this period there is a material

change that would make the prospectus misleading, the

company must file an amended prospectus.

How is an offering priced?

In most IPOs, after the road show, representatives of a

company and the underwriters will meet to price the

offering. The initial public offering price will be

determined based on the demand for the stock, current

market conditions and the price range stated in the

preliminary prospectus. If the number of shares will be

significantly increased or decreased or the offering will

not be priced within the range, a free writing prospectus

is often issued at this point to make sure that investors

have the necessary information before deciding to

purchase the shares. Additional information will also

be determined at this time, including the underwriters’

fees and commissions and the members of the

underwriting syndicate. The company will issue a press

release to announce the IPO price before the stock

market opens the following day.

What is a ‘syndicated offering’?

In a syndicated offering, at the time of pricing, the

managing underwriter(s) will invite additional

underwriters to participate in the offering. Each

member of the underwriting syndicate will agree to

underwrite, that is, purchase, a portion of the shares to

be sold and will enter into a separate addendum to the

existing general agreement among underwriters that

governs their relationship.

What is a “green shoe” or “over-allotment option”?

Most “firm commitment” equity public offerings

include an “over-allotment option” or “green shoe” (the

latter name references a case about these kinds of

options). This option enables the underwriters to

purchase additional shares (usually 15% of the “firm”

shares purchased by the underwriters) from the

company if there is substantial demand for the offered

shares. The option is typically exercisable for 30 days

after the pricing of the IPO and the underwriters may

purchase the additional shares at the same price per

share as those sold in the IPO.

What happens at a closing?

The closing of the offering usually takes place three or

four business days (T+3 or T+4) after the pricing of the

IPO, typically T+4 because offerings are usually priced

after the close of the market at 4 p.m. Eastern time.

Immediately prior to the closing, the underwriters will

also hold a bring-down diligence call with the company

to confirm that no material changes in the company’s

business or finances have occurred since the date of

pricing and that the statements in the prospectus remain

accurate. At the closing, the company will deliver the

documents required by the underwriting agreement,

including a bring-down comfort letter, certificates of

officers and one or more opinions of counsel. Upon

satisfaction of the closing conditions, the underwriters

will wire transfer the net proceeds of the offerings to the

company and upon receipt, the company will instruct

its transfer agent to release the shares to the

34

underwriters. A final prospectus must accompany or

precede the delivery of the securities after their sale.

What actions may underwriters take after pricing?

After pricing and during the offering itself, the

underwriters may purchase and sell shares of common

stock in the open market. These transactions may

include short sales, purchases to cover positions created

by short sales and stabilizing transactions.

Short sales involve the sale by the underwriters of a

greater number of shares than they are required to

purchase in the IPO. Covered short sales are sales made

in an amount not greater than the underwriters’ option

to purchase additional shares of common stock from the

company in the IPO. The underwriters may close out

any covered short position by either exercising their

option to purchase additional shares or purchasing

shares in the open market. In determining the source of

shares to close out the covered short position, the

underwriters consider, among other things, the price of

shares available for purchase in the open market

compared to the price at which they may purchase

shares through the over-allotment option.

Naked short sales are any sales in excess of the over-

allotment option. The underwriters must close out any

naked short position by purchasing shares in the open

market. A naked short position is more likely to be

created if the underwriters are concerned that there may

be downward pressure on the price of the shares in the

open market prior to the completion of the offering.

Stabilizing transactions consist of various bids for or

purchases of the company’s common stock made by the

underwriters in the open market prior to the completion

of the offering.

The underwriters may also impose a penalty bid. This

occurs when a particular underwriter repays to the

other underwriters a portion of the underwriting

discount received by it because the sole book-running

manager has repurchased shares of the common stock

sold by or for the account of that underwriter in

stabilizing or short covering transactions.

Purchases to cover a short position and stabilizing

transactions may have the effect of preventing or

slowing a decline in the market price of the common

stock. In addition, these purchases, along with the

imposition of the penalty bid, may stabilize, maintain or

otherwise affect the market price of the common stock.

As a result, the price of the common stock may be

higher than the price that might otherwise exist in the

open market. These transactions may be effected on the

relevant exchange, in the over-the-counter market or

otherwise.

Liability

What liability can a company face in an IPO?

Civil and criminal liability may arise under the

Securities Act from material misstatements or omissions

in a registration statement when it becomes effective or

in a preliminary prospectus upon which a contract for

sale of shares of a company’s stock is based. Liability

can also arise from the failure to comply with

registration requirements or to supply or make available

a final prospectus to investors. Purchasers of a

company’s stock in a registered public offering have a

right of action under Section 11 of the Securities Act for

an untrue statement of material fact or an omission to

state a material fact in a registration statement. Section

11 imposes liability on the issuer, each person who signs

35

the registration statement, each director, the company’s

accountants (and certain other experts) and the

underwriters. Purchasers also have a right of action

under Section 12(a)(2) for false or misleading statements

that are material in a prospectus and in oral statements.

The SEC may bring actions under Section 17 of the

Securities Act and Section 10(b) and Rule 10b-5 under

the Exchange Act.

Under the Securities Act, the company is absolutely

liable for material misstatements or omissions in the

registration statement, regardless of good faith or the

exercise of due diligence. Directors and officers of the

company, however, may have certain due diligence

defenses, as do underwriters, the company’s

accountants and other experts and controlling persons.

Who may also be liable under the Securities Act?

If a company’s registration statement contains an untrue

statement of a material fact or omits to state a material

fact required to be stated in it (or that is necessary to

make the statements not misleading), any purchaser of

the company’s stock can sue the issuer and the

following persons:

anyone who signed the registration statement

(the registration statement is signed by the

company’s chief executive, principal financial

and accounting officers, and at least a majority

of the company’s directors);

anyone who was a director of the issuer (or

anyone who consented to be named as a

director) at the time the registration statement

was filed;

every accountant, engineer, appraiser or other

expert who consented to be named as having

prepared or certified the accuracy of any part

of the registration statement, or any report or

valuation used in the registration statement

(but liability is limited to that information); and

every underwriter.

A purchaser of a security can also sue any person

who:

offered or sold the company’s stock to that

purchaser in violation of Section 5 of the

Securities Act; and

offered or sold the company’s stock to that

purchaser by means of a prospectus or oral

communication that included an untrue

statement of a material fact or omitted to state

a material fact necessary to make a statement,

in light of the circumstances under which it

was made, not misleading.

Every person who controls (through share ownership,

agreement or otherwise) any other person that is liable

under Section 11 or 12 of the Securities Act is jointly and

severally liable with that other person, unless the

controlling person had no knowledge of, or reasonable

grounds to believe in, the existence of the facts that

resulted in the alleged liability.

Is directors’ and officers’ insurance needed?

Yes. Anyone who signs the company’s registration

statement and anyone who is or was a director of the

company or who consented to be named as a director of

the company at the time the registration statement was

filed may be sued by any purchaser of the company’s

stock. These officers and directors have several

potential defenses to liability, including a due diligence

defense. No person will serve as a director or officer

without indemnification from the company and

appropriate directors’ and officers’ insurance, and a

36

company usually represents that it has such insurance

in the underwriting agreement.

What is the SEC’s position on indemnification for

Securities Act liabilities?

Since its early history, the SEC has consistently stated

that indemnification of directors, officers and

controlling persons for Securities Act liabilities is

against public policy and is therefore unenforceable.

Every registration statement is required to set forth the

SEC’s position. Nonetheless, companies have always

provided such indemnification and courts have upheld

such contract rights.

____________________________

By Anna T. Pinedo, Partner,

and James R. Tanenbaum, Partner,




A B O U T R E G U L A T I O N F D

Background

What is Regulation FD?

Regulation FD (for “Fair Disclosure”), promulgated by

the SEC under the Securities Exchange Act of 1934, as

amended (the “Exchange Act”), prohibits companies

from selectively disclosing material nonpublic

information to analysts, institutional investors, and

others without concurrently making widespread public

disclosure. The rule reflects the view that all investors

should have equal access to a company’s material

disclosures at the same time. Since its enactment in

2000, Regulation FD has fundamentally reshaped the

ways in which public companies conduct their

conference calls, group investor meetings, and so-called

“one-on-one” meetings with analysts and investors.

Why was Regulation FD adopted?

Regulation FD is intended to promote full and fair

disclosure of information by issuers. The SEC adopted

Regulation FD to address the selective disclosure by

issuers of material nonpublic information. In its

adopting release, the SEC referred to publicized reports,

describing that many issuers were disclosing important

nonpublic information, such as advance warnings of

earnings results, to securities analysts or selected

institutional investors or both, before making full

disclosure of the same information to the general public.

Where this had happened, the SEC observed, those who

were privy to the information beforehand were able to

profit or avoid a loss at the expense of those kept in the

dark.1

The Regulation

What does Regulation FD require?

Under Regulation FD, whenever a public company, or

any person acting on its behalf, discloses material

nonpublic information to certain enumerated persons,

the company must disclose that information to the

public. The timing of the required public disclosure

depends on whether the selective disclosure was

intentional or unintentional. Accordingly, the company

must make this public disclosure (i) simultaneously, in

the case of intentional disclosures, or (ii) promptly

afterwards, in the case of unintentional disclosures. The

public disclosure may be made through an Exchange

Act filing (such as a Current Report on Form 8-K) or

through any method reasonably designed to effect

broad, non-exclusionary distribution of the information.

1 See the Regulation FD adopting release available at

http://www.sec.gov/rules/final/33-7881.htm.

http://www.sec.gov/rules/final/33-7881.htm

2

See Frequently Asked Questions About Liability of

Public Companies and Companies in Registration for

Website and Social Media Content — “Regulation FD

and Company Web Content.”

Scope of Regulation FD

Which companies are subject to Regulation FD?

Regulation FD applies to all companies that have a class

of securities registered under Section 12 of the Exchange

Act or that are required to file reports under Section

15(d) of the Exchange Act, including any closed-end

investment company (as defined in Section 5(a)(2) of the

Investment Company Act of 1940), but not including

(i) any other investment company, or (ii) any foreign

government or foreign private issuer.

Which employees are covered by Regulation FD?

Regulation FD applies to the public issuer and any

“person acting on behalf of the issuer.” This definition

includes the following individuals:

senior company officials (a director, executive

officer, investor relations or public relations

officer, or other person with similar functions),

including individuals acting under their

direction; and

other officers, employees, or agents of the

company who regularly communicate with

securities market professionals or with security

holders. Note that this element of the definition

is limited to those who “regularly” communicate

with securities market professionals and security

holders.

As part of its Regulation FD policy, a company should

specify which employees are authorized to speak on

behalf of the company and the procedures related to

responding to media and other inquiries.

What constitutes “material information” for purposes

of Regulation FD?

Regulation FD regulates the disclosure of nonpublic

material information. Though Regulation FD does not

define materiality, the adopting release2 provides

guidance in its references to existing case law regarding

determinations of “materiality.”

Information is considered material if there is a

“substantial likelihood that a reasonable shareholder

would consider it important” in making an investment

decision, or if the facts “would have been viewed by the

reasonable investor as having significantly altered the

‘total mix’ of information made available.” The

adopting release also includes a list of information that,

if disclosed, would likely be considered material:

earnings information (including historical or

earnings estimates);

mergers, acquisitions, tender offers; joint

ventures or changes in assets;

new products or discoveries;

developments regarding customers or

suppliers, such as the acquisition or loss of a

contract;

changes in control or management;

change in auditors or auditor notification that

an issuer may no longer rely on an auditor’s

report;

2 See footnote 1.

3

defaults on senior securities;

stock splits or dividends;

redemptions or repurchases of securities;

public or private sales of securities; and

bankruptcy.

What is “nonpublic information” for purposes of

Regulation FD?

As with the materiality standard discussed above, the

SEC does not provide a specific definition. Essentially,

information is “nonpublic” if it has not been

disseminated in a manner making it available to

investors generally. For information to be made public,

“it must be disseminated in a manner calculated to

reach the securities marketplace in general through

recognized channels of distribution, and public

investors must be afforded a reasonable waiting period

to react to the information.” The exact length of a

“reasonable waiting period” depends on the

circumstances of the dissemination.

Which disclosures are proscribed?

Regulation FD is not a blanket prohibition on material

nonpublic disclosures; rather, the rule only proscribes

disclosures to the following individuals:

securities market professionals, such as

brokers, dealers, investment advisers,

institutional investment managers, and sell-

side and buy-side analysts; and

shareholders who it is reasonably foreseeable

would trade on the basis of the information.

By limiting the types of communications covered by

the rule to the above enumerated persons, the SEC

attempted to exclude ordinary-course business

communications with customers, suppliers, and

strategic partners, as well as communications made to

the public media and to governmental agencies. In

addition, as described below, there are a few types of

communications that are specifically excluded from the

rule. See “What communications are exempt from

Regulation FD?”

Are directors prohibited from speaking privately with

shareholders?

No. Question 101.11 in the Compliance and Disclosure

Interpretations (“C&DIs”) published by the staff of the

SEC3 confirms that Regulation FD does not prohibit an

issuer’s directors from speaking privately with a

shareholder or groups of shareholders, provided the

director does not disclose material nonpublic

information to such shareholder or shareholders under

circumstances in which it is reasonably foreseeable that

the shareholder will trade the issuer’s securities on the

basis of such information. Alternatively, a private

communication between a director and a shareholder

would not present Regulation FD issues, if the

shareholder expressly agrees to maintain the disclosed

information in confidence.

When drafting or updating Regulation FD policies in

light of the recent C&DIs, if a company’s directors are

authorized to speak on behalf of the company and plan

on speaking privately with a shareholder or group of

shareholders, consideration should be given to

implementing procedures intended to help avoid

Regulation FD violations. Pre-clearing discussion topics

with the shareholder or having counsel participate in

the meeting are examples noted in the C&DIs.

3 See the Compliance and Disclosure Interpretations regarding

Regulation FD, updated June 4, 2010, available at

http://sec.gov/divisions/corpfin/guidance/regfd-interp.htm.

http://sec.gov/divisions/corpfin/guidance/regfd-interp.htm

4

What communications are exempt from Regulation FD?

Regulation FD specifically excludes certain

communications from the scope of the regulation. These

exempted disclosures generally fit into the following

three categories:

Communications to a person who owes the

issuer a duty of trust or confidence. This

would include counsel, financial advisers, and

other so-called “temporary insiders.”

Communications to any person who expressly

agrees to maintain the information in

confidence. There is no requirement that the

individual agree not to trade on the

information; a promise to maintain

confidentiality is sufficient. Note, of course,

that insider trading laws would still apply.

Communications in connection with an

offering of securities registered under the

Securities Act of 1933 (the “Securities Act”).

Since Regulation FD’s adoption, communications to

credit rating agencies have been exempt from its

requirements; however, the SEC recently adopted an

amendment to Regulation FD eliminating this

exemption.4 Accordingly, issuers will need to consider

whether a credit rating agency is among the enumerated

persons covered by Regulation FD, and if the credit

rating agency is among the enumerated persons,

whether another exemption from Regulation FD is

available whenever material nonpublic information is

provided to the credit rating agency. See the discussion

below.

4 The amendment to Regulation FD was mandated by Section

939B of the Dodd-Frank Wall Street Reform and Consumer

Protection Act of 2010 and became effective upon publication

in the Federal Register on October 4, 2010.

Under what circumstances may an issuer make

disclosures to credit rating agencies?

Disclosures of material nonpublic information by an

issuer to a credit rating agency will continue to be

exempt under other Regulation FD exemptions. For

example, if a credit rating agency has expressly agreed

to maintain the disclosed information in confidence, or

owes a duty of trust or confidence to the issuer,

disclosures to the credit rating agency will be exempt

from Regulation FD. Before making any material non-

public disclosures to a credit rating agency, issuers

should confirm that an agreement between the issuer

and the credit rating agency imposes a confidentiality

obligation or establishes the requisite fiduciary duty,

unless an issuer intends to publicly disseminate that

information. See “What is the timing for required public

disclosures under Regulation FD?”

Regulation FD and Securities Offerings

Does Regulation FD apply to disclosures made in

connection with a registered offering?

Except in certain limited circumstances, Regulation FD

does not apply to company communications and

disclosures made in connection with an offering of

securities registered under the Securities Act. This

exemption is not available for certain registered shelf

offerings, including secondary offerings, employee

benefit plan offerings and offerings under warrants and

other convertible securities. The exemption operates by

defining the starting and ending points of a registered

offering and exempting disclosure made during that

period, if the disclosure is made in connection with the

registered offering.

5

Does the exemption extend to unregistered private

offerings?

No. The SEC did not extend the offering exemption to

unregistered private offerings. Thus, Regulation FD

applies to disclosures made in connection with an

unregistered offering. A reporting company subject to

Regulation FD that is making an unregistered private

offering must consider carefully the Regulation FD

issues that may arise in connection with its discussions

regarding a potential private or exempt offering.

Generally, the company must either (i) publicly disclose

any material information it privately discloses to

investors or potential investors, or (ii) require that those

who receive such information agree to maintain it in

confidence. See Frequently Asked Questions About

PIPEs — “Regulation FD and Other Legal Concerns.”

How are disclosures made in connection with proxy

solicitations or tender offers treated under Regulation

FD?

The SEC also did not exempt from Regulation FD

disclosures that companies make in connection with

proxy solicitations or tender offers. Accordingly, a

reporting company subject to Regulation FD must

consider whether statements or commitments it makes

in the context of soliciting proxies or opposing a third-

party tender offer involve material nonpublic

information that is required to be disclosed under

Regulation FD. This applies even though a person

soliciting in opposition to a company or conducting a

hostile tender offer is not subject to a corresponding

requirement under Regulation FD.

Public Disclosure Under Regulation FD

Does Regulation FD require that a company make a

public disclosure?

Regulation FD does not require that a company make a

public disclosure. A company is not required as a result

of Regulation FD to make a premature disclosure of

information. Regulation FD is simply intended to “level

the playing field” once a company has made selective

disclosures; however, it does not impose an affirmative

obligation to make an announcement. Reporting issuers

should keep in mind their pattern of disclosures, and

should, in the context of a securities offering, give

special consideration to their disclosures. However, the

“bad news” doctrine still provides important guidance

in this regard.

What is the timing for required public disclosures under

Regulation FD?

Regulation FD imposes different deadlines for

disclosure depending on the nature of the selective

disclosure.

Intentional selective disclosure: Issuers must make a

simultaneous public disclosure of any private

communication when the individual making the

disclosure knows, or is reckless in not knowing, that the

information he or she is communicating is both material

and nonpublic. Thus, a CEO who makes an off-the-cuff

remark that includes information he or she knows to be,

or is reckless in not knowing is, material and non-public

to select analysts would be violating Regulation FD

even though the remark was not planned.

6

Unintentional selective disclosure: Issuers must make a

public disclosure “promptly” after selective disclosures

when the individual making the disclosure did not

know, or was not reckless in not knowing, that the

information he or she was communicating was material

and nonpublic.

What does “promptly” mean?

Regulation FD defines the outer boundary for “prompt

disclosure” to mean as soon as reasonably practical, but

in no event after the later of (i) 24 hours or (ii) the start

of the next day’s trading on the New York Stock

Exchange (regardless of where or whether the

company’s stock is traded), in both cases after a senior

company official learns of the disclosure.

What qualifies as “public disclosure” under Regulation

FD?

Regulation FD allows for two means of effecting public

disclosure. A company required to publicly disclose

information may do so by either of the following

methods:

Exchange Act Filing: A company may include

the information in a public filing under the

Exchange Act; (for example, a Form 8-K under

“Item 7.01. Regulation FD Disclosure”); or

A Combination of Disclosure Methods: A

company may choose a method or combination

of methods of public disclosure reasonably

designed to provide broad, non-exclusionary

distribution of the information to the public. These

methods might include some or all of the

following: (i) a press release distributed

through a widely circulated news or wire

service, such as Dow Jones, Bloomberg,

Business Wire, PR Newswire, or Reuters; (ii) a

news conference to which the public is granted

access and for which advance notice is given;

(iii) a simultaneous webcast of a news

conference or analyst conference call;

(iv) posting of the information on the

company’s website; and (v) making available

to the public a replay of the company’s news

conference or conference call.

May a company use its website to effect “public

disclosure” for purposes of Regulation FD?

Yes, under certain circumstances. When Regulation FD

was first enacted, the SEC held a more limited view in

the value of disclosures on a website: while Internet

disclosure, such as a simultaneous webcast or a post on

a company’s website, could be useful, such disclosure

on its own might not be adequate “public disclosure” in

all circumstances. The SEC has since adjusted its view

with respect to online disclosure, and, in August 2008,

published an interpretive release entitled “Commission

Guidance on the Use of Company Websites,” which

provides additional guidance on the use of company

websites (the “2008 Guidance”). This 2008 Guidance

addresses the circumstances under which information

posted on an issuer’s website would be considered

“public” for purposes of evaluating the (1) satisfaction

of Regulation FD’s “public disclosure” requirement; and

(2) applicability of Regulation FD to subsequent private

discussions or disclosure of public information. See

“Frequently Asked Questions About Liability of Public

Companies and Companies in Registration for Website

and Social Media Content — Regulation FD and

Company Websites.”

7

What should the company consider when using its

website for purposes of making “public disclosures”?

The 2008 Guidance clarifies that websites can serve as

an effective means for disseminating information if

investors have been notified that they can locate the

company information on the website. In determining

whether information disclosed solely on the company’s

website qualifies as “public” for Regulation FD

purposes, the SEC provides that a company should

consider whether:

The website is a recognized channel of

distribution;

The posting of information on the website

disseminates the information in a manner that

makes it generally available to the securities

marketplace; and

There has been a reasonable waiting period for

investors and the market to react to the posted

information.

It is the company’s responsibility to evaluate whether

the posting of information on its website meets the

simultaneous or prompt timing requirements of

Regulation FD for public disclosure once a selective

disclosure has been made.

May a company use social media to effect “public

disclosure” for purposes of Regulation FD?

Yes, under circumstances similar to making public

disclosure via a company’s website as discussed above.

On April 2, 2013, the SEC issued guidance providing

that social media channels, such as Twitter and

Facebook, may be used by companies to disseminate

material information, without running afoul of

Regulation FD.5 The SEC emphasized that companies

should apply the 2008 Guidance regarding the

disclosure of material information on company websites

when analyzing whether a social media channel is in

fact a “recognized channel of distribution,” including

that investors must be provided with notice of the

specific channels that a company will use in order to

disseminate material nonpublic information.

In its social media guidance, the SEC confirmed that

Regulation FD applies to social media and other

emerging means of communication used by companies

in the same way that it applies to company websites.

The SEC indicates that every situation must be

evaluated on its own facts. The SEC further indicates

that disclosure of material nonpublic information on the

personal social media site of an individual corporate

officer, without advance notice to investors that the

social media site may be used for this purpose, is

unlikely to qualify as an acceptable method of

disclosure.

What should a company do in light of the social media

guidance?

It may be prudent for companies to consider whether to

address the use of social media in Regulation FD

policies, including whether prohibitions, restrictions or

oversight should apply to the use of social media by

individuals authorized to speak for the company. If a

company determines that social media channels may be

useful for communicating information, it should begin

providing notice that information about the company

5 The SEC issued the guidance in the form of a Report of

Investigation under Section 21(a) of the Exchange Act. See

Report of Investigation Pursuant to Section 21(a) of the

Securities Exchange Act of 1934: Netflix, Inc., and Reed

Hastings, Release No. 34-69729 (April 2, 2013) (the “21(a)

Report”) available at

http://www.sec.gov/litigation/investreport/34-69279.pdf.

http://www.sec.gov/litigation/investreport/34-69279.pdf

8

may be found on those channels. Companies should

also advise individual officers, directors and employees

that posting information about the company on social

media channels could potentially implicate Regulation

FD, and that such individuals must exercise caution

when using social media for communications.

Enforcement of Regulation FD

What potential liabilities could result from violations

of Regulation FD?

Regulation FD is a disclosure rule and not an antifraud

rule. Companies that violate Regulation FD can be

subject to an SEC enforcement action, as can the

individual personnel at the company who were

responsible for the violation. The enforcement might

comprise an injunction or fines, along with the

attendant obligations to disclose the violation.

There are several important limitations to potential

enforcement:

Because Regulation FD is not an antifraud rule,

only conduct that is knowing or reckless can

constitute a violation.

A finding that a company has violated

Regulation FD is not, on its own, sufficient to

give rise to liability under other SEC rules.

Regulation FD includes a provision expressly

stating that the failure to make a public

disclosure under Regulation FD does not in

and of itself constitute a Rule 10b-5 violation.

Regulation FD does not provide for a private

right of action. Therefore, private plaintiffs —

including shareholders — cannot make a claim

based on a company’s violation of Regulation

FD.

The SEC has been increasingly active in pursuing

Regulation FD violations.

Will a Regulation FD violation cause a company to

forfeit its Form S-3 eligibility?

No. The SEC has stated that a violation of Regulation

FD will not cause a company to forfeit its Form S-3

eligibility, nor will the violation prevent a shareholder

from making sales under Rule 144.

Potential Preventive Measures

Are there preventive measures a company may

consider?

Yes, there are a number of preventative steps companies

can adopt to reduce the risks associated with Regulation

FD. Below is a non-exclusive list of suggested

measures.

Review current disclosure policies to

determine how information is currently

disclosed to analysts, institutional investors,

other shareholders, and the public, and

evaluate those processes in light of Regulation

FD.

After identifying potential issues, prepare and

follow a comprehensive disclosure policy,

making sure to emphasize the seriousness and

potential consequences of Regulation FD

violations. This policy should be made

available to senior officials, investor relations

personnel, and anyone else responsible for

speaking with analysts or investors.

9

Engage in periodic Regulation FD compliance

training.

Establish an earnings guidance policy.

Designate a compliance officer to be

responsible for deciding whether information

is material, determining whether it already has

been disclosed to the public, and answering

any other questions about compliance with

Regulation FD.

Establish a record that collects the company’s

public statements (SEC filings, press releases,

transcripts of conference calls, etc.) to track

whether information has been disclosed to the

public.

Establish a framework for Regulation FD

disclosures so that the company is prepared to

navigate Regulation FD’s accelerated filings

schedule. Remember that issuers must

publicly disclose material nonpublic

information following an unintentional

selective disclosure before the later of 24 hours

or the beginning of the next day’s trading on

the New York Stock Exchange (regardless of

whether the issuer’s stock is traded on another

exchange).

Given this timeline, identify in advance a team

that will be responsible for public disclosures.

This team should include members from legal,

investor relations, and finance. Make sure that

the team includes someone who is up to date

on the company’s safe harbor warnings,

because Regulation FD disclosures should

include that language.

If using outside vendors is anticipated to make

disclosure, choose them now. Do not wait

until the company has 24 hours to start looking

for a webcasting service.

Whenever possible, those speaking to analysts

should take a “bodyguard” — someone

familiar with making determinations about

materiality who will listen for any

unintentional disclosures that might trigger the

need to prepare a Regulation FD disclosure —

and serve as a witness.

Review the company’s directors’ and officers’

insurance policy to ensure that the definition of

“claim” includes an SEC investigation into

alleged violations — many (and sometimes,

most) of the expenses are incurred during the

investigation. If possible, seek out a policy that

provides coverage for the investigation.

In addition, review the company’s

indemnification agreements with directors and

officers to determine if they covered the

situation where costs associated with an SEC

investigation are incurred.

Review by counsel of proposed

communications with analysts and

shareholders.

Are there any specific preventative measures to focus on

when speaking with analysts?

Yes. Private meetings with analysts or institutional

investors are particularly risky from a Regulation FD

perspective, and as a result special precautions should

be considered whenever such meetings take place.

10

When speaking with analysts:

consider preparing detailed scripts for the

speaker to use in meetings and other

communications with analysts, including

answers to anticipated questions;

remember to give the safe harbor warnings;

ensure that the analyst understands that the

speaker does not intend to disclose material

nonpublic information selectively;

tell the analyst that, in the speaker’s view, he

or she is not disclosing any material nonpublic

information;

if the analyst disagrees with the speaker’s

assessment of the information the speaker has

disclosed (and particularly if the analyst plans

to write a report changing his or her rating

based on the information), ask that the analyst

notify the speaker before publishing the

information;

explain that the notification is needed so that

the company can determine whether it needs

to make a Regulation FD disclosure so that the

company and the analyst do not violate

Regulation FD;

consider making all analyst and investor calls

and meetings open to the public, with

adequate advance notice; and

make transcripts (written or audio) of these

calls and meetings available to the public for

some period of time afterwards through

webcast or broadcast to the public.

What Regulation FD considerations should companies

be aware of when providing or confirming “guidance”

to analysts?

The SEC has drawn particular attention to the practice

of providing guidance to analysts. In the SEC’s words,

an issuer takes on a “high degree of risk under

Regulation FD” when it engages in private discussion

with an analyst seeking guidance. Even seemingly

benign comments that earnings match analysts’

forecasts could trigger a violation of Regulation FD. For

this reason, issuers may elect to avoid providing

guidance to analysts outside of methods that meet the

definition of “public disclosure” as discussed above. In

light of the recent guidance from the SEC staff, which

we discuss below, companies should consider whether

it is prudent to implement a “no comment” policy

regarding confirmation of prior guidance, particularly

in those situations where there is a heightened risk for

selective disclosure regarding prior guidance.

To what extent may companies permissibly confirm

prior public guidance to analysts or investors on a

selective basis?

The staff of the Division of Corporation Finance of the

SEC published C&DIs regarding Regulation FD.

Question 101.01 in the C&DIs6 addresses the extent to

which a company may permissibly confirm prior public

guidance to analysts or investors on a selective basis.

The C&DIs indicate a few key principles for companies

to consider when confirming guidance and drafting or

updating its Regulation FD policies:

Whether a Regulation FD disclosure obligation

is triggered depends on the materiality of the

company’s confirmation of the guidance.

6 See footnote 3.

11

In assessing the materiality, a company must

consider the extent to which the confirmation

(including the related circumstances and

context around the confirmation) conveys

additional material information.

In examining these circumstances, the amount

of time that has elapsed since the original

guidance was given, and the extent to which

there have been intervening events since that

time may be relevant factors.

For example, the confirmation of

quarterly guidance at the end of a

quarter may be material, while

confirmation in the middle of the

quarter may not be deemed as

material, given differing inferences

that could be drawn, based on the

relative timing of the confirmations.

An intervening loss of a customer

since the publication of the original

guidance may make a subsequent

confirmation of the original guidance

material.

While it should be acceptable to confirm guidance

privately within a short time after guidance is

announced publicly, outside of those parameters, there

may be significant risks associated with engaging in

private discussions with analysts or investors regarding

guidance. The narrow window for permissibly

confirming guidance would not exist in circumstances

where there has been a subsequent intervening event

that would call into question the guidance, or where the

timing of the confirmation itself conveys additional

material information.

Should companies be alert to specific language that

may be deemed to be confirming prior guidance?

Yes. Question 101.01 in the C&DIs addresses the types

of language that may be deemed to be confirming prior

guidance. A statement by the company that it has “not

changed” or that it is “still comfortable with” prior

guidance is the same as providing a direct confirmation

of the prior guidance. Further, the C&DIs note that

merely a reference to the prior guidance may imply

confirmation of that guidance. In the event that a

company does not wish to confirm the prior guidance,

the C&DIs note that the company could say “no

comment.” Further, a company could make clear when

referring to prior guidance that the guidance was

provided as an estimate as of the date it was given, and

that it is not being updated at the time of the subsequent

statement.

____________________________


and Brian D. Hirshberg, Associate,




A B O U T C O M M U N I C A T I O N S I S S U E S F O R

I S S U E R S A N D F I N A N C I A L I N T E R M E D I A R I E S

These Frequently Asked Questions (FAQs) focus on the

rules and regulations affecting communications. The

Securities and Exchange Commission (the “SEC”) seeks

to promote timely and robust disclosures by reporting

issuers, while regulating communications made in

proximity to, or about, proposed offerings of securities.

Offering-related communications are subject to careful

scrutiny in order to ensure that disclosures are fair and

balanced and are not intended to condition the market

for the offered securities. Over time, communications

have become more dynamic, in large measure as a result

of the proliferation of electronic means of disseminating

information on a real-time basis. To address these

developments, SEC regulations concerning

communications have been made more flexible and

contingent upon the type of company and its size and

sophistication as we explain below.

These FAQs primarily address communications in the

offering context (other than in the context of tender or

exchange offers or business combinations) by issuers

that are not investment companies, business

development companies or other specialized issuers.1

1 Registered investment companies and business development

companies are regulated under the Investment Company Act

of 1940, as amended, and many of the rules discussed in these

FAQs specifically exclude those entities from the benefits of

For additional information about communications

under other aspects of the federal securities laws, see:

Use of Websites and Social Media by Issuers

– Frequently Asked Questions About Liability

of Public Companies and Companies in

Registration For Website and Social Media

Content, available at

http://www.mofo.com/files/Uploads/Documen

ts/FAQCompanyWebsiteContent.pdf.

Disclosure by Reporting Issuers – Frequently

Asked Questions About Regulation FD,

available at

http://media.mofo.com/files/Uploads/Images/F

AQs-Regulation-FD.pdf.

Analysts and Investment Bankers –

Frequently Asked Questions About Separation

of Research and Investment Banking, available

at

http://www.mofo.com/files/Uploads/Images/Fr

equently-Asked-Questions-about-Separation-

of-Research-and-Investment-Banking.pdf.

their safe harbors. These FAQs also do not address

communications with shareholders.

http://www.mofo.com/files/Uploads/Documents/FAQCompanyWebsiteContent.pdf

http://www.mofo.com/files/Uploads/Documents/FAQCompanyWebsiteContent.pdf

http://media.mofo.com/files/Uploads/Images/FAQs-Regulation-FD.pdf





2

Communication Rules Overview

What is an “offer” within the meaning of the federal

securities laws, and why is it relevant to the

communications rules?

The term “offer” is defined broadly in Section 2(a)(3) of

the Securities Act of 1933, as amended (the “Securities

Act”), as “every attempt or offer to dispose of, or

solicitation of an offer to buy . . . for value.” The

Securities Act regulates all offers of securities unless

there is an available exemption. Exemptions are

available for private or limited offerings, offerings made

outside the United States and offerings of certain

exempt securities. A particular area of concern is offers

that are made to the general public without the

protections of the Securities Act. Therefore, the SEC

regulates whether a particular communication is an

“offer,” the manner in which communications are made,

the contents of communications made in connection

with offers of securities and who may make certain

communications, including whether the person making

the communication is an issuer subject to the reporting

and other obligations (a “reporting issuer”) under the

Securities Exchange Act of 1934, as amended (the

“Exchange Act”).

What kinds of communications are not deemed “offers”

or are protected by safe harbors?

The SEC and the courts interpret the term “offer”

broadly. The SEC has long cautioned that publicity

prior to a proposed offering may be considered an effort

to condition the market and create interest in the issuer

or its securities in a manner that raises questions about

whether such publicity is part of a selling effort.2

2 See Securities Act Release No. 33-3844 (October 8, 1957).

However, there are communications that do not

constitute offers based on (i) the nature of the

information in the communication, (ii) the timing of the

communication, (iii) the purpose of the communication

or (iv) the person making the communication. In most

cases, common business communications are not

“offers.”

The following is a brief outline of the primary safe

harbors, which are discussed in greater detail in these

FAQs. These safe harbors are non-exclusive, and other

exemptions and protections may be available under

applicable circumstances. It should also be noted that

the exemptions and safe harbors do not protect actions

that are in technical compliance with the applicable rule

but have the primary purpose of conditioning the

market or are part of a scheme to evade the

requirements of Section 5 of the Securities Act.

Issuers who are not subject to the reporting

obligations of the Exchange Act (“non-reporting

issuers”) may publish regularly released factual

business information that is intended for use by persons

other than in their capacity as investors or potential

investors. (Rule 169)

Communications by issuers more than 30 days before

filing a registration statement are also permitted as long

as the communications do not reference an offering.

(Rule 163A) Additional safe harbors are available to

well-known seasoned issuers (“WKSIs”), which are

permitted to engage at any time in oral and written

communications, including use at any time of free

writing prospectuses, subject to certain conditions and,

in specified cases, filing with the SEC. (Rule 163)

All reporting issuers may publish forward-looking

information as well as regularly released factual

business information. (Rule 168)

3

Simple announcements of proposed offerings are

exempt communications under Rule 135. In addition, a

broad category of routine communications regarding

issuers, offerings, and procedural matters, such as

communications about the schedule for an offering or

about account-opening procedures, are permitted

pursuant to Rule 134.

Analysts’ research reports are permitted in accordance

with Rules 137, 138 and 139.

In April 2012, the Jumpstart Our Business Startups Act

(“JOBS Act”) established a new category of issuer called

an emerging growth company (“EGC”), which is

allowed to engage in communications with potential

investors that are qualified institutional buyers (“QIBs”)

or institutional accredited investors (“IAIs”),3 in order to

gauge interest in a securities offering (“test-the-

waters”), either prior to or following the filing of a

registration statement, without those communications

being “offers” in violation of Section 5 of the Securities

Act. The JOBS Act also allows a broker-dealer to

publish or distribute research reports regarding

securities of an EGC. Further, the JOBS Act directed the

SEC to promulgate rules eliminating the prohibition of

general solicitation in connection with private offerings

under Rule 506 of Regulation D and Rule 144A, which

became effective in September 2013. The impact of

these JOBS Act changes on market practices are still

being sorted out.

Which section of the Securities Act governs offering-

related communications?

Section 5(c) of the Securities Act prohibits all “offers” in

any form prior to the filing of a registration statement.

3 QIBs and IAIs are defined in Rule 144A and Rule 501(a),

respectively, under the Securities Act.

After the filing of a registration statement, it is a

violation of Section 5(b)(1) to make written offers other

than by means of a prospectus that meets the

requirements of Section 10 of the Securities Act. An

example of a prospectus that complies with Section 10 is

a preliminary prospectus (the first prospectus

distributed to investors prior to a new issuance of a

security that contains an indicative price for the

security). Section 5(b)(2) prohibits the delivery of a

security unless accompanied or preceded by a Section

10 prospectus.

What is “gun jumping” and what are its consequences?

Section 5 violations are commonly referred to as “gun

jumping,” as the offeror is making an offer before a

Section 10 prospectus is required and available. Gun

jumping can have business and legal consequences. If

the SEC becomes aware of gun jumping, it can take any

of a number of actions including:

withholding effectiveness of the registration

statement until the effects of such gun jumping

activity have dissipated (an imposed “cooling

off period”);

requiring the issuer to file such

communications as part of the registration

statement, resulting in Securities Act liability

for such statements;

requiring that the gun jumping underwriter be

excluded from the offering; and

assessing administrative penalties against all

persons responsible for such activity.

In addition, every purchaser of the security that was

subject to an illegal offer has a rescission right for a

period of one year.

4

How does the nature of the issuer affect its

communications?

For communications purposes, there are primarily five

types of issuers:

WKSI – generally, a reporting company that

meets the registrant requirements for use of a

registration statement on Form S-3 (or Form

F-3), is not an “ineligible issuer” (defined

below), and

has worldwide market value (public

float) of its outstanding voting and

non-voting common equity held by

non-affiliates of $700 million or more;

or

has issued in the last three years at

least $1 billion aggregate principal

amount of non-convertible securities,

other than common equity, in

primary offerings for cash (and not in

exchange) registered under the

Securities Act, and will register only

non-convertible securities other than

common equity.

Seasoned issuer – generally, a reporting

company that meets the registrant

requirements for use of a registration statement

on Form S-3 (or Form F-3) and

has a public float equal to $75 million,

or

is offering non-convertible securities,

other than common equity, for cash,

provided the issuer:

o has issued at least $1 billion

in non-convertible securities,

other than common equity,

in primary offerings for cash

(not exchange) registered

under the Securities Act,

over the prior three years; or

o has outstanding at least $750

million of non-convertible

securities, other than

common equity, issued in

primary offerings for cash,

not exchange, registered

under the Securities Act.

Unseasoned reporting issuer – generally, a

reporting company that is not a WKSI or

seasoned issuer.

EGC – an issuer with total gross revenues of

under $1 billion (subject to inflationary

adjustment by the SEC every five years) during

its most recently completed fiscal year. An

issuer that qualifies as an EGC will remain an

EGC until the earliest of:

the last day of the fiscal year during

which the issuer’s total gross

revenues exceed $1 billion; or

five years from the issuer’s initial

public offering (“IPO”); or

the date on which the issuer has sold

more than $1 billion in non-

convertible debt; or

the date on which the issuer becomes

a large accelerated filer (i.e., has a

public float of $700 million).

For communications issues not expressly

permitted by the JOBS Act, an EGC will have

5

the same status as an unseasoned reporting

issuer.

Non-reporting issuers.

Varying restrictions apply to different categories of

issuers. WKSIs have the most freedom to communicate

at any time as they are widely followed issuers who are

also most likely to have a regular dialogue with

investors and market participants through the press and

other media. In the SEC’s view, WKSI communications

are subject to scrutiny by investors, the financial press,

analysts and others who evaluate disclosure when it is

made, making it harder for communications by or about

such issuers to manipulate the market.

Certain rules also apply to “voluntary” filers, which

are issuers that file with the SEC for contractual or other

reasons but not because they meet the regulatory

requirements for filing.

What is an “ineligible issuer”?

Rule 405 under the Securities Act defines an ineligible

issuer as one that:

is not current in its reporting obligations under

the Exchange Act (with exceptions for certain

reports on Form 8-K);

within the past three years, is or was a blank

check, shell or penny stock company;4 or

is the subject of a bankruptcy, criminal,

judiciary or administrative proceeding.

4 A blank check company is a development stage company that

has no specific business plan or purpose or has indicated its

business plan is to engage in a merger or acquisition with an

unidentified company or companies, another entity or person.

(Securities Act Rule 419(a)(2)). A shell corporation is a

company that serves as a vehicle for business transactions

without itself having any significant assets or operations.

(Securities Act Rule 405). A penny stock issuer is a very small

issuer of low-priced speculative securities. (Exchange Act Rule

3a51-1).

Ineligible issuers have very limited use of free writing

prospectuses, do not qualify for inclusion in the

research reports permitted by the research safe harbors

and may not be able to conduct anything but live road

shows.

General Business Communications

Do the federal securities laws regulate general business

communications?

Ordinary course business communications with

customers and suppliers, including advertisements and

announcements of new products and services and

changes in management are not generally regulated by

the federal securities laws and rules. However,

depending on whether the issuer is a reporting issuer

and the context, such as whether the communication is

made shortly before or during an offering, or the timing

of the announcement, the federal securities laws may be

relevant, as further detailed in these FAQs.

Why should a non-reporting issuer be concerned about

the SEC’s communications rules?

A non-reporting issuer should be aware that the federal

securities laws apply to its activities even before it files a

registration statement for an IPO. There are also

limitations on communications in connection with

exempt offerings that apply whether or not the issuer is

a reporting company.

Further, for any non-reporting issuer contemplating

an IPO, it is good practice during at least the year prior

to beginning the IPO process to issue factual and even

forward-looking information about its business on a

regular basis in order to develop a record of making

such releases as well as to become more comfortable

6

with SEC requirements and the available safe harbors

for such information. It takes time to understand the

nature of the disclosure and the process of releasing

information to the public – suppliers, customers and

other non-investors – in an SEC-compliant manner.

Offering-Related Communications

How did Securities Offering Reform affect

communications?

For many years prior to 2005, the SEC modernized the

securities offering process through incremental changes.

In 2005, the SEC adopted new rules relating to the

securities offering process,5 referred to as “Securities

Offering Reform,” which significantly changed existing

registration, communication and offering processes for

issuers, and also amended the existing categorization of

issuers. The new rules also revised disclosure

regulations relating to securities offerings, resulting in

significantly greater flexibility for issuers and other

offering participants while explicitly addressing when

liability attaches to disclosures. The reforms resulted in

the following:

introduction of the WKSI, which is permitted

to communicate freely (without gun jumping

concerns) and to file automatically effective

shelf registration statements;

creation of a new communications framework,

including the “free writing prospectus,” and

expanded offering-related communication safe

harbors; and

5 Securities Offering Reform, Securities Act Release No. 33-8591

(July 19, 2005).

redefinition of “written communications” as all

communications other than oral

communications for Securities Act purposes.

How has the JOBS Act affected communications?

The JOBS Act has resulted in the following fundamental

changes to offering-related communications by issuers

and underwriters:

An EGC may engage in oral or written

communications with QIBs and IAIs in order

to gauge their interest in a proposed IPO either

prior to or following the first filing of the IPO


The JOBS Act permits a broker-dealer to

publish or distribute a research report about an

EGC that proposes to register or is in

registration, and the research report will not be

deemed an “offer” under the Securities Act

even if the broker-dealer will participate or is

participating in the offering. The JOBS Act also

prohibits any self-regulatory organization

(“SRO”), such as FINRA, and the SEC from

adopting any rule or regulation that would

restrict a broker-dealer from participating in

certain meetings relating to EGCs.

Post-offering, no SRO or the SEC may adopt

any rule or regulation prohibiting a broker-

dealer from publishing or distributing a

research report or making a public appearance

with respect to the securities of an EGC. This

does away with the traditional post-IPO “quiet

period” for EGCs.

The SEC was directed to revise Rule 506 under

Regulation D to make the prohibition against

general solicitation or general advertising

7

contained in Rule 502 inapplicable in the

context of Rule 506 private offerings, provided

that all purchasers in the offering are

accredited investors. Rule 506(c)

implementing such provision became effective

in September 2013.

The SEC was directed to revise Rule 144A to

permit the use of general solicitation or general

advertising. Effective September 2013, Rule

144A was amended to eliminate references to

“offer” and “offeree,” and as a result, Rule

144A requires only that the securities are sold

to a QIB or to a purchaser that the seller and

any person acting on behalf of the seller

reasonably believe is a QIB. Thus, resales of

securities pursuant to Rule 144A can be

conducted using general solicitation.

Does Regulation FD apply to communications made in

connection with offerings?

Regulation Fair Disclosure, or FD, prohibits the

intentional disclosure of material non-public information

regarding an issuer or its securities to select categories

of people, such as broker-dealers, investment advisers,

investment companies and investors. In addition, if an

issuer unintentionally discloses material non-public

information to persons covered by Regulation FD, the

issuer must publicly disclose the information promptly.

Such public disclosure obligations are not triggered by

disclosure to persons who expressly agree to keep the

disclosed information confidential. The public

disclosure obligations under Regulation FD do not

apply generally to disclosure in “connection with a

securities offering registered under the Securities Act.”6

Thus, in certain instances, such as communications prior

to commencement of an offering, Regulation FD would

be applicable in addition to the rules discussed in these

FAQs. For additional information about Regulation FD,

see Frequently Asked Questions About Regulation FD,

available at

http://media.mofo.com/files/Uploads/Images/FAQs-

Regulation-FD.pdf.

What is the general framework for the communications

rules for registered offerings?

SEC rules on communications follow the three stages of

a registered offering – pre-filing, the period prior to the

SEC declaring the registration statement effective,

which includes the offering itself, (the “waiting

period”), and after the offering. It should be noted that

while the SEC focuses on the filing and effectiveness of

a registration statement, the filing and even the

effectiveness of a “shelf” registration statement, which

is intended to register securities that may be offered in

the future by the registrant, is not necessarily the

commencement of an offering, and the rules described

below must be reviewed carefully.

Communications Before an Offering

What communications are permitted prior to an

offering?

Rule 163A under the Securities Act is a safe harbor

available to all issuers, even non-reporting issuers and

6 In the Release adopting Regulation FD, the SEC stated: “We

believe that the Securities Act already accomplishes most of the

policy goals of Regulation FD for purposes of registered

offerings....” See Release Nos. 33-7881, 34-43154 (August 15,

2000).



8

voluntary filers, for certain communications made more

than 30 days prior to the filing of a registration

statement. Communications occurring more than 30

days prior to filing of a registration statement are not

considered pre-filing offers prohibited by Section 5(c) of

the Securities Act and will, therefore, be free from gun

jumping concerns. Such communications are also not

considered to be free writing prospectuses and are not

required to be filed with the SEC.

A communication made pursuant to Rule 163A must

satisfy the following conditions:

the communication cannot refer to the

securities offering that is the subject of the

registration statement;

the communication must be authorized and

made by the issuer; and

the issuer must take “reasonable steps within

its control” to prevent further distribution of

the information during the 30-day period prior

to filing the registration statement.

The Rule 163A safe harbor may not be used in

connection with certain types of business combination

transactions, offerings to employees registered on Form

S-8, and offerings by ineligible issuers. This safe harbor

is also not available for communications regarding

offerings made by a registered investment company or a

business development company.

May a WKSI make offers before a registration

statement is filed?

Yes. Rule 163 under the Securities Act is a non-

exclusive exemption for WKSIs from the prohibition on

making offers prior to filing a statutory prospectus

under Section 10 of the Securities Act. This rule allows

WKSIs to engage in unrestricted oral and written offers

before filing a registration statement. Under Rule 163,

an offer by a WKSI before filing a registration statement

is free from Section 5(c) restraints, provided that certain

conditions are met, including that the written

communication:

contains a prescribed legend;

is filed with the SEC promptly upon filing a

registration statement for the offering; and

does not relate to “ineligible offerings,” such as

certain business combination transactions.

A written offer under Rule 163 is considered to be a

statutory prospectus that is subject to liability under

Section 12(a)(2) of the Securities Act, and a free writing

prospectus that must be filed pursuant to Rule 433. If

no registration statement is filed, however, a Rule 163

communication will not need to be filed. Rule 163

communications will not automatically be subject to

Section 11 liability because a free writing prospectus is

not deemed to be part of a registration statement for

Section 11 liability purposes. See “What are the liability

provisions applicable to free writing prospectuses?” below.

May underwriters and their other offering participants

rely on Rules 163 and 163A?

Underwriters or other offering participants may not rely

on either Rule 163 or Rule 163A. Communications

under Rules 163 and 163A must be made “by or on

behalf of” an issuer. Rule 163 provides that a

communication is made “by or on behalf of” an issuer if

the issuer or an agent or representative of the issuer,

other than an offering participant who is an underwriter

or dealer, authorizes or approves the communication

before it is made. As a result, the availability of the Rule

163 exemption has been narrowly limited to issuer

communications, significantly restricting the ability of a

9

WKSI to conduct any meaningful pre-marketing

activities in advance of filing an automatically effective

shelf registration statement. Although in 2010 the SEC

proposed amendments to Rule 163 to permit

underwriters to pre-market WKSI offerings (before any

registration statement is filed), the proposal has been

tabled. It should also be noted that Rule 163A

specifically requires no mention of the offering, thus,

eliminating the ability of an underwriter to make any

meaningful communication.

May an EGC communicate with investors prior to filing

a registration statement?

Yes. The JOBS Act allows an EGC to gauge potential

interest in a securities offering prior to the filing of a

registration statement from QIBs and IAIs only. It is

difficult to determine whether a standard process or

form for these “test-the-waters” communications will

develop but it is advisable for the EGC to consult with

counsel and its underwriters to ensure that such

communications are consistent with its registration

statement. The SEC has not announced any plans to

amend Rule 163A or other rules to address the ability of

an EGC to “test-the-waters” as this provision of the

JOBS Act was effective immediately.

May an issuer announce a proposed registered public

offering?

Rule 135 permits an issuer or a selling security holder to

announce a proposed registered public offering without

such notice constituting an illegal offer under Section 5

of the Securities Act. The Rule 135 notice can contain

the name of the issuer, the title, amount and basic terms

of the securities to be offered, and a brief statement of

the manner and purpose of the offering. The Rule

permits additional disclosure relating to offerings to

existing security holders, including for rights offerings,

offerings to employees, exchange offers and Rule 145(a)

offerings. A Rule 135 notice cannot identify the

managing underwriters.

Is there a safe harbor for information about foreign

offerings?

Rule 135e permits foreign private issuers, selling

securityholders, their representatives (including an

underwriter7) and foreign government issuers to

provide journalists with access to information that

discusses a present or proposed offering of securities.

This rule can be used if the following conditions are

met:

the information must be provided at a press

conference or in meetings or written materials

held outside the United States;

the offering is not conducted solely in the

United States;

access is provided to both United States and

foreign journalists; and

press-related materials:

contain the specific legends that are

appropriate to an offering in the

United States;

if there is an intention to register the

offering in the United States, contain a

statement of that intention; and

do not include a purchase order or

coupon in the materials.

The Rule 135e adopting release states that one-on-one

interviews held outside the United States are covered by

7 See Securities Act Release No. 33-7470 (October 10, 1997).

10

this safe harbor.8 Investor calls are also covered by this

safe harbor as long as the participants are all outside the

United States.9

Communications During an Offering

May an issuer continue to release factual and forward-

looking information?

Rule 168 under the Securities Act generally permits

reporting issuers to continue publishing or

disseminating “regularly released factual business and

forward-looking information,” even around the time of

a registered offering. This safe harbor is designed to

permit ongoing communications with the market, such

as press releases, earnings releases, conference calls,

earnings guidance, and other information released in

accordance with an issuer’s past practices, but cannot

contain information about a potential offering and

cannot be made as part of the offering process. These

communications will not be deemed to constitute an

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.

Rule 168 is available to any U.S. reporting company

and some participants in asset-backed securities

transactions. Rule 168 is also available to a foreign

private issuer that meets the following conditions:

satisfies all of the requirements for use of a

Registration Statement on Form F-3 (other than

reporting history); and

8 Id. 9 In addition to Rules 135, 135a, 135c and 135e, Rule 135a

addresses certain “generic advertising” by investment

companies, and Rule 135b addresses options disclosure that

meets the requirements of Rule 9b-1 of the Exchange Act by a

broker-dealer prior to execution of any order to buy or sell an

options contract.

either

has a public float of at least $75

million; or

is issuing non-convertible securities

and either has (i) issued at least $1

billion in non-convertible securities,

other than common equity, in

primary offerings for cash, not

exchange, registered under the

Securities Act, over the prior three

years; or (ii) has outstanding at least

$750 million of non-convertible

securities, other than common equity,

issued in primary offerings for cash,

not exchange, registered under the

Securities Act;10 and

either its equity securities have been listed on a

designated offshore securities market for at

least twelve months or has a worldwide

common equity market value held by non-

affiliates of at least $700 million.

Rule 168 is not available to non-reporting issuers, who

may rely on Rule 169.

An issuer must satisfy additional conditions before

availing itself of the Rule 168 safe harbor, including:

the issuer must have previously released

factual information in the ordinary course of

business; and

the timing, manner and form of information

must be consistent with prior practice.

New types of financial information cannot be released

in anticipation of an offering, and the issuer should not

10 See note 5, supra.

11

use new methods to release factual business

information.

Rule 168 applies to information released on a regular

basis and on an unscheduled or episodic basis. In

deciding whether the safe harbor is available, the

threshold question to consider concerns the nature of

the event triggering the release of information.

May a non-reporting issuer or a voluntary filer

continue to release factual business information after

commencing an offering?

A non-reporting issuer (but one that has filed a

registration statement for an offering) can continue to

release factual information pursuant to the Rule 169 safe

harbor. The information that can be released in reliance

on this safe harbor is not as broad as under Rule 168 and

excludes dividend notices and forward-looking

information. The information released under this safe

harbor must be widely disseminated and must be

intended for use by a non-investor audience, such as

suppliers and customers.

What is a Rule 134 notice and when is it used?

Rule 134 allows issuers to make certain written

communications regarding an offering after a Section 10

prospectus is filed. Rule 134 allows inclusion of the

following information:

certain basic factual information about the

identity and corporate location of the issuer,

including contact information, and business

segments;

information about the securities offered, such

as the title of the securities or amounts being

offered;

a brief description of the business of the issuer;

a brief description of the intended use of

proceeds;

the name, address, phone number and email

address of the distributor of communications

regarding the securities being offered, and the

fact that it is participating in the offering;

the names of the underwriters in the syndicate;

an anticipated schedule for the offering;

marketing events information;

a description of the procedures by which

underwriters will conduct the offering;

a description of the procedures for opening

accounts and submitting indications of interest;

information regarding the selling security

holders, such as their names and email

addresses;

whether, in the opinion of counsel, the

securities are a legal investment for savings

banks, fiduciaries, insurance companies or

similar investors under the laws of any state or

territory or the District of Columbia, and the

permissibility or status of the investment

under the Employee Retirement Income

Security Act of 1974;

whether, in the opinion of counsel, the

securities are exempt from specified taxes, or

the extent to which the issuer has agreed to

pay any taxes with respect to the securities;

whether the securities are being offered

through rights issued to security holders and

pertinent details thereof;

the exchanges where the securities will be

listed, the ticker symbols, and the CUSIP

number assigned to the securities; and

12

required legends.

After a preliminary prospectus has been filed

containing a price range in the case of IPOs, a Rule 134

notice can include pricing information, including, in the

case of debt securities, the final or anticipated maturity,

interest rate and yield provisions. A detailed term sheet

cannot be included in a Rule 134 notice; however, it may

be included in a free writing prospectus.

If the registration statement is not yet effective, Rule

134(b) requires a legend stating that the registration

statement is not effective and the name and address of a

person from whom a written prospectus for the offering

may be obtained.

When Rule 134 requires that the communication be

preceded or accompanied by a Section 10 prospectus,

that obligation can be satisfied if the communication

contains an active hyperlink to such prospectus.

Free Writing Prospectuses and Road Shows

What are “written communications” and “graphic

communications”?

Rule 405 under the Securities Act defines a “written

communication” as:

any written or printed communication;

any radio or TV broadcast (regardless of how

transmitted); or

any “graphic communication.”

“Graphic communication” is defined to include all

forms of electronic media, except for a communication

that, at the time of the communication, originates live,

in real time to a live audience and does not originate in

recorded form or otherwise as a graphic

communication, although it is transmitted

electronically. Examples of graphic communications

that may be treated as free writing prospectuses

include:

emails;

websites;

“blast” voicemail messages; and

CD-ROMs.

Individual telephone voicemail messages from live

telephone calls, as well as live road shows, will not be

considered graphic communications. Subsequent

electronic retransmission of these communications,

however, will be considered graphic communications

and, therefore, would be free writing prospectuses.

What is a free writing prospectus?

Rule 405 under the Securities Act defines a free writing

prospectus as, unless the context requires otherwise,

any “written communication” that constitutes an offer

to sell or a solicitation of an offer to buy securities

relating to a registered offering, that is used after a

registration statement has been filed (or, in the case of a

WKSI, whether or not such registration statement is

filed). A preliminary or final prospectus is not a free

writing prospectus. Similarly, a communication

delivered after effectiveness of a registration statement

that is accompanied or preceded by a statutory

prospectus is not a free writing prospectus.

Communications that are not considered offers or

prospectuses, such as Rule 134 or Rule 135

communications, communications benefiting from the

Rule 168 or 169 safe harbors, and research reports are

also not considered to be free writing prospectuses.

Free writing prospectuses are primarily governed by

Rule 164 and Rule 433 under the Securities Act.

13

Who may use a free writing prospectus?

The ability to use a free writing prospectus depends

primarily on whether the issuer is a WKSI, seasoned

issuer, unseasoned issuer, non-reporting issuer or

ineligible issuer.

A WKSI may use a free writing prospectus for an

offering at any time (see “May a WKSI make offers before a

registration statement is filed?” above).

A seasoned issuer may use a free writing prospectus

at any time after the registration statement is filed; there

is no requirement to deliver a Section 10 prospectus

with or in advance of a free writing prospectus.

For unseasoned issuers and non-reporting issuers, free

writing prospectuses can be used at any time after filing

a statutory prospectus. In addition, the statutory

prospectus must precede or accompany the free writing

prospectus, subject to two exceptions. Once a statutory

prospectus is filed, if there are no material changes

between the free writing prospectus and the most recent

statutory prospectus, there is no need to deliver an

additional statutory prospectus. In addition, a statutory

prospectus need not be delivered if a free writing

prospectus is not prepared by the issuer or an offering

participant and is published by a third party.

An ineligible issuer may use a free writing prospectus

but it must contain only a description of the terms of the

offering, such as a term sheet.

When may a free writing prospectus be used?

Rule 164 under the Securities Act provides that once a

registration statement has been filed, the issuer or other

offering participant can use a free writing prospectus if

the issuer is not an ineligible issuer, the offering is an

eligible registered offering and, with respect to road

show materials, the additional conditions of Rule 433

are met. Registered offerings that do not qualify for use

of a free writing prospectus are offerings involving

certain business combinations as well as offerings on

Form S-8.

What information may be included in a free writing

prospectus?

A free writing prospectus may include information that

is not included in the registration statement. However,

the information in the free writing prospectus must not

conflict with the information in the registration

statement that has been filed nor may it conflict with

any Exchange Act reports that are incorporated by

reference into the registration statement.

A free writing prospectus must include an appropriate

legend that advises the investor to read the issuer’s

registration statement and SEC filings and provides a

toll-free number that can be used to obtain a copy of the

prospectus.

What are the filing requirements for free writing

prospectuses?

Generally, an issuer must file a free writing prospectus

with the SEC no later than the day that it is used. If the

free writing prospectus contains information about the

final terms of the offering, it must be filed within two

business days of first use or the establishment of the

terms. The exceptions to this rule are discussed in

“What is a road show and when does it need to be filed?”

below.

An “issuer free writing prospectus” is defined as a free

writing prospectus prepared by or on behalf of the

issuer, used or referred to by the issuer, containing

material information about the issuer or its securities

provided by or on behalf of the issuer and a description

14

of the final terms of the issuer’s securities. When an

issuer authorizes the use of information or the

communication, it is considered to be an issuer free

writing prospectus and subject to filing.

Underwriters and offering participants other than the

issuer also have filing obligations if they distribute a

free writing prospectus in a manner that is designed to

lead to a broad unrestricted dissemination. For

example, the filing condition applies if an underwriter

includes a free writing prospectus on an unrestricted

website or provides a hyperlink from an unrestricted

website to information that would be a free writing

prospectus. Another example of when the filing

condition applies is when an underwriter sends out a

press release regarding the issuer or the offering that is

a free writing prospectus.

Does information on a website constitute a free writing

prospectus?

Rule 433 under the Securities Act provides that offers of

securities that are contained on an issuer’s website or

hyperlinked from the issuer’s website are considered

free writing prospectuses and need to be filed with the

SEC. Historical information located separately and not

incorporated by reference into an SEC filing and

earnings releases may also qualify for the safe harbor if

they meet the Rule 168 or Rule 169 requirements.

What is a media free writing prospectus and must it be

filed?

Any written offer of securities that is approved or

authorized by an issuer, even if it is prepared and

distributed by a third party, is considered a media free

writing prospectus and needs to be filed. The obligation

to file a media free writing prospectus depends on

whether the issuer paid for the article to be published or

whether the article was published independently.

If the issuer or underwriter authorized the article, it is

considered a free writing prospectus, subject to the

legend, delivery and filing requirements. The filing

must include information about the issuer, its securities,

the offering and a copy of the article. If the issuer

reasonably believes that information in the article needs

to be updated or corrected, the issuer may include that

information in the filing.

If the issuer or underwriter did not authorize the

article and did not pay for publication, there is no

legend or Section 10 prospectus delivery requirement

but the article has to be filed within four business days

of the issuer or underwriter becoming aware of such

publication. An issuer is allowed to correct in such

filing any information in the press coverage. The issuer

may also file a copy of the materials published,

including transcripts of interviews.

What is a road show and when does it need to be filed?

During the offering process, an issuer’s management

may make presentations to invited groups of

institutional investors, money managers and other

potential investors. This is commonly referred to as a

“road show” and is usually organized by the

underwriters. WKSIs may conduct a road show at any

time. All other issuers can conduct an offering road

show only after a registration statement has been filed.

Rule 433 defines a “road show” as an offer that

contains a presentation regarding an offering by one or

more members of an issuer’s management, and includes

discussions of the issuer, management and the securities

being offered.

15

A live road show is not considered a written

communication or a graphic communication. “Live

road shows” include:

a live, in-person road show to a live audience;

a live, in real-time road show to a live audience

that is transmitted graphically;

a live, in real-time road show to a live audience

that is transmitted to an “overflow room;”

a webcast or video conference that originates

live and in real-time at the time of transmission

and is transmitted through video conferencing

facilities or is webcast in real-time to a live

audience; and

the slide deck or other written materials used

during any such live road show are not

considered “written communications” for

purposes of Rule 433 unless investors are

permitted to print or take copies of such

information.

All other road shows are considered written

communications and therefore free writing

prospectuses, which may be required to be filed, as

discussed below.

In an IPO (specifically, an offering of common equity

or convertible equity by a non-reporting issuer), a road

show that is a written communication (that is, copies of

the slides are distributed to investors or the presentation

is retransmitted or otherwise is not considered “live”) is

considered a free writing prospectus and must be filed

with the SEC. However, if the issuer makes at least one

version of a bona fide electronic road show available

without restriction to any person, there is no filing

obligation. The obligation to make the electronic road

show generally available is usually satisfied by posting

the road show on the issuer’s website. A bona fide

electronic road show is defined in Rule 433 as a road

show that is a written communication transmitted by

graphic means (and cannot be merely the transcript of

the event). If the issuer uses more than one electronic

road show, then the one posted on the website must

include the same general information regarding the

issuer, management and the securities being offered as

contained in other electronic road shows used for the

same offering.

Road show “written communications” by reporting

issuers are not required to be filed with the SEC. It is

common practice for issuers to post their road shows or

investor presentations on their websites and update

them periodically. Under certain circumstances,

particularly if the issuer is concerned with Regulation

FD, an issuer may also file or furnish the road show

materials under the cover of Form 8-K.

There are also “non-deal road shows” in which issuers

meet with institutional investors even though no

offering is then contemplated. As with offering road

shows, the better practice is not to distribute slides to

investors; however, even if slides are distributed, they

are not considered written communications or free

writing prospectuses because they are not provided in

connection with an offering.

What are the record retention requirements for free

writing prospectuses?

Rule 433 requires issuers and offering participants to

retain all free writing prospectuses used in connection

with an offer and that have not been filed for three years

from the initial bona fide offering of the securities.

16

Liability for Certain Communications

During an Offering

What liability provisions apply to free writing

prospectuses?

Free writing prospectuses are not considered part of a

registration statement and, therefore, are not subject to

Section 11 liability. However, every free writing

prospectus, whether or not filed with the SEC, subjects

the issuer and other offering participants to Section

12(a)(2) liability. Other anti-fraud provisions such as

Section 17(a)(2) of the Securities Act also apply in

actions brought by the SEC. The adopting release for

these rules notes that oral statements made at road

shows are subject to liability regardless of whether they

are free writing prospectuses.

Is there an exception from liability for “immaterial and

unintentional” deviations?

Issuers that do not comply with the conditions set forth

in Rule 433 with respect to free writing prospectuses

violate Section 5(b)(1) of the Securities Act. However,

Rule 164 provides relief for “immaterial or

unintentional” deviations. Under Rule 164, a failure to

file or a delay in filing a free writing prospectus will not

be considered a violation as long as a good faith and

reasonable effort was made to comply with the filing

requirement and the free writing prospectus is filed as

soon as practicable after the discovery of the failure to

file. If a required legend is not included, it will not be

considered a violation as long as a good faith and

reasonable effort was made to comply with the

requirement, the free writing prospectus is amended to

include the legend as soon as practicable after the

discovery of the failure to file and is retransmitted using

the same method and directed to the same prospective

purchasers to whom the original free writing prospectus

was sent.

Do free writing prospectuses subject an underwriter to

liability?

Rule 159A under the Securities Act provides that an

underwriter or other offering participant will not be

liable under Section 12(a)(2) to a purchaser unless the

underwriter used or referred to the free writing

prospectus in offering or selling securities to the person,

the underwriter sold securities to the person and

participated in the planning for the use of the free

writing prospectus by another offering participant to

sell securities to the same person, or the underwriter

was otherwise required to file the free writing

prospectus. In practice, it is essential that underwriters

agree early in the transaction on the permitted free

writing prospectuses.

Communications Issues Affecting

Confidentially Marketed Offerings

What rules affect the ability of issuer and underwriters

to market registered offerings on a confidential basis?

Since Securities Offering Reform in 2005, issuers have

faced extraordinary market volatility, which raises

special concerns in capital raising transactions. These

concerns include significant execution risk associated

with an offering, particularly the potentially adverse

impact on an issuer’s stock price if an offering is

launched but not successfully completed. Further,

underwriters have been faced with increased market

risk, particularly in markets where there may be

significant short selling in the company’s securities at or

17

around the time when the offering is publicly

announced.

To navigate these risks, underwriters have found it

beneficial to engage in pre-marketing activities prior to

public announcement of a transaction. During the pre-

marketing phase, the underwriters contact a select

group of institutional investors on a confidential basis to

gauge the potential interest of those investors in the

offering. Prospective investors expressing an interest in

learning about a potential offering are brought “over the

wall” by the underwriter, and are told about the issuer

and the offering subject to their agreement to keep the

information confidential and not trade on the basis of

the information. Following a successful pre-marketing

phase, the issuer may choose to publicly announce the

transaction and have the underwriters market the

securities to a broader group of investors with the

expectation of very quickly (usually in a matter of

hours) determining the size and price of the offering.

Under current rules, these sorts of pre-marketed or

“wall-crossed” transactions can typically only be

completed when a registration statement is on file and

effective with respect to the securities to be offered.

Logically, an issuer (as opposed to an underwriter) is

not in a position to solicit the interest of prospective

investors under Rule 163 on a confidential basis without

subjecting itself to market risk, principally because any

such solicitations would immediately reveal the issuer’s

identity. See also “May underwriters and other offering

participants rely on Rules 163 and 163A?” above.

Communications After a Registered Offering

What communications rules apply immediately

following an IPO?

Following an IPO, an issuer has specified obligations

with respect to amending its prospectus and issuing

required periodic and current reports under the

Exchange Act. For 25 days following an IPO,

aftermarket sales of shares by dealers must be

accompanied by the final prospectus or a notice with

respect to its availability. If during this period there is a

material change that would make the prospectus

misleading, the company must file an amended

prospectus. Therefore, it is customary for an IPO issuer

not to issue significant communications, particularly

relating to additional offerings, during the 25 days in

order to avoid amending the prospectus. Further,

under FINRA’s research rule, FINRA Rule 2241,

analysts are required to be “quiet” during specified

periods following an IPO, although these quiet periods

were modified for EGCs by the JOBS Act. FINRA

recently amended its rules relating to equity research,

which were formally contained in FINRA Rule 2711 and

now are contained in FINRA Rule 2241. FINRA Rule

2241 has modified significantly the quiet period

requirements. See “What are the ‘mandated quiet periods’

under FINRA Rule 2241?” below.

Communications Issues Affecting Exempt

or Hybrid Offerings

What are the communications issues in Regulation D

offerings?

There are several exemptions from registration that

issuers may rely on in order to raise capital. Prior to the

18

promulgation of Regulation D, issuers relied on Section

4(a)(2) of the Securities Act (prior to the JOBS Act, it was

Section 4(2)), which provides an exemption from the

registration requirements of the Securities Act for

transactions by an issuer “not involving a public

offering.” As the statute does not define “public

offering,” for many years issuers relied on judicial and

administrative interpretations. Regulation D,

promulgated by the SEC in 1982, provides issuers with a

rules-based safe harbor from the Securities Act

registration requirements.

If an issuer wishes to rely on Regulation D (other than

Rule 506(c)) for an offering, neither the issuer nor any

person acting on its behalf, may engage in any form of

general solicitation or advertising, such as

advertisements, articles, notices or other

communications published in newspapers, magazines

or similar media or broadcast over television, radio or

the Internet. Meetings or seminars whose attendees

have been invited by general advertising or general

solicitation are also prohibited.

It should be noted that if Regulation D is not available

for the private offering, Section 4(a)(2) may still be

available provided that there has not been any general

solicitation that could be deemed to cause the offering

to be a “public offering.”

May an issuer announce a proposed non-registered

offering?

A reporting company may issue a notice pursuant to

Rule 135c about an unregistered offering. The notice

can be in the form of a news release, a written

communication to security holders or employees or

other published statements about an unregistered

offering. The Rule 135c notice can contain the name of

the issuer, the title, amount and basic terms of the

offering, the time of the offering, a statement as to the

manner and purpose of the offering without naming the

underwriters and other specific information relating to

the type of offering. Prior to the adoption of Rule 506(c)

and for any private offering not involving general

solicitation, this kind of notice was more likely to be

used after an unregistered offering had been priced or

sold but before the offering closed because this rule

generally created tension with the SEC’s prohibition on

general solicitation in connection with non-registered

offerings.11 However, an issuer conducting a Rule 506(c)

or Rule 144A offering may use a press release that does

not comply with Rule 135c.

A Rule 135c notice must be filed with the SEC on a

current report on Form 8-K (domestic) or report on

Form 6-K (foreign private issuer) filing, as applicable.

Rule 135c is also available for foreign private issuers

that are exempt from registration under the Exchange

Act pursuant to Rule 12g3-2(b); any Rule 135c notice is

furnished to the SEC in accordance with Rule 12g3-2(b).

Rule 135c is not available for non-reporting issuers.

How has Rule 506 been revised to permit “general

solicitation,” as required by the JOBS Act?

Title II of the JOBS Act directed the SEC to eliminate the

ban on general solicitation and general advertising in

Rule 502(c) for certain offerings under Rule 506 of

Regulation D under specified conditions. Rule 506 is

the most popular means for conducting a private

offering because it permits issuers to raise an unlimited

amount of money and preempts state securities laws.

This change to Rule 506, as well as the change to Rule

11 See, e.g., Rule 502(c) under the Securities Act. But see “How

has Rule 506 been revised to permit “general solicitation,” as

required by the JOBS Act?” below.

19

144A, are available to all issuers, not just EGCs, as well

as private companies and funds. The JOBS Act specifies

that any offering made pursuant to Rule 506(c) that uses

general advertising or general solicitation will not be

deemed a “public offering.”

As required by the JOBS Act, the SEC adopted Rule

506(c), effective September 2013, which permits the use

of general solicitation and general advertising, subject to

the following conditions:

the issuer must take reasonable steps to verify

that the purchasers of the securities are

accredited investors; the SEC’s Staff indicated

that “reasonable efforts” to verify investor

status will be an objective determination by the

issuer based on the SEC’s principles-based

guidance;

all purchasers of securities must be accredited

investors, either because they come within one

of the enumerated categories of persons that

qualify as accredited investors or the issuer

reasonably believes that they qualify as

accredited investors, at the time of the sale of

the securities; and

the conditions of Rule 501 and Rules 502(a) and

502(d) are satisfied.

At the same time as the SEC adopted Rule 506(c), it

also issued proposals12 to amend Regulation D and

Form D to address some of its concerns regarding the

impact of general solicitation on the private offering

process and provide the SEC with additional

information about the Rule 506(c) process, including the

following:

12

See Securities Act Release No. 33-9416 (July 10, 2013),

available at http://www.sec.gov/rules/proposed/2013/33-

9416.pdf.

an issuer would be required to file a Form D

not later than 15 calendar days from the

commencement of general solicitation efforts

and a final amendment within 30 days after the

completion of such an offering.

Form D would request additional information

about the issuer, the offered securities, the use

of proceeds of the offering, the types of general

solicitation that were used, and the methods

used to verify investor status.

Rule 507 would be amended to promote

compliance with the Form D filing requirement

by implementing certain disqualification

provisions to the extent that the issuer and its

affiliates failed to comply with Form D filing

requirements.

Proposed Rule 509 would require an issuer to

include certain legends on any written general

solicitation materials regarding type of

offering, nature of investors and risks.

For a temporary two-year period, issuers be

required to file with the SEC any written

solicitation materials, which would not be

publicly available.

The proposal also solicits comment on the

definition of “accredited investor” and

requests comment on whether there should be

additional requirements relating to the

communications used in general solicitation.

The SEC has not announced any timing for adopting

or amending these proposals.

http://www.sec.gov/rules/proposed/2013/33-9416.pdf

http://www.sec.gov/rules/proposed/2013/33-9416.pdf

20

Is there a definition of “general solicitation” or has the

Staff of the SEC provided guidance regarding the types

of communications that would be viewed as a general

solicitation?

After the adoption of the final rules relaxing the

prohibition against general solicitation for Rule 506(c)

offerings, there was considerable debate regarding the

types of communications that would constitute a

“general solicitation.” It was well understood that the

SEC would interpret the term broadly and that the term

would encompass communications relating to an

offering of securities that were not directed at specific

individuals or entities with which the issuer or a

financial intermediary acting on the issuer’s behalf had

a pre-existing substantive relationship.

Over the years, the Staff of the SEC had provided

guidance regarding the types of activities that were

sufficient to establish a relationship prior to an offering

of securities being made. In 2015, the Staff of the SEC’s

Division of Corporation Finance provided guidance in

the form of a number of Compliance & Disclosure

Interpretations (C&DIs) that reaffirmed longstanding

principles relating to the types of communications that

would or would not be viewed as constituting a

“general solicitation.” The C&DIs reiterate that

regularly released factual business communications

would not be considered a general solicitation.

Presentations at business plan competitions and the like

should be evaluated and considered based on the facts

and circumstances. If there is no mention made of a

securities offering or the attendees are known to the

issuer or confirmed to be sophisticated investors, one

might conclude that there is no general solicitation.

Communications that are directed to persons with

whom the issuer or its agent has a pre-existing

substantive relationship also would not be considered to

be a general solicitation. Of course, by contrast,

unrestricted communications relating to an offering

made using the internet would constitute a general

solicitation. The C&DIs also address certain questions

relating to establishing a substantive relationship prior

to making an offer of securities. The Staff of the SEC

also addressed the establishment by a registered

investment adviser of a pre-existing substantive

relationship in a recently issued no action letter.

Source: Compliance and Disclosure Interpretations

(“C&DIs”), Securities Act Rules, questions 256.29 to

256.32. See also Citizen VC, Inc. (Aug. 6, 2015), available

at https://www.sec.gov/divisions/corpfin/cf-noaction/

2015/citizen-vc-inc-080615-502.htm.

Is general solicitation available for other resales of

securities?

The JOBS Act lifting of the prohibition on general

solicitation applies only to Rule 506 and Rule 144A.

Rule 506(c) is available only to issuers. Thus, general

solicitation is not permitted in connection with a resale

of securities under Section “4(a)(1-1/2)” (the practice-

created interplay of Section 4(a)(1) and Section 4(a)(2)

exemptions).

The Fixing America’s Surface Transaction Act (the

“FAST Act”), enacted on December 4, 2015,

incorporates the provisions of the Reforming Access for

Investments in Startup Enterprises Act (“RAISE Act”)

that codify a new resale exemption, Section 4(a)(7)

under the Securities Act (the “Section 4(a)(7)

exemption”). The Section 4(a)(7) exemption became

effective immediately after the FAST Act was signed

into law. The Section 4(a)(7) exemption, which exempts

certain accredited investor transactions involving

https://www.sec.gov/divisions/corpfin/cf-noaction/

21

unregistered resales, is not available if general

solicitation is used.

Will the use of general solicitation in a Rule 506(c)

offering affect whether there has been “gun jumping” in

a subsequent IPO?

Issuers and their counsel have generally gotten

comfortable that a private placement pursuant to

Section 4(a)(2) or Rule 506(b) shortly before the filing of

an IPO is not likely to be considered gun jumping (see

“What is “gun jumping” and what are its

consequences?” above) because there is no general

solicitation. However, an issuer conducting a Rule

506(c) offering in close proximity to the filing of an IPO

might be more problematic, given that the general

solicitation (especially if the Rule 506(c) offering

involves the sale of the same security as that offered in

the IPO) may be viewed as “gun jumping.” Further, in

the case of EGCs, the JOBS Act specifically permits test-

the-waters communications with QIBs and IAIs prior to

or after the filing of a registration statement; however,

general solicitation used in a Rule 506(c) offering may

also raise concerns for any test-the-waters discussions.

What precautions should a placement agent take in a

private financing transaction?

The placement agent should place the appropriate

legends on the private placement memorandum that is

given to investors. The placement agent should

carefully track the number of investors contacted and

who have received the private placement

memorandum. If the placement agent uses electronic

methods to disseminate the private placement

memorandum, the document should be sent in a read-

only pdf document and the recipients must be alerted to

the confidential nature of the information with the

appropriate legends.

Do the safe harbors offered by Rules 137, 138 and 139

for analysts’ research reports apply to private

placements?

The safe harbors offered by Rules 137, 138 and 139

apply to private placements. Rule 137 is available only

to broker-dealers that are not participants in the offering

and applies to most issuers, including non-reporting

issuers.

Rule 138 permits a broker-dealer participating in a

distribution of securities of an issuer to publish research

reports about that issuer if certain conditions are met.

Rule 139 permits a broker-dealer participating in a

distribution of securities of an issuer to publish research

reports concerning that issuer or any class of its

securities if certain conditions are met. Research reports

permitted by Rules 138 and 139 will not be considered

general advertising or solicitation for purposes of Rule

144A offerings, nor will they constitute a directed

selling effort or be inconsistent with the offshore

transaction requirement for offerings pursuant to

Regulation S.

How can a placement agent prequalify potential

investors without violating confidentiality?

The placement agent should use an investor script to

prequalify all potential investors. The script will alert

all potential investors that they are receiving

confidential information regarding an issuer and a

transaction. This script should be given prior to

revealing the issuer’s name. The placement agent will

receive oral confirmation from all potential investors

that the information will be kept confidential.

22

What are the typical communications in a PIPE

offering?

An issuer is owed a duty of confidentiality from its

agents, such as its placement agent, accountants, and

other similar participants in the PIPE (Private

Investment in Public Equity) process. Generally, an

issuer does not share any information with potential

investors that has not already been included in the

issuer’s Exchange Act reports. A private placement

memorandum for a PIPE transaction usually contains

the issuer’s Exchange Act reports, together with legal

disclaimers. It is prudent to limit the information

contained in the private placement memorandum

unless the issuer will be receiving signed confidentiality

agreements. Although the issuer is not sharing material

nonpublic information about the issuer’s business with

potential investors, the issuer is sharing its plans

concerning a potential financing transaction. The fact

that the issuer is contemplating a PIPE transaction may

itself constitute material nonpublic information. The

issuer should ensure that, before the placement agent

reveals the issuer’s name, the placement agent obtains

an oral agreement from each potential purchaser it

contacts that information shared will be kept

confidential. An investor who agrees to keep the

information confidential also agrees not to trade on that

information. This oral agreement may be documented

subsequently through an acknowledgement and a

covenant in the purchase agreement.

The ability to use general solicitation in a Rule 506(c)

offering will probably not be relevant to a PIPE

transaction because, as with confidentially marketed

public offerings, the mere announcement of the

potential private offering could adversely affect the

stock price.

What is a “cleansing release”?

If a public company provides material non-public

information (“MNPI”) to investors or potential investors

in connection with a private or exempt offering, the

recipients of this information will typically require the

issuer to disclose MNPI within a day or less of the

offering being priced in order for the recipients to avoid

any implication that they are thereafter trading on the

basis of or while in possession of MNPI. They are

“cleansed” of MNPI; hence, the “cleansing release.” The

issuer may also be required to file a Form 8-K in order

to satisfy its obligations under Regulation D. An

obligation to issue a cleansing release can be

problematic if the offering does not price, and issuers

and potential investors may have significant

negotiations over MNPI provided and the obligation to

cleanse. In a Rule 144A offering, an issuer may decide

to disclose MNPI before or simultaneously with the

commencement of the offering.

What communications are allowed in a Rule 144A

offering?

Pursuant to the JOBS Act, the SEC was directed to revise

Rule 144A to permit the use of general solicitation or

general advertising. The SEC adopted amendments to

Rule 144A, effective September 2013, to eliminate

references to “offer” and “offeree,” and as a result, Rule

144A will require only that the securities are sold to a

QIB or to a purchaser that the seller and any person

acting on behalf of the seller reasonably believe is a QIB.

Thus, resales of securities pursuant to Rule 144A can be

conducted using general solicitation, eliminating the

restrictions on communications with potential investors,

including, for example, the requirements of Rule 135c

for press releases. The SEC also has clarified that even

23

where a general solicitation is used in connection with

resales under Rule 144A, the private sale made by the

issuer to the initial purchaser in reliance on the Section

4(a)(2) exemption is not affected.13

Rules 168 and 169 are available to the financial

intermediaries acting as “initial purchasers” in respect

of a Rule 144A offering. Publication or distribution of a

research report is not considered an offer for sale or an

offer to sell a security and, therefore, would not violate

the current general solicitation or general advertising

restrictions of Rule 144A.

Electronic road shows are also permitted in connection

with Rule 144A offerings. However, access to the road

show must be password-protected, with a separate

password for each offering. Passwords may be issued

only to those potential purchasers the seller reasonably

believes are QIBs, and the seller must not otherwise

have knowledge or reason to believe that any such

potential purchaser is not a QIB. The SEC has issued a

no-action letter permitting sellers to rely on a third-

party vendor’s Internet-based list of QIBs, which must

be certified by such vendor(s).14

What communications are allowed in a Regulation S

offering?

Rules 168 and 169 are available to financial

intermediaries in respect of a Regulation S offering.

Publication or distribution of a research report does not

constitute directed selling efforts. In addition, Rule 135

or 135c notices, 135e notices, and customary

13

See Securities Act Release No. 33-9415 (July 10, 2013), note

172, available at http://www.sec.gov/rules/final/2013/33-

9415.pdf. 14 SEC No-Action Letter, Net Roadshow, Inc. (Jan. 30, 1998);

and SEC No-Action Letter, CommScan, LLC (Feb. 3, 1999).

communications to shareholders are permitted

communications.

Rule 902 specifically excludes certain advertisements

and activities from the definition of “directed selling

efforts,” including the following:

an advertisement required to be published by

U.S. or foreign laws, regulatory or self-

regulatory authorities, where the

advertisement contains no more information

than that which is legally required and

includes a legend disclosing that the securities

have not been registered under the Securities

Act and may not be offered or sold in the

United States (or to a U.S. person, if the

advertisement relates to a Regulation S

Category 2 or 3 offering) absent registration or

reliance on an applicable exemption from the

registration requirements of the Securities Act;

a communication with persons excluded from

the Rule 902(k) definition of U.S. person or

person holding accounts excluded from the

Rule 902(k) definition of U.S. person solely in

their capacities as holders of those accounts;

and

a tombstone advertisement in a publication

having less than 20% of its worldwide

circulation in the United States that contains

the following:

the legend described above and

legends required by law or any

foreign or U.S. regulatory authority;

and

limited permitted information,

including the issuer’s name and a

http://www.sec.gov/rules/final/2013/33-9415.pdf


24

brief indication of its business; terms

of the securities to be sold; the name

and address of the managing

underwriters; the dates on which

sales commence and conclude; and

whether the offering is pursuant to

rights issued to security holders and

related information;

bona fide visits to real estate, plants or other

facilities located in the United States conducted

for a prospective investor by an issuer, a

distributor or any of their respective affiliates;

quotations of a foreign broker-dealer

distributed by a third-party system that

primarily distributes this information in

foreign countries, provided that no security

transaction can be executed through the system

between broker-dealers and persons in the

United States, and no communication with U.S.

persons is initiated;

publication by an issuer of a notice pursuant to

Rule 135 or Rule 135c;

access for any journalist to press conferences

held outside of the United States, to meetings

with the issuer or selling securityholder

representatives conducted outside the United

States, or to written press-related materials

released outside the United States, at or in

which a present or proposed offering of

securities is discussed, if the requirements of

Rule 135e are satisfied; and

publication or distribution of a research report

by a broker or dealer in accordance with Rule

138(c) or Rule 139(b).

The SEC has made it clear that a Regulation S

offering will not be integrated with a Rule 506(c) or

Rule 144A offering, and that the use of general

solicitation will not constitute “directed selling

efforts” in respect of the Regulation S offering.15

Certain Communications Issues Applicable

to Financial Intermediaries

For additional information on these issues, see also our

Frequently Asked Questions About Separation of

Research and Investment Banking, available at

http://www.mofo.com/files/Uploads/Images/Frequently

-Asked-Questions-about-Separation-of-Research-and-

Investment-Banking.pdf.

What is a research report?

Rule 137 defines “research report” as a written

communication that includes information, opinions or

recommendations with respect to securities or an issuer,

whether or not it provides information reasonably

sufficient for an investment decision.

FINRA Rule 2241 defines “research report” in slightly

different manner, as a “written (including electronic)

communication that provides (1) an analysis of equity

securities of individual companies or industries, and

(2) information reasonably sufficient upon which to

base an investment decision.”

It is important to note the difference between these

two definitions. A publication would be considered a

research report, even if an investor could not base an

investment decision upon the report, and be subject to

15

See Securities Act Release No. 33-9415 (July 10, 2013), at the

text accompanying note 177, available at

http://www.sec.gov/rules/final/2013/33-9415.pdf.





25

the various disclosures required by Rules 137-139 while

not being governed by FINRA Rule 2241.

Are there communications safe harbors available to

financial intermediaries?

Rules 137, 138 and 139 under the Securities Act are

designed to protect analysts, brokers and dealers from

general solicitation and gun jumping violations in

connection with their regularly disseminated research

reports. As noted above, there are also limited safe

harbors in other rules. In all cases, the broker or dealer

must publish research reports on the types of securities

or issuers in question in the regular course of business.

What are the requirements for research reports by

broker-dealers not participating in distribution?

Rule 137 covers distribution of research reports by

broker-dealers that are not participating in an offering.

A broker-dealer that is not a participant in an offering

but publishes or distributes research about an issuer

will not be deemed to make offers of a security or to

participate in a distribution of those securities as an

underwriter. Conditions to the availability of this safe

harbor are:

the broker-dealer must not participate in the

offering and must not have received

compensation from the issuer, its affiliates or

participants in the securities distribution;

the broker-dealer must publish or distribute

the research report in the regular course of

business; and

the issuer is not a blank check company, shell

company or a penny stock issuer.

Independent research prepared by a broker-dealer not

participating in an offering, but paid for by a broker-

dealer participating in the offering, will be considered

distributed by an offering participant and will not

satisfy the Rule 137 safe harbor. Subscription payments

in the ordinary course are permitted.

What are the requirements for research reports for

broker-dealers participating in a distribution of

securities not covered by the research report?

Rule 138 covers publication of research reports by a

broker-dealer participating in an offering about

securities that are not the subject of the offering,

whether a registered offering or an exempt transaction

pursuant to Rule 144A or Regulation S. The broker-

dealer must publish research reports on the types of

securities in question in the regular course of business.

Rule 138 permits a broker-dealer participating in the

distribution of an issuer’s securities to publish and

distribute research reports that either:

relate solely to the issuer’s common stock, debt

securities or preferred stock convertible into

common stock, where the offering solely

involves the issuer’s non-convertible debt

securities or non-convertible non-participating

preferred stock; or

relate solely to the issuer’s non-convertible

debt securities or non-convertible non-

participating preferred stock, where the

offering solely involves the issuer’s common

stock, debt securities, or preferred stock

convertible into common stock.

Rule 138 is available for research reports on all

reporting issuers, other than voluntary filers, that are

current with their reporting obligations under the

Exchange Act. It is also available for reports on a

foreign private issuer:

26

satisfies all of the requirements of Form F-3

(other than reporting history); and

either

has a public float of at least $75

million; or

is issuing non-convertible investment

grade securities; and either its equity

securities have been listed on a

designated offshore securities market

for at least twelve months or has a

worldwide common equity market

value held by non-affiliates of at least

$700 million.

Rule 138 is not available for research reports about

voluntary filers and ineligible issuers.

What are the requirements for research reports for

broker-dealers participating in a distribution for

securities covered by the research report?

Rule 139 covers publication of research about the

securities being offered by an underwriter. A broker-

dealer participating in a registered offering can publish

research reports about the issuer and its securities or the

issuer’s industry or sub-industry without violating

Sections 2(10) and 5(c) of the Securities Act; provided

the issuer:

has filed all required Exchange Act reports

during the preceding 12 months and meets

registrant requirements of Form S-3/F-3, and

either:

has $75 million or more in public float;

is or will be offering securities that

qualify as non-convertible investment

grade securities (in accordance with

Form S-3/F-3); or

is a WKSI; or

is a foreign private issuer that meets the

conditions described above under “What are the

requirements for research reports for broker-dealers

participating in a distribution of securities not

covered by the research report?” above.

This rule is not available for research reports about

voluntary filers, blank check companies, shell

companies and penny stock issuers.

What are the Rule 139 requirements for issuer-specific

reports?

Under Rule 139, in addition to the issuer requirements,

the conditions for a broker-dealer issuing an issuer-

specific report are:

the broker-dealer must publish or distribute

research reports in the regular course of its

business; and

such publication or distribution cannot

represent either the initiation of publication or

the re-initiation of publication.

What are the Rule 139 requirements for industry-

specific reports?

Industry-specific reports are reports that a broker-dealer

publishes in the regular course of business. The

publication of the research cannot be initiated prior to

the offering. Such reports must contain similar types of

information about the issuer or its securities as

contained in prior reports. In addition, similar

information about other issuers in the same industry or

sub-industry is usually included. However, the analysis

about the issuer should not be given greater prominence

27

or space in the publication than that given to other

issuers.

When a publication contains a projection of a

company’s sales or earnings, such projections will have

to be published on a regular basis, will need to be

published with respect to the company in registration

and must include information about a substantial

number of companies in the company’s industry.

What are the disclosures required under FINRA Rule

2241?

If a member or a research analyst has a financial interest

in the securities of the subject company, then details

about such interest must be disclosed. If the member or

research analyst owns 1% or more of the securities of

the subject company, at the end of the calendar month

preceding the publication of the research report, then

this fact must be disclosed. Any other conflicts of

interest must also be disclosed.

What are the “mandated quiet periods” under FINRA

Rule 2241?

There are several quiet periods under Rule 2241. For

example, no member can publish or distribute a

research report and no analyst can make a public

appearance for 10 calendar days following an IPO and

for three calendar days following a secondary offering.

However, the JOBS Act has excluded offerings by EGCs

from these requirements. See “How does the JOBS Act

affect FINRA Rule 2241? below.

What are analysts prohibited from doing under FINRA

Rule 2241?

Rule 2241 prohibits a research analyst from:

participating in a road show relating to an

investment banking transaction;

communicating with a customer in the

presence of investment banking personnel or

company management about a pending

investment banking services transaction; and

publishing unfair and misleading

communications about an investment banking

transaction.

How does the JOBS Act affect FINRA Rule 2241?

The JOBS Act prohibits any national securities

association (which includes FINRA) or the SEC from

adopting any rule or regulation prohibiting a broker-

dealer from publishing or distributing a research report

or making a public appearance with respect to the

securities of an EGC within any prescribed period of

time following the EGC’s IPO or the expiration date of

any lock-up agreement. This eliminates the post-IPO

“quiet period” for EGCs.

Furthermore, Title I of the JOBS Act allows a broker-

dealer assisting in any public offering of the common

equity securities of an EGC to publish or distribute a

research report about the issuer. This research report

will not be deemed to be an “offer” under the Securities

Act, even if the broker-dealer is or intends to participate

in the offering.

The JOBS Act also prohibits a national securities

association or the SEC from maintaining rules

restricting research analysts from participating in

meetings with investment banking personnel and an

EGC in connection with an EGC’s IPO.

None of the above requirements of the JOBS Act

required implementing rules so they were effective

immediately.

__________________

28




THE GUIDE TO SOCIAL MEDIA AND THE SECURITIES LAWS JUNE 2015

The Guide to Social Media and the Securities Laws

INTRODUCTION

The growing use of social media has created challenges for federal securities regulators, who must enforce antifraud rules that were written at a time when the prevailing technology was the newspaper.

This Guide summarizes how federal regulation of securities has evolved in the face of the growing use of social media by investors, securities issuers, broker-dealers, investment advisers and investment companies. Given the fast pace of changes, this Guide is a work in progress.

REGULATION FD

Beginning in 1999 and continuing into 2000, media reports about selective disclosure of material nonpublic information by issuers raised concerns that select market professionals who were privy to this information profited at the expense of others. A consensus began to emerge that selective disclosure (1) adversely affects market integrity (to a similar extent as does insider trading) and (2) allows issuers to use nonpublic information unfairly to gain favor with analysts or investors.1

In response to the perceived threat presented by selective disclosure of material nonpublic information by issuers, the Securities and Exchange Commission (SEC) adopted Regulation Fair Disclosure (“Regulation FD”) in 2000. Regulation FD requires an issuer that discloses material nonpublic information to certain individuals (generally holders of the issuer’s securities and securities market professionals) to also make the information publicly available. The required timing of the public disclosure depends on whether the issuer selectively disclosed the information intentionally. If the issuer made the selective disclosure intentionally, the issuer must simultaneously present the material to the public. If the issuer made the selective disclosure unintentionally, it must promptly disclose the information to the public.

Regulation FD provides that a person acting on behalf of a company can be (1) any senior official of the issuer or (2) any other officer, employee or agent of an issuer who regularly communicates with any of the enumerated persons described in Regulation FD (generally thought

1 Selective Disclosure and Insider Trading, 65 Fed. Reg. 51,716 (Aug. 24, 2000), available at http://www.gpo.gov/fdsys/pkg/FR-2000-08-24/pdf/00-21156.pdf.

to include directors, senior officers, investor relations and public relations officers, or people who perform similar functions, as well as any other agents or employees of a company who regularly communicate with company investors and market professionals). Regulation FD also extends to any employee who has been directed to make a selective disclosure by a member of senior management. If a noncovered employee makes selective disclosure, and if that employee has been directed to make the selective disclosure by a senior official, then the senior official would be held responsible for the selective disclosure.

The question of who is a “covered person” for Regulation FD purposes is important from a social media perspective because those within a company who are responsible for social media communications may not be the most senior executives in the company and may have a role that is different from the role of traditional investor relations professionals. Here’s a principal concern: An employee responsible for tweeting, or posting on Facebook, or providing information through another social media outlet, may not be a senior official or person who generally communicates with the company’s investors or market professionals. Nonetheless, Regulation FD’s requirements may apply when the employee is handling and communicating material nonpublic information about the company.

Moreover, covered persons must carefully consider whether statements made through social media would be considered personal to the individual and not subject to regulation, or statements attributable to the company.

Determining If Information Posted on a Website Is Public

Regulation FD effectively requires issuers to consider whether they adequately disseminate information to the public. When the SEC adopted Regulation FD in 2000, it indicated that public disclosure “may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, nonexclusionary distribution of the information to the public.”2

Since then, issuers have disclosed significantly more information on their websites.3 In 2000, the SEC stopped short of stating that it considered disclosure on

2 Selective Disclosure and Insider Trading, 65 Fed. Reg. at 51,716. 3 Commission Guidance on the Use of Company Web Sites, 73 Fed. Reg. 45,862 (Aug. 7, 2008), available at http://www.gpo.gov/fdsys/pkg/FR-2008-08-07/pdf/E8-18148.pdf.

1 Attorney Advertisement

http://www.gpo.gov/fdsys/pkg/FR-2000-08-24/pdf/00-21156.pdf

http://www.gpo.gov/fdsys/pkg/FR-2000-08-24/pdf/00-21156.pdf

http://www.gpo.gov/fdsys/pkg/FR-2008-08-07/pdf/E8-18148.pdf


a company’s website to be adequate public dissemination.4 At the time, the SEC indicated that “[a]s technology evolves and as more investors have access to and use the Internet,” the SEC might consider a website posting to meet the public disclosure requirements of Regulation FD.5 In 2008, the SEC addressed the issue in an interpretive release providing guidance as to whether information on a company’s website could be considered a sufficient means of public disclosure for the purposes of Regulation FD. The SEC determined that when a company is evaluating if information posted on its website is public or not, the company must consider whether:

• a company website is a recognized channel of distribution;

• posting of information on a company website disseminates the information in a manner making it available to the securities marketplace in general; and

• there has been a reasonable waiting period for investors and the market to react to the posted information.6

In determining whether a company’s website is a recognized channel of distribution, the analysis focuses on what the company has done to notify investors and the market of its website and disclosure policy. The SEC indicated that steps a company can take to establish its website as a recognized channel for disclosing information include:

• listing a company’s website address on periodic reports and press releases;

• establishing a pattern of posting important information on its website; and

• informing investors that they can find important information about the company on its website.

In evaluating whether the posting of information on a company website disseminates the information in a manner making it available to the public in general, the SEC indicated that companies should focus on the manner in which the information is posted on a company’s website and the accessibility of such information. Questions that a company should consider include:

4 Id. 5 Id. 6 Id.

• Is the website designed to effectively direct visitors to important information?

• Is information for investors prominently displayed on the website?

• Do the media regularly pick up and report information posted on the company’s website?

The SEC also noted that a company can also improve the accessibility of information on its website by utilizing “push” technology. Push technology is a type of communication that originates with a publisher of the information, such as an RSS feed, in contrast to the concept of a “pull” communication, which originates with the consumer of information.

In determining if there has been a reasonable waiting period for investors to react to information posted on a company’s website, the SEC indicated that the analysis depends on the circumstances of the dissemination. For a website, this means evaluating the traffic that the site generates, how often investor-specific information is accessed and the complexity of the information presented. For example, simple information posted on a website with heavy traffic that is routinely used by investors would likely be considered disseminated to the public sooner than complex information that is posted on a website with little traffic and that is not routinely used by investors.

Rule 101(e) of Regulation FD specifies that the filing or furnishing of information on a Form 8-K is sufficient to make the information public for the purposes of Regulation FD, notwithstanding any other efforts on the part of a company to utilize some broad, nonexclusionary means to disseminate that information. In public forums, the SEC Staff has indicated that an effective model for accomplishing the dissemination of information in a Regulation FD-compliant manner, at least with earnings announcements, would be to first furnish to the SEC an earnings release with an Item 2.02 Form 8-K, and then, following confirmation of the appearance of the filing on EDGAR, proceed with website posting of the earnings release.

The factors for determining if information has been adequately disseminated to the public for the purposes of Regulation FD are equally applicable for determining if information is publicly available for antifraud purposes.7 For example, a potential plaintiff or the SEC

7 Listed public companies also must consider stock exchange guidelines on the release and dissemination of information. Both the New York Stock Exchange and NASDAQ have policies that require



would likely not be able to successfully allege that material nonpublic information had not been adequately disclosed to the market in the course of trading by a company in its own securities if the company had taken the necessary steps discussed above to disseminate the information.

To facilitate an ongoing determination that a company’s website is a recognized channel of distribution of material information concerning the company, it is suggested that the company take the following steps:

• In all company communications to investors, include a statement that the company routinely posts all important information about the company on its website and include a reference to the URL of the company’s website.

• Consider including a separate means to access the Investor Relations pages of the company’s website from the main page of the website so that it is more readily apparent where investors may locate important information about the company that is posted on the company’s website.

• Monitor the dissemination of information to determine the extent to which information reaches intended audiences and the extent to which persons access the company’s website for material information about the company.

SEC Guidance on the Use of Social Media

As companies rely more heavily on social media, a critical question is whether public dissemination of information through social media is adequate for purposes of compliance with Regulation FD.

In a Report of Investigation under Section 21(a) published on April 2, 2013, the SEC said that social media channels—such as Twitter and Facebook—could be used by public companies to disseminate material information, without running afoul of Regulation FD.8 The SEC emphasized that companies should apply the guidance from its 2008 interpretive release regarding the disclosure of material information on company websites when analyzing whether a social media channel is in fact a “recognized channel of distribution,”

prompt release of material nonpublic information to the public in a manner that is compliant with Regulation FD.

8 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings, Release No. 34-69279 (April 2, 2013) (the “21(a) Report”), available at https://www.sec.gov/litigation/investreport/34-69279.pdf.

including the guidance that investors must be provided with appropriate notice of the specific channels that a company will use to disseminate material nonpublic information.

Section 21(a) of the Exchange Act authorizes the SEC to investigate violations of the federal securities laws and, in its discretion, “to publish information concerning any such violations.” Section 21(a) Reports do not represent an adjudication of the facts or issues addressed. Rather, they express the SEC’s views regarding the matters discussed in the report. Because the Section 21(a) Report describes the views of the SEC, it can serve as authoritative interpretive guidance on the matters discussed, much like an SEC interpretive release. In the course of an investigation of a potential Regulation FD violation arising from a CEO’s Facebook post, the SEC Staff learned that there was uncertainty as to how the 2008 Guidance should apply in the context of releasing information through social media channels, so the SEC determined that the 21(a) Report would serve as a vehicle for communicating how to apply Regulation FD and the 2008 Guidance to communications made through social media channels. The SEC did not initiate an enforcement action or allege wrongdoing in connection with issuing the 21(a) Report.

The SEC confirmed in the 21(a) Report that Regulation FD applies to social media and other emerging means of communication used by public companies in the same way that it applies to company websites as discussed in the 2008 Guidance, which clarified that websites can serve as an effective means for disseminating information if investors have been made aware that they can locate the company information on the website.

The 21(a) Report indicates that, while every situation must be evaluated on its own facts, disclosure of material nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the social media site may be used for this purpose, is unlikely to qualify as an acceptable method of disclosure under securities laws. In this regard, the SEC notes that it would not normally be assumed that the personal social media sites of public company employees would serve as channels through which the company discloses material nonpublic information.

The SEC acknowledges in the 21(a) Report that the ways in which companies may use social media channels are not fundamentally different from the ways in which the websites, blogs and RSS feeds addressed by the 2008 Guidance are used. In revisiting the 2008 Guidance in the context of social media channels, the SEC notes that the 2008 Guidance was designed to be flexible and adaptive, and therefore provides issuers “with a factor-


https://www.sec.gov/litigation/investreport/34-69279.pdf


based framework for analysis, rather than static rules applicable only to web sites.” In analyzing whether a website is a recognized channel of distribution, the SEC notes:

The central focus of this inquiry is whether the company has made investors, the market, and the media aware of the channels of distribution it expects to use, so these parties know where to look for disclosures of material information about the company or what they need to do to be in a position to receive this information.

In analyzing how Regulation FD applies to any communication, the SEC notes that while the Regulation FD adopting release highlighted concerns about “selective” disclosure of information to favored analysts or investors, “the identification of the enumerated persons within Regulation FD is inclusive, and the prohibition does not turn on an intent or motive of favoritism.” The SEC also emphasizes that nothing in Regulation FD suggests that disclosure of material nonpublic information to a broader group that includes both enumerated and nonenumerated persons, but that still would not constitute a public disclosure, would somehow result in Regulation FD being inapplicable. Rather, the SEC states that “the rule makes clear that public disclosure of material nonpublic information must be made in a manner that conforms with Regulation FD whenever such information is disclosed to any group that includes one or more enumerated persons.” As a result, whenever a company discloses information to enumerated persons, including to a broader group of recipients through a social media channel, the company must consider whether that disclosure implicates Regulation FD. Issuers should determine, for example, whether the disclosure includes material nonpublic information and whether the information was being disseminated in a manner “reasonably designed to provide broad, nonexclusionary distribution of the information to the public” in the event that the issuer did not choose to file a Form 8-K.

Drawing on the reference to “push” technologies (such as email alerts, RSS feeds and interactive communication tools, such as blogs) in the 2008 Guidance, the SEC acknowledged that social media channels are an extension of these concepts, and therefore the guidance should apply equally in the context of social media channels. Given the “direct and immediate communication” possible through social media channels, such as Facebook and Twitter, the SEC expects companies to examine whether such channels are recognized channels of distribution. In particular, the SEC emphasized the need to take steps to alert the market about which forms of communication a company

intends to use for the dissemination of material nonpublic information. The SEC notes that without this sort of notice, the investing public would have to keep pace with a “changing and expanding universe of potential disclosure channels.” The ways in which such notice could be provided would include (1) references in periodic reports and press releases to the corporate website and disclosures that the company routinely posts important information on that website and (2) disclosures on corporate websites identifying the specific social media channels a company intends to use for the dissemination of material nonpublic information (thereby giving people the opportunity to subscribe to, join, register for or review that particular channel).

In light of the SEC’s guidance, companies should consider whether to specifically address the use of social media in their Regulation FD policies, including whether prohibitions, restrictions or editorial oversight should be implemented to govern the use of social media by those persons authorized to speak for the company. This area is still evolving and should be continuously monitored, as the methods for interacting with shareholders, analysts and others continue to evolve.

As with the 2008 Guidance, companies may not be able to implement the 21(a) Report’s guidance to eliminate more traditional forms of public dissemination. But the guidance may provide more comfort for companies using social media to supplement other more traditional forms of communication. Companies should carefully evaluate which social media channels may be useful for communicating information and begin providing notice to investors in the company’s filings that information about the company may be found on those social media channels, while using those channels as a regular source of information. At the same time, companies should advise individual officers, directors and employees that posting information about the company on social media channels could potentially implicate Regulation FD, and therefore such persons must exercise caution when communicating through social media.

FORWARD-LOOKING STATEMENTS

Issuers often include forward-looking information, such as estimates, projections, plans and beliefs regarding future performance in their required public filings. Section 27A of the Securities Act of 1933 (the “Securities Act”) and the Exchange Act provide a safe harbor from liability for forward-looking statements if a statement is:

• identified as a forward-looking statement; and

• accompanied by meaningful cautionary statements



identifying important factors that could cause actual results to differ materially from the forward-looking statement.

Twitter’s 140-character limit, for example, may present challenges for issuers seeking to rely on the safe harbor for forward-looking statements. This limit is hardly enough space to accommodate the statement itself, let alone language identifying the statement as forward-looking and cautioning the reader as to potential factors that could cause actual results to differ materially from the forward-looking statement. Some companies have attempted to address the problem by posting multiple-tweet disclaimers before tweeting presentations that include forward-looking information. Other companies have sought to address this concern by linking to a web page, SEC report or press release where information about the forward-looking statements is provided in full. It remains uncertain whether a court would determine that either of these methods provides a means by which the forward-looking statements are identified and are accompanied by meaningful cautionary statements.

NONGAAP MEASURES

Issuers should consider Regulation G, which requires issuers to reconcile nonGAAP financial information to a comparable GAAP financial measure, when publishing financial performance in social media. Similar to the approach taken with forward-looking statements discussed above, issuers providing nonGAAP financial information through Twitter have used multiple tweets in order to include the necessary accompanying disclosure required by Regulation G, or have provided links to where the reconciliation information is provided elsewhere. As with forward-looking statements, there is a threat that posts such as these will be taken out of context or only partially retweeted (resulting in a communication that may not be considered fully compliant with Regulation G).

ADOPTION OF OR ENTANGLEMENT WITH THIRD-PARTY STATEMENTS

The SEC has generally taken the view that a company is not responsible for statements that third parties post on a company-sponsored website, nor does a company have any obligation to correct a misstatement made by a third party. A company can be held liable for third-party information to which it hyperlinks from its website and that could be attributable to the company through concepts of entanglement or adoption.

Chief among a company’s concerns in adopting or being entangled with the statements of another is that the

statements could be deemed misleading under the federal securities laws and as a result the company could be deemed liable for the statement. Issuers should therefore be careful when referencing, and especially when linking to, online content that they do not control. Particular care should be taken when linking to content that may change after the link is posted, as even diligent monitoring cannot ensure that a member of the public will not follow the link and find materially misleading information. Moreover, activity such as “friending” a securities research analyst on Facebook or tweeting an analyst’s handle on Twitter—as well as retweeting an analyst’s tweet about the company—could potentially be construed as adoption of the analyst’s past and future statements about a company or its securities.

LIABILITY FOR MISSTATEMENTS AND OMISSIONS

Electronic communications, including through social media websites, can create risks due to the rapid and often informal nature of the communications. However, given the potential liability for a material misstatement or omission in public communications, companies and their counsel are well-advised to treat any statements by or on behalf of the company made through social media websites with the same care that is used when evaluating disclosures included in SEC reports and press releases.

SECURITIES OFFERING COMMUNICATIONS

The SEC Staff has provided guidance on applying its rules regarding communications in connection with securities offerings. The Staff’s guidance permits the use of a hyperlink to information required by certain rules when a character- or text-limited social media channel such as Twitter is used for a regulated communication, and also confirms that a communication that has been retransmitted by a third party that is not an offering participant or someone acting on behalf of the issuer is not attributable to the issuer for the purposes of the rules that apply to such communication.

Rule 134 Notices

Rule 134 under the Securities Act permits an issuer conducting a registered securities offering to make limited communications that will not be deemed to be a prospectus or free writing prospectus, provided that the communication includes no more information than is permitted by the rule and the communication includes specific legends, including the statement required by Rule 134(b)(1) and information required by Rule 134(b)(2), unless the conditions of Rule 134(c) are met, as well as the statement required by Rule 134(d) if the communication solicits from a recipient an offer to buy the security or



requests the recipient to indicate whether he or she might be interested in the security.

Rule 134(b)(1) provides that if the registration statement has not yet become effective, the following statement must be included:

A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective.

Rule 134(b)(2) indicates that the notice must include the name and address of a person or persons from whom a written prospectus for the offering, meeting the requirements of Section 10 of the Securities Act, other than a free writing prospectus, including a price range where required, may be obtained.

Rule 134(d) provides that a communication sent or delivered to any person that is accompanied or preceded by a prospectus that meets the requirements of Section 10 of the Securities Act (other than a free writing prospectus), including a price range where required, at the date of such communication, may solicit from the recipient of the communication an offer to buy the security or request the recipient to indicate whether he or she might be interested in the security, if the communication contains substantially the following statement:

No offer to buy the securities can be accepted and no part of the purchase price can be received until the registration statement has become effective, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance given after the effective date.

Recognizing the growing interest in the use of social media, in Securities Act Rules Compliance and Disclosure Interpretations Question 110.01, the Staff indicates that it would not object to the use of an active hyperlink to satisfy the requirements of Rule 134(b) and Rule 134(d) in limited circumstances when: • The electronic communication is distributed through

a platform that has technological limitations on the number of characters or amount of text that may be included in the communication;

• The inclusion of the entire required statements,

together with the other information in the communication, would cause the communication to

exceed the limit on the number of characters or amount of text; and

• The communication contains an active hyperlink to

the required statements and prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.

The Staff points out that when an electronic communication is capable of actually including the required statements, along with the other information, without exceeding a limit on the number of characters or amount of text, then the use of the hyperlink would not be appropriate. Therefore, the guidance appears to be limited to those micro-blogging social media channels with character or text limitations such as Twitter, rather than other social media channels, such as Facebook, which permit longer postings. The Staff took a similar approach in Securities Act Rules Compliance and Disclosure Interpretations Question 232.15,9 which provides an interpretation with respect to Rule 433 under the Securities Act. Rule 433 provides conditions for the use of free writing prospectuses (as defined in Securities Act Rule 405), and any free writing prospectus (other than free writing prospectuses that comply with Rule 433(f)(1)) must contain the legend required by Rule 433(c)(2)(i). The Rule 433(c)(2)(i) legend states:

The issuer has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates. Before you invest, you should read the prospectus in that registration statement and other documents the issuer has filed with the SEC for more complete information about the issuer and this offering. You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov. Alternatively, the issuer, any underwriter or any dealer participating in the offering will arrange to send you the prospectus if you request it by calling toll-free 1-8[xx-xxx-xxxx].

The legend also may provide an email address at which the documents can be requested and may indicate that the documents also are available by accessing the issuer’s website and provide the Internet address and the particular location of the documents on the website.

9 Securities Act Rules Compliance and Disclosure Interpretations (last update Jan. 23, 2015), available at https://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm.


http://www.sec.gov/

https://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm



The Staff notes that, under the same conditions set forth above with respect to Rule 134, an issuer can use an active hyperlink to provide the legend required by Rule 433(c)(2)(i).

The Staff also points out, in Securities Act Rules Compliance and Disclosure Interpretations Questions 110.02 and 232.16, that an issuer does not need to ensure compliance with Rule 134 and Rule 433 for electronic communications that are retransmitted by a third party that is not an offering participant or acting on behalf of the issuer, as long as the issuer has no involvement in the third party’s retransmission of the information other than having initially prepared the communication in compliance with Rule 134 or Rule 433. In this regard, the Staff confirms in the context of social media platforms the guidance that the SEC provided in Release No. 33-8591, which stated:

[W]hether information prepared and distributed by third parties that are not offering participants is attributable to an issuer or other offering participant depends upon whether the issuer or other offering participant has involved itself in the preparation of the information or explicitly or implicitly endorsed or approved the information.10

The Staff’s guidance appears to be directed at situations in which an offering communication prepared in compliance with Rule 134 or Rule 433 is retweeted by a third party, or otherwise retransmitted via a similar social media channel.

BUSINESS COMBINATION COMMUNICATIONS

The Staff guidance also addresses an analogous rule in the context of business combination transactions, Securities Act Rule 165. In Securities Act Rules Compliance and Disclosure Interpretations Question 164.02, the Staff notes that the legend required by paragraph (c)(1) of Rule 165 may be provided by use of an active hyperlink, subject to the same conditions specified for Rule 134 notices and Rule 433 free writing prospectuses discussed above.11 Rule 165(c)(1) specifies that a communication made under the rule must contain a prominent legend that urges investors to read the relevant documents filed or to be filed with the SEC because they contain important information, and the

10 Securities Offering Reform, Release No. 33-8591 (July 19, 2005), available at https://www.sec.gov/rules/final/33-8591.pdf. 11 Securities Act Rules Compliance and Disclosure Interpretations (last update Jan. 23, 2015), available at https://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm.

legend also must explain to investors that they can get the documents for free at the SEC’s website and describe which documents are available free from the offeror.

The Staff also notes that this same interpretation applies with respect to similar legend requirements specified in Rule 14a-12 under the Exchange Act, which deals with written communications that constitute solicitations, and pre-commencement written communications in connection with tender offers that are subject to Exchange Act Rules 13e-4(c), 14d-2(b) and 14d-9(a).

PROXY SOLICITATIONS

Many types of communications, including those made over social media, can be considered a proxy solicitation that is subject to the SEC’s proxy rules. Rule 14a-1 defines “solicitation” and “solicit” to include any “communication to security holders under circumstances reasonably calculated to result in the procurement, withholding, or revocation of a proxy.” Proxy solicitations are subject to SEC requirements, including in some instances filing requirements, as well as the applicability of antifraud rules. Social media communications by a company could be deemed to be proxy solicitations, and investors may in turn communicate about issues regarding a proxy solicitation through social media outlets. Because the definition of “solicitation” is so broad, companies need to take care to avoid the appearance of a proxy solicitation in the course of their communications. This includes all communications made over social media. Even if the communication is designed to merely inform the public or does not specifically reference a proxy or the company’s proxy statement, courts could still find that a communication should be deemed to be a solicitation.

Exchange Act Rule 14a-17 permits the use of electronic shareholder forums to facilitate communications within limits prescribed by the rule. Under this provision, a company that sets up or runs an electronic shareholder forum will not be liable under the federal securities laws for any statement made or information provided “by another person” on the forum. If the SEC were to take the position that social media websites such as Twitter or Facebook constitute such a forum, it would provide companies with express protection for the statements of third parties on these social media websites.

A company remains responsible for its own statements and statements made on its behalf and could also be held responsible for a third-party statement if the company takes action to adopt, endorse or approve the statement. For example, if a user tweets a false or misleading


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statement about a company, and the company then tweets in a way that approves the statement through an exchange with the user, then the company could be held responsible for that statement. Rule 14a-2 provides express protection with respect to the proxy solicitation rules in the context of electronic shareholder forums, as long as the communication occurs 60 days prior to the date of the company’s annual or special shareholder meeting and no proxy is sought.

CAPITAL-RAISING CONSIDERATIONS

The use of social media for company communications can raise concerns in connection with both private and public offerings of securities. Social media communications could potentially result in impermissible general solicitation or general advertising in connection with a private offering and gun-jumping or conditioning the market in connection with public offerings. At the same time, social media may prove useful in the context of new mechanisms for raising capital, such as under the provisions relating to certain Rule 506 offerings or those for conducting exempt crowdfunding offerings contemplated by the JOBS Act.

Private Offerings

Many private offerings of securities are conducted under Regulation D, which provides an exemption for offerings meeting the conditions specified in the Regulation. Over time, companies have come to rely frequently on Rule 506 of Regulation D, which permits issuers to sell their securities in a private placement to an unlimited number of accredited investors, provided that issuers comply with the general requirements of Regulation D. Historically, Rule 502(c) of Regulation D prohibited the issuer or any person acting on its behalf to offer or sell securities by any form of general solicitation or general advertising, including, but not limited to, “any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.” This prohibition on the use of general solicitation and general advertising in private offerings made in reliance on Regulation D was criticized by many market participants as anachronistic given the development of communications technologies. Title II of the Jumpstart Our Business Startups (JOBS) Act, titled “Access to Capital for Job Creators,” addressed the prohibition on general solicitation by mandating that the SEC undertake rulemaking to amend Rule 506 to make the prohibition against general solicitation or general advertising contained in Rule 502 inapplicable in the context of Rule 506 offerings, provided that all

purchasers in the offering are accredited investors. Congress believed that by removing this restriction on communications, emerging companies would be able to raise capital more easily and contact investors with whom they may not have a pre-existing relationship.

The SEC adopted the required amendment in July 2013, and the amended rule became effective September 23, 2013. An issuer may now decide to rely on existing Rule 506(b) to conduct a private offering without using general solicitation or general advertising. Alternatively, an issuer may choose to rely on Rule 506(c), which permits the use of general solicitation and general advertising, subject to the following conditions:

• The issuer must take reasonable steps to verify that the purchasers of the securities are accredited investors;

• All purchasers of securities must be accredited investors, either because they fall within one of the enumerated categories of persons that qualify as accredited investors or the issuer reasonably believes that they qualify as accredited investors, at the time of the sale of the securities; and

• The issuer satisfies the conditions of Rule 501 and Rules 502(a) and 502(d).

An issuer relying on Rule 506(c) must take “reasonable steps” to verify that investors are accredited investors. The Staff indicated that “reasonable efforts” to verify investor status will be an objective determination by the issuer based on the SEC’s principles-based guidance. The SEC noted that, in determining whether it has taken reasonable steps to verify investor status, an issuer should consider the nature of the purchaser; the nature and amount of information about the purchaser; and the nature of the offering. The amended rule also provides a nonexclusive list of factors to consider in verifying the accredited investor status of natural persons.

In addition to the changes adopted to Rule 506, the SEC amended Rule 144A to eliminate references to “offeror” and “offeree,” and, as a result, Rule 144A requires only that the securities are sold to a qualified institutional buyer, or QIB, or to a purchaser that the seller and any person acting on behalf of the seller reasonably believe is a QIB. The changes to Rule 506 and Rule 144A have no effect on the statutory private placement exemption available under Section 4(a)(2) of the Securities Act. General solicitation or general advertising cannot be used in the context of an offering exempt from registration in reliance on the Section 4(a)(2) exemption.



The relaxation of the ban on general solicitation and general advertising for certain Rule 506 offerings likely will facilitate wider use of social media in connection with private offerings. Before commencing any private offering, an issuer and its advisers should consider carefully whether the issuer will employ general solicitation, and determine the means by which the issuer intends to communicate with potential investors about a possible financing. Documentation, including engagement letters with financial intermediaries, placement agency agreements and offering memoranda, is likely to change as a result of the amended rules. An issuer will remain liable for the content of any general solicitation it makes in connection with a securities offering. As a result, issuers should consider updating their Regulation FD policies and their communications policies to ensure that they address communications made in the context of securities offerings. Also, certain types of issuers, such as private funds and their registered investment advisers, as well as commodity pools, will be subject to specific restrictions on the content of their communications.

Public Offerings

“Gun-jumping” refers to impermissible offers of securities by companies in connection with a registered securities offering. Gun-jumping is a particular concern when companies use, or their employees use, social media during the time leading up to an initial public offering. The SEC has indicated that statements made through electronic means, such as website postings and emails, can be deemed written offers for the purposes of the communications rules under the Securities Act. Therefore, an electronic communication that relates to the issuer or its prospects may be deemed to be an offer of securities or otherwise “condition the market” for the offering, subjecting the issuer to liability for making an illegal offer of securities.

Because impermissible communications in connection with an offering can have significant consequences for the company and offering participants, social media use should be subject to special controls by companies contemplating a public offering. In some cases, companies contemplating an initial public offering stop making postings on company-sponsored Twitter accounts. Ongoing monitoring of social media communications is necessary to avoid concerns that written offers are being made other than by means of a prospectus or other permitted communications. There is close scrutiny of company websites, media outlets and other information sources in connection with the review of registration statements by the SEC.

Title I of the JOBS Act, titled “Reopening American Capital Markets to Emerging Growth Companies,”

establishes a new category of issuer, an “emerging growth company,” for which certain disclosure and other requirements will be phased in over time following a company’s initial public offering. The JOBS Act amends the Securities Act and the Exchange Act to add a definition of an “emerging growth company.” An emerging growth company is defined as an issuer with total gross revenues of less than $1 billion (subject to inflationary adjustment by the SEC every five years) during its most recently completed fiscal year. A company remains an “emerging growth company” until the earliest of:

1. the last day of the fiscal year during which the issuer has total annual gross revenues in excess of $1 billion (subject to inflationary indexing);

2. the last day of the issuer’s fiscal year following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act;

3. the date on which such issuer has, during the prior three-year period, issued more than $1 billion in nonconvertible debt; or

4. the date on which the issuer is deemed a “large accelerated filer.”

An issuer will not be able to qualify as an emerging growth company if it first sold its common stock in a registered offering prior to December 8, 2011.

An emerging growth company may submit a draft registration statement to the SEC for confidential nonpublic review prior to public filing, provided that the initial confidential submission and all amendments thereto shall be publicly filed with the SEC no later than 21 days prior to the issuer’s commencement of a road show. Emerging growth companies may engage in oral or written communications with qualified institutional buyers, or QIBs, and institutional accredited investors (as defined in Rule 501 of the Securities Act) in order to gauge their interest in a proposed initial public offering either prior to or following the first filing of the registration statement. While these provisions provide increased flexibility with respect to communications for emerging growth companies prior to and after filing a registration statement for an initial public offering, the requirement that communications take place only with QIBs and institutional accredited investors substantially limits the availability of more broadly accessible social media as a means for making any such communications.

Given the relaxation of the ban on general solicitation in certain Rule 506 offerings discussed above, issuers and



their advisers also should consider the possibility that a permitted general solicitation in the context of a Rule 506(c) offering immediately preceding an initial public offering may be viewed as gun-jumping.

Crowdfunding

Crowdfunding is an emerging source of financing that has its roots in social media. It is a concept where people pool their relatively small contributions together to fund a common enterprise. Title III of the JOBS Act, titled “Crowdfunding,” amends Section 4 of the Securities Act to add a new paragraph (6) that provides a crowdfunding exemption from registration under the Securities Act. The conditions of the crowdfunding exemption, which must be established through SEC rulemaking, are that:

• The aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the crowdfunding exemption during the 12-month period preceding the date of the transaction, is not more than $1,000,000;

• The aggregate amount sold to any investor by the issuer, including any amount sold in reliance on the crowdfunding exemption during the 12-month period preceding the date of the transaction, does not exceed:

o the greater of $2,000 or 5 percent of the annual income or net worth of the investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; or

o 10 percent of the annual income or net worth of an investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000;

• The transaction is conducted through a broker or funding portal that complies with the requirements of the exemption; and

• The issuer complies with the requirements of the exemption.

Among the requirements for exempt crowdfunding offerings would be that an intermediary:

• registers with the SEC as a broker or a “funding portal,” as such term is defined in the amendment;

• registers with any applicable self-regulatory authority;

• provides disclosures to investors, as well as questionnaires, regarding the level of risk involved with the offerings;

• takes measures, including obtaining background checks and other actions that the SEC can specify, of officers, directors and significant shareholders;

• ensures that all offering proceeds are provided to issuers only when the amount equals or exceeds the target offering amount, and allows for cancellation of commitments to purchase in the offering;

• ensures that no investor in a 12-month period has invested in excess of the limit described above in all issuers conducting exempt crowdfunding offerings;

• takes steps to protect privacy of information;

• does not compensate promoters, finders or lead generators for providing personal identifying information of personal investors;

• prohibits insiders from having any financial interest in an issuer using that intermediary’s services; and

• meets any other requirements that the SEC may prescribe.

Issuers also must meet specific conditions in order to rely on the exemption, including that an issuer file with the SEC and provide to investors and intermediaries information about the issuer (including financial statements, which would be reviewed or audited depending on the size of the target offering amount), its officers, directors and greater than 20 percent shareholders, and risks relating to the issuer and the offering, as well as specific offering information such as the use of proceeds for the offering, the target amount for the offering, the deadline to reach the target offering amount and regular updates regarding progress in reaching the target.

The provision would prohibit issuers from advertising the terms of the exempt offering, other than to provide notices directing investors to the funding portal or broker, and would require disclosure of amounts paid to compensate solicitors promoting the offering through the channels of the broker or funding portal.

Issuers relying on the exemption would need to file with the SEC and provide to investors, no less than annually, reports of the results of operations and financial statements of the issuers as the SEC may determine is



appropriate. The SEC may also impose any other requirements that it determines appropriate.

A purchaser in a crowdfunding offering could bring an action against an issuer for rescission in accordance with Section 12(b) and Section 13 of the Securities Act, as if liability were created under Section 12(a)(2) of the Securities Act, in the event that there are material misstatements or omissions in connection with the offering.

Securities sold on an exempt basis under this provision would not be transferable by the purchaser for a one-year period beginning on the date of purchase, except in certain limited circumstances. The crowdfunding exemption would be available only for domestic issuers that are not reporting companies under the Exchange Act and that are not investment companies, or as the SEC otherwise determines is appropriate. Bad actor disqualification provisions similar to those required under Regulation A would also be required for exempt crowdfunding offerings.

Funding portals would not be subject to registration as a broker-dealer but would be subject to an alternative regulatory regime, subject to SEC and SRO (a self-regulatory organization) authority, which is, in this case, FINRA, to be determined by rulemaking at the SEC and SRO. A funding portal is defined as an intermediary for exempt crowdfunding offerings that does not:

1. offer investment advice or recommendations;

2. solicit purchases, sales or offers to buy securities offered or displayed on its website or portal;

3. compensate employees, agents or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal;

4. hold, manage, possess or otherwise handle investor funds or securities; or

5. engage in other activities as the SEC may determine by rulemaking.

The provision would pre-empt state securities laws by making exempt crowdfunding securities “covered securities”; however, some state enforcement authority and notice filing requirements would be retained. State regulation of funding portals would also be pre-empted, subject to limited enforcement and examination authority.

For those issuers who are seeking to raise small amounts of capital from a broad group of investors, the

crowdfunding exemption may ultimately provide a viable alternative to current offering exemptions, given the potential that raising capital through crowdfunding over the Internet may be less costly and may provide more sources of funding. At the same time, issuers will need to weigh the ongoing costs that will arise with crowdfunding offerings, in particular the annual reporting requirement that is contemplated by the legislation. Moreover, it is not yet known how much intermediaries such as brokers and funding portals will charge issuers once SEC and SRO regulations apply to their ongoing crowdfunding operations.

Intrastate Crowdfunding

A number of states have moved forward to adopt regulatory frameworks that permit crowdfunding by issuers within their states. In addition, the Staff of the Division of Corporation Finance of the SEC provided guidance in its Securities Act Rules Questions and Answers of General Applicability Questions 141.03, 141.04, and 141.05 that address Section 3(a)(11) of the Securities Act and Rule 147 under the Securities Act. Section 3(a)(11) provides an exemption from the registration requirements of the Securities Act for any security which is a part of an issue offered and sold only to persons who reside in a single state or territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such state or territory. Rule 147 under the Securities Act provides a safe harbor for offerings conducted pursuant to Section 3(a)(11), which requires that the issuer must be a resident of, and doing business in, the same state in which all offers and sales are made, and the offering may not be offered or sold to non-residents.

The SEC Staff reiterated in its guidance that Rule 147 does not prohibit general advertising or general solicitation. However, any general advertising or general solicitation must be conducted in a manner consistent with the requirement that offers made in reliance on the intrastate exemption under Section 3(a)(11) and Rule 147 be made only to persons resident in the state or territory of which the issuer is a resident. This CD&I notes that an issuer claiming an exemption under Rule 147 may use a third-party internet portal to promote an offering to residents of a single state in accordance with a state statute or regulation intended to enable crowdfunding within that state if the portal implements measures to ensure that offers of securities are made only to persons resident in the relevant state or territory. These measures must include, at a minimum: disclaimers and restrictive legends which make clear that the offering is limited to residents of the relevant state under applicable law; and limiting access to information about specific investment opportunities to persons who confirm they



are residents of the relevant state (examples of an acceptable confirmation are a representation as to residence or in-state residence information, such as a zip code or residence address).

This C&DI notes that issuers generally use their websites and social media presence to communicate in a broad and indiscriminate manner. Therefore, although the specific facts and circumstances would determine whether a particular communication is an offer of securities, using an established internet presence to issue information about specific investment opportunities would likely involve offers to residents outside the state in which the issuer does business.

SEC GUIDANCE FOR REGISTERED INVESTMENT ADVISERS

OCIE Compliance Concerns (2012)

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) published a National Examination Risk Alert, which outlines in stark terms the SEC Staff’s compliance concerns on the use of social media by registered investment advisers.12

The SEC Staff has stated its view that use of social media to communicate with clients and prospective clients may implicate Rule 206(4)-1 under the Investment Advisers Act of 1940, which governs advertisements by investment advisers. This rule, in relevant part, provides that an investment adviser will violate the Investment Advisers Act’s antifraud provisions if it publishes, circulates or distributes “any advertisement” that:

• refers, directly or indirectly, to “testimonials of any kind concerning the investment adviser” or the investment advice it provides;

• refers, directly or indirectly, to past specific recommendations it provides (e.g., “cherry-picking”), unless the adviser discloses a list of all recommendations, subject to certain requirements;

• represents that a graph, chart or formula, by itself, can be used to determine which securities to buy, without prescribed disclosures;

• contains a statement to the effect that a report, analysis or other service will be furnished free of

12 Office of Compliance Inspections and Examinations, National Examination Risk Alert, Vol. II, Issue 1, Investment Adviser Use of Social Media (January 2012), available at https://www.sec.gov/about/offices/ocie/riskalert-socialmedia.pdf.

charge, unless it is actually provided entirely free of charge without condition; or

• that contains any untrue statement of a material fact, or that is otherwise false or misleading.

The SEC defines “advertisement” broadly. “Advertisements” include any notice, circular, letter or other written communication addressed to more than one person, or any notice or announcement in any publication or by radio or television, that (1) offers analysis, report or publication concerning securities, or that is to be used in making any determination as to when to buy or sell any security; or (2) any graph, chart, formula or other device to be used in making any determination as to when to buy or sell any security; or (3) any other investment advisory service with regard to securities. We can reasonably conclude that it applies to all kinds of social media communications, including blogs, wikis, photo and video sharing, podcasts, social networking and virtual worlds.

OCIE’s regulatory concerns can be categorized into three broad categories: compliance policies and procedures, third-party content, and recordkeeping.

First, the SEC Staff is concerned that investment adviser compliance programs may include overlapping procedures that apply to advertisements and communications but do not specifically include social media. The Staff urges investment advisers to evaluate the effectiveness of their compliance programs with respect to use of social media by the firms, investment adviser representatives or solicitors, including the following hot buttons:

• Usage guidelines. Compliance procedures should address appropriate usage and restrictions on use of social media, based on potential risks.

• Content standards. Content may implicate fiduciary duty or other regulatory issues, which procedures should address.

• Monitoring. Advisers should consider how to monitor use of social media by employees, representatives and solicitors, taking into consideration the lack of ability to monitor third-party sites.

• Frequency of monitoring. The Staff suggests a risk-based approach for frequency of monitoring of social media communications.

• Approval of content. Advisers should consider


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preapproval of communications, rather than after-the-fact reviews.

• Firm resources. Does the adviser have sufficient resources to adequately monitor personnel?

• Criteria for approving participation. Compliance procedures should assess risks to the adviser, including operational, reputational, privacy and other regulatory issues.

• Training. Advisers should consider implementing a training program related to social media, with a view toward promoting compliance.

• Certification. Consider procedures that require personnel to certify that they understand and will comply with social media policies.

• Functionality. Advisers should consider the functionality of social media sites approved for use, including the continuing obligation to address any upgrades or modifications.

• Personal/professional sites. Advisers should consider whether to adopt policies to address business conducted on personal or third-party media sites.

• Information security. Advisers should consider whether permitting representatives to have access to social media sites poses information security risks, and how to protect information.

• Enterprise-wide sites. Advisers that are part of a larger financial services or corporate enterprise might consider whether to create usage guidelines designed to prevent the advertising practices of a firmwide social media site from violations of the Advisers Act.

Second, the Staff has indicated that third-party content on social media sites presents special compliance challenges. These issues arise when third parties post messages, forward links or post articles to an adviser’s website or in social media sites. Adviser representatives and solicitors generally do not interact with their third parties or respond to their postings. The Staff noted its concern about direct or indirect testimonials “of any kind,” and generally it broadly construes what constitutes a testimonial. A posting by a third party that comments on an adviser’s stock-picking prowess, the Staff warns, may amount to a prohibited “testimonial.” Even hitting the “Like” button on an adviser’s Facebook

page could be a prohibited testimonial if the thumbs-up represents an explicit or implicit statement of a client’s experience with an investment adviser or its representative.

The SEC Staff’s third area of concern is recordkeeping obligations of advisers. OCIE noted that the recordkeeping rules do not differentiate between traditional paper communications, like snail mail, and electronic communications, such as emails, instant messages and other ways that investment advisers provide advisory services. In other words, the federal regulators focus on the content of the communication, rather than its form. OCIE urges investment advisers to ensure that their recordkeeping policies and procedures allow advisers that use social media to comply with the recordkeeping requirements.

At the same time, the SEC published an Investor Alert, Social Media and Investing: Avoiding Fraud, designed to make investors aware of fraudulent investment schemes that use social media, and provides tips for checking the backgrounds of investment advisers and brokers. An Investor Bulletin, Social Media and Investing, Understanding Your Accounts provide tips for investors who use social media about privacy settings, security and password selection. Also on the same day, the Enforcement Division announced that the SEC charged an Illinois-based investment adviser with offering to sell fictitious securities on LinkedIn. Among other things, the Division alleged that the adviser used LinkedIn discussions to promote fictitious “bank guarantees” and “medium term notes,” which generated interest from potential investors. The adviser failed to comply with recordkeeping requirements or maintain a required Code of Ethics.

The SEC’s Enforcement Division noted that fraudsters are quick to adapt to new technologies to exploit them for unlawful purposes. This case suggests that the federal regulators are determined to adapt to new technologies to follow the fraud.

Testimonials (2014)

Acknowledging the growing demand by consumers for information through social media, the Division of Investment Management set some ground rules on how investment advisers can use social media and publish advertisements that feature public commentary about them that appears on social media sites.13

Generally, advisers may refer to commentary published

13 Division of Investment Management Guidance Update No. 2014-4, Guidance on the Testimonial Rule and Social Media, available at http://www.sec.gov/investment/im-guidance-2014-04.pdf.


http://www.sec.gov/investment/im-guidance-2014-04.pdf


in social media without violating the rule prohibiting publication of client “testimonials” if the content is independently produced and the adviser has no “material connection” with the independent social media site. While not a bright line in the sand, the distinction goes a long way to clear up this murky area.

Section 206 of the Investment Advisers Act of 1940 contains broad antifraud provisions that apply to advisers. Rule 206(4)-1(a)(1) under the Advisers Act defines fraud to include “any advertisement which refers, directly or indirectly, to any testimonial of any kind concerning the investment adviser or concerning any advice, analysis, report or other service” provided by the adviser. This is the so-called “testimonial rule.” In a 1985 no-action letter, the Staff said that the basis of the prohibition is that a “testimonial may give rise to a fraudulent or deceptive implication, or mistaken inference, that the experience of the person giving the testimonial is typical of the experience of the adviser’s clients.” While the SEC’s rules do not define the term “testimonial,” the SEC’s Staff has indicated that public commentary made by a client endorsing an investment adviser, or a statement made by a third party about a client’s experience with the adviser, may be a testimonial for this purpose. And, as the guidance notes, whether public commentary on a social media site constitutes a testimonial depends on the facts and circumstances relating to the statement.

In the age of social media, this decades-old rule presents enormous compliance challenges for advisers whose clients rely on social media. Over the years, the Staff, through the “no-action” process, has provided limited guidance on what constitutes a testimonial. For example, the Staff has said that publication of an article by an unbiased third party regarding an adviser’s performance, unless it includes a statement of a client’s experience with the adviser, or an endorsement of the adviser, would not violate the testimonial rule. The Staff has used this concept as the basis for its current guidance.

Third-party commentary. The Staff attempted to draw a line between endorsements and legitimate third-party commentary:

• Advisers may not publish public commentary on their website that is an explicit or implicit statement of a client’s experience with the adviser.

• Commentaries posted directly on the adviser’s website, blog or social media site that tout the adviser’s services are prohibited testimonials.

• Advisers will not necessarily violate the testimonial rule if they publish commentary originating from an independent social media site on their own websites or social media sites, provided:

• The independent social media site provides content that is independent of the investment adviser or its representative;

• There is no material connection between the independent social media site and the investment adviser or its representative that would “call into question the independence” of the independent social media site or its commentary; and

• The investment adviser or representative publishes all of the unedited comments appearing on the independent social media site regarding the adviser or representative.

• Content is not “independent” if the adviser or its representative had a hand in authoring the commentary, directly or indirectly. For example, paying a client (or offering a discount to a client) for saying nice things would implicate the testimonial rule.

• Advisers may not use testimonials from independent social media sites that directly or indirectly emphasize commentary favorable to the adviser, or downplay unfavorable commentary.

• Advisers may publish commentary from an independent social media site that includes a mathematical average of the public commentary—for example, based on a ratings system that is not preordained to benefit the adviser.

Investment adviser advertisements on independent social media sites.

• Investment advisers may advertise on an independent social media site, provided that it is readily apparent that the advertisement is separate from the public commentary and that the receipt of advertising did not influence the selection of public commentary for publication.

Reference to independent social media site commentary in nonsocial media advertisements.

• In print, TV and radio ads, advisers may refer to the fact that third-party social media sites feature



public commentary about the adviser, but they may not publish any actual testimonials without implicating the testimonial rule.

Client lists on social media sites.

• Simply identifying contacts or friends on a social media site by itself does not implicate the testimonial rule, as long as they are not grouped in a way that suggests that they endorse the investment adviser.

Fan and community pages.

• A third party’s creation and operation of unconnected community or fan pages generally would not implicate the testimonial rule. However, the Staff strongly cautions advisers and their employees that publishing content from those sites or directing user traffic to those sites if they do not meet the no material connection and independence conditions described above may implicate the testimonial rule.

Scope of regulatory approach. The Division of Investment Management’s approach to regulating the use of social media by advisers differs markedly from the approach adopted by FINRA for broker-dealers (summarized below). While both regulators focus on the substance of the communication, rather than the format, the differences arise primarily from the nature of the regulated entity and the starting point of regulation.

For example, the Division of Investment Management focuses almost exclusively on adequacy of compliance programs and whether a particular use of social media involves a prohibited “testimonial,” a concept largely absent from regulation of broker-dealers. On the other hand, FINRA focuses on suitability of a recommendation and whether a particular communication requires advance compliance approval. Both approaches require caution when a regulated entity publishes or relies on third-party content. The Division of Investment Management’s guidance moves the ball forward and will provide a starting point for chief compliance officers who are struggling to get their arms around advisers’ use of social media. It may also provide an opportunity for advisers to revisit their procedures for monitoring advertising. While the guidance provides some relief for advisers who now have a better idea of the limitations to which they are subject, it also provides some compliance challenges, especially when advisers and their representatives make use of fast-paced social media to advertise.

FINRA GUIDANCE FOR BROKER-DEALERS

On August 18, 2011, FINRA issued Regulatory Notice 11-39,14 providing guidance to broker-dealer members on social networking websites and business communications. The notice updated FINRA’s guidance in Regulatory Notice 10-06 from January 2010.15 Regulatory Notice 10-06 provides guidance on the application of FINRA rules governing communications by FINRA member firms with the public through social media sites, and reminds member firms of certain requirements relating to those communications.16

To understand the guidance, it is important to understand the difference between static and interactive electronic communications. Since 1999, FINRA has taken the position that participation by a registered representative of a member firm in an Internet chat room is comparable to a presentation made to a group of investors and, accordingly, is subject to the same rules applicable to presentations. This position was codified in 2003 when NASD Rule 2210 was amended to include the participation in an interactive electronic forum in the definition of “public appearance.” Hence, the FINRA rules do not require prior approval of postings by member firms or their associated persons on interactive electronic forums, provided that the member firm supervises and reviews such postings in the same manner as required for the supervision and review of correspondence under FINRA Rule 3110(b)(4).

Static communications or postings are regulated as “advertisements” under FINRA rules and, accordingly, are required to have been reviewed by a registered principal. Member firms and their associated persons must be careful to distinguish between static and interactive electronic communications. Under the current FINRA communication rule, any communication by a member firm on social media would be a retail communication, which includes any electronic communication to 25 or more retail investors within any

14 Social Media Websites and the Use of Personal Devices for Business Communications, Guidance on Blogs and Social Networking Websites and Business Communications, Regulatory Notice 11-39 (August 2011), available at https://www.finra.org/sites/default/files/NoticeDocument/p124186.pdf. 15 Social Media Web Sites, Guidance on Blogs and Social Networking Web Sites, Regulatory 10-06 (January 2010), available at https://www.finra.org/sites/default/files/NoticeDocument/p120779.pdf. 16 We note that updated FINRA communications rules became effective in February 2013. See Communications With the Public, SEC Approves New Rules Governing Communications With the Public, Regulatory Notice 12-29 (June 2012), available at http://www.finra.org/sites/default/files/NoticeDocument/p127014.pdf. In Regulatory Notice 12-29, FINRA indicated that it was codifying its existing guidance.


https://www.finra.org/sites/default/files/NoticeDocument/p124186.pdf




http://www.finra.org/sites/default/files/NoticeDocument/p127014.pdf

http://www.finra.org/sites/default/files/NoticeDocument/p127014.pdf


30-day period. FINRA Rule 2210 no longer retains the “advertisement” and “public appearance” categories, but those terms are useful in explaining FINRA’s disparate treatment of retail communications on the static and nonstatic portions of an interactive electronic forum.

Interactive Electronic Forums

Although a blog (or a bulletin board) may seem to be an online interactive electronic forum, for FINRA, the treatment of a blog will depend on the manner and purpose for which the blog has been constructed. Blogs consisting of static postings are deemed advertisements, and their contents require prior principal approval before posting. Most blogs today are used to engage in real-time interactive communications with third parties. As a result, these blogs may be deemed online interactive electronic forums and regulated as public appearances.

Social networking sites also may be subject to different rules, depending on the nature of the communication. Common social networking sites combine static content and real-time interactive communications (biographical information, status updates and wall uploads versus “comments” and “likes”). Static content remains posted until it is changed by the firm or individual who established the account. Generally, such content is accessible to all visitors of the site or page and is treated by FINRA as an advertisement. On the other hand, interactive content or nonstatic real-time communications have the characteristics of online interactive electronic forums and do not need to be approved by a registered principal, but are subject to the Rule 3310(b)(4) supervision requirements discussed above. Examples of nonstatic, real-time communications include interactive posts, such as “comments” or “likes” on Facebook or “replies” on Twitter, and these are treated as public appearances. They remain subject to the supervision rules.

Although Regulatory Notice 10-06 treats blogs and social networking sites differently, firms should pay close attention to the substance of the communication, not the form. A contemporary blog that is based on real-time interactive communications may still combine static content with interactive content. Firms should consider treating static content on an otherwise interactive blog as advertisements subject to prior approval by a principal.

FINRA recently penalized a registered representative for, among other things, misrepresenting her career accomplishments and her employer firm on a profile posted on a third-party website without obtaining prior principal approval from her then-current employer. FINRA cited FINRA Rule 2110 and Rule 2210. The same representative was cited for violating FINRA Rule 2210 for “tweeting” a recommendation on a particular security

without prior principal approval. According to FINRA, the content of the “tweets” was “unbalanced, overly positive and often predicted an imminent price increase.” FINRA did not object to the form of the communication; it objected to the content and the lack of prior approval.

Filing and Recordkeeping

Almost all communications made by broker-dealers through social media channels will be regarded as “retail communications” under applicable FINRA rules. Broker-dealers should consult FINRA Rule 2210 and establish appropriate policies and procedures designed to ensure compliance with the supervisory review and/or FINRA filing requirements. Retail communications on an online interactive electronic forum are not subject to the filing requirements of Rule 2210. Regulatory Notice 11-39 also addresses recordkeeping. Rules 17a-3 and 17a-4 under the Exchange Act and FINRA Rule 3110 require that a broker-dealer retain electronic communications made by the firm and associated persons that relate to the firm’s business. In Regulatory Notice 11-39, FINRA clarified that the posting of any content on a website by a member firm or its associated persons is a communication under the FINRA rules and, accordingly, is subject to applicable FINRA recordkeeping rules. According to FINRA, the determination of whether an electronic communication relates to a firm’s business “as such,” and hence is subject to the recordkeeping rules, depends on the facts and circumstances and the context and the contents of the communication. Neither the type of device or technology used to transmit the communication nor the ownership of the device is relevant to the determination. Finally, with respect to recordkeeping rules, the requirements are the same for both static and interactive electronic communications.

Suitability

Recommendations to customers regarding the purchase, sale or exchange of any security are regulated under FINRA Rule 2310, more commonly referred to as the suitability rule. Recommendations through a social media website are covered under this rule.

Supervision

FINRA Rule 3010 provides that member firms must establish and maintain a system to supervise the activities of each registered representative, registered principal and other associated person, and that the system must be reasonably designed to achieve compliance with applicable securities laws and regulations and with applicable FINRA rules. If an associated person wants to use a social media site for



business purposes, FINRA rules require that a registered principal should review the site prior to its use, to the extent that the content is static. A site should be approved for use for business purposes only if the registered principal has determined that the associated person can and will comply with all applicable FINRA communication rules, federal securities laws and individual firm policies.

Links to Third-Party Sites

Regulatory Notice 11-39 also addresses the potential liabilities associated with third-party posts. FINRA explains that a firm may not establish links to third-party sites that the firm knows, or has reason to know, contain false or misleading content, and should not do so when there are red flags to that effect. Further, FINRA advises that under applicable communication rules, a firm may become responsible for content on third-party sites if the firm has adopted or becomes entangled with the content on the third-party sites. A firm may be deemed to be entangled with a third-party site if, for example, the firm participates in the development of content on the third-party site. Also, a firm may be deemed to adopt third-party content if it indicates on its site that it endorses the content on the third-party site. Many social media sites, such as LinkedIn, allow third parties to “recommend” a person and allow users to request recommendations. Member firms should consider prohibiting associated persons from soliciting recommendations. Otherwise, the firm may be deemed to have “adopted” the third-party recommendation.

This guidance is consistent with guidance issued by the SEC with respect to third-party information that is hyperlinked to a public company’s site. Firms should make sure that any links to third-party sites are accessible only through a new window when linking to a site and that a legend appears on the screen warning the reader that he or she is leaving the firm site and disclaiming any responsibility for third-party content. It is unlikely that such legends will shield a member firm from sanction by FINRA, if applicable, but posting such legends may be effective for limiting liability relating to customer claims. Firms should also make sure that their policies relating to social media sites address links to third-party sites.

Third-Party Posts, Third-Party Links and Websites

In addition to adoption and entanglement, if a member firm co-brands a third-party site, it will effectively adopt the content of the entire site. A member firm may co-brand a site by, among other things, placing the firm’s logo prominently on the site.

Data Feeds

FINRA cautions that firms must manage data feeds inputted into their websites. As data feeds may contain inaccurate data, firms must be familiar with the proficiency of the vendor providing the data and its ability to provide accurate data. Managing data feeds involves understanding the criteria used by vendors in collecting or calculating the data, regular review of the data for red flags and promptly taking necessary measures to correct any inaccurate data.

Accessing Social Media Sites from Personal Devices

FINRA explains that firms may permit their associated persons to use personal communication devices to access firm business applications and to perform firm business activity. FINRA cautions, however, that a firm must be able to retain, retrieve and supervise business communications regardless of the ownership of the device used to transmit the communications. According to FINRA, firms should require, if possible, that representatives use separate applications on a device for business communications to facilitate retrieval of the business communications without retrieving personal communications.

FINRA also notes that an application that provides a secure portal into a firm’s communications system is preferable, especially if confidential customer information is shared. If a firm has the ability to separate business and personal communications on a device and has adequate policies and procedures regarding usage, the firm will not be required to (but may voluntarily) supervise personal communications on the device. Firms should consider what devices are most compatible with their internal compliance efforts and require associated persons to limit their business communications to such devices. To facilitate retrieval, it is advisable to ask associated persons to limit personal communications to private email accounts and to prohibit personal communications through firm email accounts.

SEC GUIDANCE FOR INVESTMENT COMPANIES

Investment companies do not necessarily have to file with the SEC interactive content posted in a real-time electronic forum (such as chat rooms or other social media) that is not required to be filed under FINRA Rule 2210.

In guidance published in March 2013, the Staff of the Division of Investment Management described the circumstances when registered investment companies must file interactive content under Section 24 of the



Investment Company Act or Rule 497 under the Securities Exchange Act of 1933, and when it believes filing is not necessary.17 The Staff takes the basic view that whether a fund must file a particular communication depends on the content, context and presentation of the particular communication. It requires the fund to examine the underlying substantive information transmitted to the social media user and consideration of other relevant facts and circumstances, such as whether the interactive communication is merely a response to a request for information, or whether the fund is sending previously filed content. The guidance contained examples of interactive communications and how the Staff would view a fund’s filing requirements.

For example, the Staff said that funds generally would not be required to file the following types of interactive communications:

• Incidental mention of specific funds unrelated to investment merits.

• Incidental use of the word “performance” in connection with discussion of a fund without specific mention of elements of the fund’s return.

o “We update performance of our funds every month and publish them on our website.”

o “When reviewing a fund’s performance, it is important to consider performance against a benchmark.”

• Factual introductory statements including a hyperlink to a prospectus.

• Introductory statements unrelated to a discussion of investment merits of a fund that include a hyperlink and discussions of basic investment concepts or commentaries on economic, political or market conditions.

o “Our data shows the average 401(k) balance is the highest it’s been in more than 10 years! This is partly due to increasing employer and employee contributions.”

o “The election is over, what is next for our economy? See our report analyzing the elections.”

17 Division of Investment Management Guidance No. 2013-01, Filing Requirements for Certain Electronic Communications (March 2013), available at http://www.sec.gov/divisions/investment/guidance/im-guidance-update-filing-requirements-for-certain-electronic-communications.pdf.

• Responses to inquiries that provide discrete factual information unrelated to fund performance.

The Staff provided examples of interactive communications that funds should have to file:

• Discussions of fund performance that mention elements of a fund’s return or that promote a return.

o “The fund slightly underperformed its benchmark, the S&P 500 Index, during the quarter that ended March 31, 2013.”

• Communications initiated by users that discuss investment merits of the fund.

o “Looking for dividends? Think global and consider our new Global Equity Fund [website URL].”

The Staff’s guidance provided additional examples; those cited above are representative. In any case, the examples are designed to be nonexclusive.

CONCLUSION

Given the significance of social media as a preferred method of communication for a growing percentage of market participants, the need to adapt Federal securities laws and the regulatory framework applicable to broker-dealers and investment advisers to social media channels will become all the more urgent. We regularly report on developments in this area through our alerts and blogs, which we hope you will consult.


http://www.sec.gov/divisions/investment/guidance/im-guidance-update-filing-requirements-for-certain-electronic-communications.pdf




Authors

Jay G. Baris New York (212) 468-8053 [email protected]

Other Contacts

Bradley Berman New York (212) 336-4177 [email protected]

Hillel Cohn Los Angeles (213) 892-5251 [email protected]

Anna Pinedo New York (212) 468-8179 [email protected]

Resources

The BD/IA Regulator provides frequent, focused, and practical summaries of developments, along with useful analysis and takeaways for broker-dealers, investment advisers, and investment funds.

www.bdiaregulator.com

Our MoFo Jumpstarter blog is intended to provide entrepreneurs, domestic and foreign companies of all shapes and sizes, and financial intermediaries with up-to-the-minute news and commentary on the JOBS Act.

www.mofojumpstarter.com

In an effort to stay on top of these emerging issues, and to keep our clients and friends informed of new developments, Morrison & Foerster publishes the Socially Aware blog, devoted to the law and business of social media.

www.sociallyawareblog.com

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Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.







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