Tag: Private placements

NASDAQ Shareholder Approval Rules

Janet T. Geldzahler is Of Counsel at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Ms. Geldzahler, Robert E. Buckholz, Melissa Sawyer, and Marc Trevino.

Last Wednesday [November 19, 2015], the NASDAQ Stock Market requested public comments on whether and how to improve its rules requiring shareholder approval before a NASDAQ-listed company issues securities in connection with certain acquisitions, changes of control, and certain private placements. The request for comments is being made in light of changes that have occurred in the capital markets, securities laws, and the nature and type of share issuances since the rules were adopted 25 years ago.

The comment period will run until February 15, 2016. The request for comment is available here.


Legislation to Facilitate Capital Formation

Joseph A. Hall  is a partner and head of the corporate governance practice at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum authored by Mr. Hall, Alan F. DenenbergMichael Kaplan, Richard D. Truesdell, Jr., and Michele Luburich.

[December 1, 2015], conference committee members for the House and Senate agreed on a five-year transportation bill. While this type of legislation is rarely of interest to participants in the capital markets, the bill includes several provisions that will improve upon the JOBS Act and facilitate capital formation transactions. The legislation is expected to be voted on by the House and Senate this week as lawmakers prepare to send a final bill to President Obama for signature before December 4.

The capital formation legislation was attached to the House version of the transportation bill in early November and was preserved without further modification by a conference committee tasked with reconciling the House and Senate proposals. The capital formation measures (which appear in the last section of the proposed bill, under Division G—Financial Services) include the following:


Intermediation in Private Equity: The Role of Placement Agents

The following post comes to us from Matthew Cain, Financial Economist at the U.S. Securities and Exchange Commission, Stephen McKeon of the Department of Finance at the University of Oregon, and Steven Davidoff Solomon, Professor of Law at the University of California, Berkeley.

In light of recent “pay to play” scandals, placement agents have been portrayed in a negative light, using inappropriate influence to gain business from pension funds and other institutional investors. In our paper Intermediation in Private Equity: The Role of Placement Agents, which was recently made publicly available on SSRN, we examine the determinants of placement agent usage and implications for performance using a dataset of 32,526 investments in 4,335 private equity funds.


Equity Securities in an M&A Transaction after the JOBS Act

The following post comes to us from James Moloney, partner and co-chair of the Securities Regulation and Corporate Governance Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert by Robert B. Little and Anthony Shoemaker.

In April 2012, we wrote here about the potential future impact of the Jumpstart Our Business Startups Act (“JOBS Act”) on M&A transactions in which an acquirer seeks to issue its privately placed equity securities as consideration in an acquisition. Our discussion at the time focused on the conditions of Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) and, in particular, the tension faced by issuers that are required to determine the offerees’ status as “accredited investors” or as otherwise suitable to evaluate the potential investment. We noted that such issuers have historically been prohibited from using any form of “general solicitation” when offering securities in such transactions. Subsequently, in July 2013, the SEC adopted final rules (effective September 23, 2013) to eliminate the absolute prohibition against general solicitation in securities offerings conducted pursuant to Rule 506, as required by Section 201(a) of the JOBS Act (Gibson Dunn’s summary and analysis of the rules may be found here). The following discussion updates our earlier post to address the legal and practical effects of these new rules for M&A transactions that include a private placement component.


Current SEC Priorities Regarding Hedge Fund Managers

The following post comes to us from Norm Champ, director of the Division of Investment Management at the U.S. Securities and Exchange Commission. This post is based on Mr. Champ’s remarks at the PLI Hedge Fund Management Conference; the full text, including footnotes, is available here. The views expressed in this post are those of Mr. Champ and do not necessarily reflect those of the Securities and Exchange Commission, the Division of Investment Management, or the Staff.

This is truly an opportune time to examine the regulatory landscape for hedge funds and their advisers—many of you are probably returning from vacations during a summer that witnessed the third anniversary of the enactment of the Dodd-Frank Act and just in time for the effective date of some significant rulemakings relating to a private placement exemption often used by hedge funds. As you know, the Dodd-Frank Act imposed greater oversight on advisers to hedge funds, while recent changes were made to the private placement exemptions by the JOBS Act. These changes create both opportunities and challenges for those advisers managing hedge funds.

For this morning, I will begin with a discussion on what you are likely most interested in—the general solicitation and the “bad actor” rules. Afterward, I will focus on our continuing efforts to be better informed regulators. In the post-Dodd-Frank era, we are more cognizant regulators not only because of the enhanced data we receive from you regarding the size and operations of your industry, but also due to our continuous efforts to improve our ability to use that data and our heightened focus on industry awareness. After an overview of what we now know about your industry and how we intend to use it, I’ll highlight some regulatory initiatives of interest to the hedge fund industry. However, before I finish this morning, I want to briefly share some thoughts on the importance of a robust culture of compliance, which is underscored by the recent Commission actions against hedge fund managers for insider trading.


SEC’s New Reg D Rules and Private Fund Offerings

The following post comes to us from Marco V. Masotti, partner and co-head of the Private Funds Group at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on a Paul Weiss client memorandum.

On July 10, 2013, the U.S. Securities and Exchange Commission (the “SEC”) approved final rules that eliminate the prohibition against general solicitation and general advertising (collectively referred to herein as “general solicitation”) in certain offerings of securities pursuant to Rule 506 of Regulation D (“Reg D”) and Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The SEC also approved final rules disqualifying felons and other “bad actors” from Rule 506 offerings, and proposed related amendments to Reg D, Form D and Rule 156 under the Securities Act. The final rules become effective 60 days after publication in the Federal Register (with an estimated effective date of September 13, 2013). The proposed amendments will be open for comment for a period of 60 days after publication.

I. Rules Permitting General Solicitation in Private Offerings

The final rules create a new form of offering under Rule 506(c) that permits issuers to use general solicitation in connection with the sale of securities in private placements if: (i) the purchasers of all securities are “accredited investors;” [1] and (ii) the issuer takes reasonable steps to verify that the purchasers are accredited investors. The new rules leave intact Section 4(a)(2) of the Securities Act (which exempts from registration transactions by an issuer “not involving any public offering”) and existing Rule 506(b) (which provides a safe harbor under Section 4(a)(2) for offerings conducted without general solicitation).

Although new Rule 506(c) allows for the use of advertising in connection with fundraising activities, there are certain limitations for private funds relying on Rule 506(c):


FINRA Proposes Disclosure of Recruitment Practices

The following post comes to us from Russell Sacks, partner at Shearman & Sterling in the Financial Institutions Advisory & Financial Regulatory Group, and is based on a Shearman & Sterling publication; the full text, including appendix, is available here.

On January 4, 2013, FINRA published Regulatory Notice 13-02, proposing a new FINRA rule (the “proposed rule”) in connection with the recruitment compensation practices of member firms. [1]


In short, the proposed rule would:


FINRA Issues Guidance for Private Placement Filings

The following post comes to us from Anna T. Pinedo, partner focusing on securities and derivatives at Morrison & Foerster LLP, and is based on a Morrison & Foerster memorandum by Nilene R. Evans.

On December 3, 2012, FINRA’s new Rule 5123 went into effect. [1] The Rule requires members selling securities issued by non-members in a private placement to file the private placement memorandum, term sheet or other offering documents with FINRA within 15 days of the date of the first sale of securities, or indicate that there were no offering documents used. In connection with the effectiveness of the Rule, FINRA issued frequently asked questions (the “Private Placement FAQs”) on the process as well as rolled out the Private Placement Filing System in the FINRA Firm Gateway.

Private Placement FAQs

The Private Placement FAQs are a mix of technical filing requirements and substantive guidance. The technical questions address how firms gain access to the Private Placement Filing System, the use of third parties, such as law firms and consultants, to make the required filings, the requirement that offering documents be filed in searchable PDF format, and the maximum size of individual documents. In addition, while a firm can designate another member participating in the private placement to file on its behalf, it should arrange to receive confirmation from the designated filer in order to satisfy its own filing obligation.

The substantive FAQs include the following:


SEC Approves FINRA Private Placement Rule

Bradley Sabel is partner and co-head of Financial Institutions Advisory & Financial Regulatory practice group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Russell Sacks, Charles Gittleman, and Michael Blankenship.

On June 7, 2012, the US Securities and Exchange Commission (“SEC”) approved FINRA Rule 5123 governing regulation of broker-dealer participation in private placements of securities. The new rule will require member firms to file certain disclosure documents and material amendments to previous disclosure documents with the Financial Industry Regulatory Authority, Inc. (“FINRA”).


On June 7, 2012, the SEC approved FINRA’s proposed Rule 5123 (the “Rule”), which, as adopted, significantly expands the scope of FINRA’s regulation over broker-dealer participation in private placements. [1] Among other things, unless exempt, Rule 5123 imposes a notice filing requirement on member firms participating in a private placement—with FINRA no later than 15 days after the date of first sale. The Rule’s various exemptions effectively limit its applicability to non-institutional private placements. [2]

It should be noted that FINRA has withdrawn an earlier proposal that would have required specific disclosure to each investor to whom the security is sold; that disclosure would have required (a) a description of the anticipated use of offering proceeds, (b) the amount and type of offering expenses, and (c) the amount and type of compensation provided or to be provided to sponsors, finders, consultants, and members and their associated persons in connection with the offering. As a result, the Rule as adopted requires only the filing with FINRA of the disclosure documents described below.


FINRA Proposed Rule on Private Placements

The following post comes to us from Robert E. Buckholz, Jr., partner at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication.

In January 2011, FINRA proposed to amend Rule 5122 (“Private Placements of Securities Issued by Members”) so that its disclosure and filing requirements, which currently apply only to private placements of securities issued by a FINRA member or a “control entity” of a member, would apply to all private placements, including those of unaffiliated issuers, covered by the rule. [1] On October 18, 2011 and in response to comments on the January proposal, FINRA withdrew its proposal to amend Rule 5122 and instead submitted new proposed Rule 5123 (“Private Placements of Securities”) to the Securities and Exchange Commission for adoption. [2] Rule 5122 would remain unchanged.

Proposed Rule 5123 would prohibit members and persons associated with a member from offering or selling a security in reliance on an exemption from registration under the Securities Act of 1933 (which the proposed rule defines as a “private placement”), or from participating in the preparation of a private placement memorandum, term sheet or other disclosure document in connection with such a private placement, unless the member or associated person provides to each investor, prior to sale, information about the anticipated use of the offering proceeds and the amount and type of offering compensation and expenses. This required information must be included in a private placement memorandum or term sheet or, if none is prepared, in a separate disclosure document. Although the rule’s definition of “private placement” is literally quite broad, it is unclear whether FINRA intends the rule to apply outside the context of non-public offerings generally effected pursuant to Section 4(2) or Regulation D.