At today’s meeting of the American Bar Association’s Federal Regulation of Securities Committee meeting in Washington, DC, various representatives from the Securities and Exchange Commission provided some comments and updates.
During his presentation, the Director of the Division of Corporation Finance, Keith Higgins, reviewed the Staff’s current priorities, which also had been identified by Chair White in her Congressional testimony earlier in the week. Mr. Higgins noted that the Division continues its work with FASB regarding the types of information required by FASB in notes to financial statements included in registration statements and the requirements under Regulation S-K and Regulation S-X for certain accounting policy related disclosures in order to identify, among other things, possible areas of repetition that could be addressed in connection with the ongoing disclosure simplification review. He noted that work continues in order to address the three remaining executive compensation related rulemakings under the Dodd-Frank Act. Mr. Higgins noted that the accredited investor review is expected to be completed soon (within the next 90 to 120 days). Also, it is anticipated that the Commission will complete the actions required by the JOBS Act relating to the Exchange Act Section 12(g) threshold. Mr. Higgins also briefly reviewed the proposed amendments to Rule 147. He noted that many questions had been received regarding the process or level of Staff review of Regulation A offering statements and noted that the process for review is substantially similar to the process for review of IPO registration statements. Mr. Higgins noted that the Staff always takes into account in its review a sense of scale that is informed by the type of issuer, sophistication of the issuer, risks presented and other similar factors.
David Frederickson, Chief Counsel in the Division of Corporation Finance, reviewed the recent guidance on general solicitation and pre-existing substantive relationships. In this context, he noted that most of the guidance was in the nature of a restatement or clarification of prior Staff guidance and positions. Mr. Frederickson noted that, as a baseline, if an issuer is using the internet and providing information about an offering without password protection, such that the information is generally available, that would be viewed as a general solicitation. However, as noted in the C&DIs (and prior Staff guidance), there are many types of communications, such as ordinary course business communications, that would not be viewed as constituting a “general solicitation.” The guidance regarding pre-existing substantive relationships, he noted, refocuses the analysis on the nature of the relationship. A relationship is substantive if the issuer or an agent acting on its behalf have enough information to evaluate and do in fact evaluate a prospective investor’s financial situation and sophistication. He noted that there is no “magic” period of time that would be viewed as necessary to establish that a relationship is pre-existing (other than a reference in the Lamp Technologies no-action letter). The relationship must have been formed before the offering has commenced as to the individual (when the individual was contacted about the offering). Mr. Frederickson also commented on the recent CitizensVC no-action letter, which extends to an investment adviser the ability to establish a pre-existing substantive relationship. Mr. Frederickson noted that a new issue addressed in the recent C&DIs is a framework for thinking about contact with established networks, such as angel networks. To this end, if the issuer can form a reasonable belief that members of an angel network have the appropriate level of sophistication, communications to the members would not constitute a general solicitation. Of course, these matters are always based on the particular facts and circumstances and a determination as to whether a communication is a general solicitation would be influenced by various factors, including, among others, the number of people contacted, the financial sophistication of offerees, and the nature of the outreach (whether a communication is directed and bilateral or general, not targeted and impersonal). Similarly, depending on the facts and circumstances, communications at demo days may be an offering of securities if such details are discussed.
As is customary for similar public appearances, the regulators reminded audience members that the views expressed reflected those of the individual participants, and not necessarily those of the Commission.