As readers of this publication know, the SEC’s amendments to Regulation D and Rule 144A required by the JOBS Act will become effective on September 23, 2013.
Our more detailed client alerts discussing the new rules may be found at:
- General Solicitation: http://www.mofo.com/files/Uploads/Images/130710-Goldilocks-Porridge-and-General- Solicitation.pdf.
- Bad Actor Rules: http://www.mofo.com/files/Uploads/Images/130715-Bad-Actor-Disqualifications.pdf.
In this article, we set forth a few reminders as to how these changes will affect Regulation D and Rule 144A structured note programs, and describe a few action items being undertaken by offering participants to address the new rules.
First, we would mention that we do not anticipate substantial changes in the marketing of offerings as a result of these changes. Unlike their SEC-registered cousins, Regulation D and Rule 144A offerings of structured notes are typically intentionally designed to be quite private, and many are issued on a reverse inquiry basis. Some purchasers of Rule 144A notes do not want their transactions to become public knowledge, for fear that other investors will learn more about their investment strategies. In addition, in the structured products world, brokers are generally quite careful about marketing their securities only to persons they know to be suitable investors, and would not deem a general solicitation as a helpful way to do so. And of course, those market participants who are also active in the registered note market have a variety of tools at their disposal, such as websites and free writing prospectuses, to communicate with a large number of investors for some types of communications.
Planning a General Solicitation?
Notwithstanding, some market participants may consider additional marketing materials, as well as webpages, in order to promote these types of offerings, or to help educate investors. Of course, the new rules are not a license to say anything at any time. Materials must be carefully vetted for accuracy and compliance with FINRA’s communication rules. In connection with FINRA’s current focus on the use of social media by broker-dealers, many brokers are reexamining their use of these communication tools, which may also be used in Regulation D and Rule 144A offerings. In addition, under the FINRA rules, any “retail communications” used for Regulation D offerings will be subject to FINRA’s principal approval, record retention and content requirements (but not the FINRA filing requirement that applies to some registered offerings).
If a Regulation D offering is conducted with a general solicitation, reasonable steps must be taken to verify that the investors that purchase the securities are in fact accredited investors. Brokers who do so will need to carefully plan the procedures that will be used, and any documentation that will be required to establish the investor’s status. Issuers are likely to want to carefully review and understand the procedures that will be employed by the dealer, to ensure that they do not lose the benefit of the private placement exemption.
If a general solicitation is planned (or permitted), the offering agreements between issuers and distributors (program agreements, distribution agreements, etc.) will typically need to be amended—virtually all existing forms for these types of offerings prohibit general solicitations. These prohibitions would be replaced with relevant representations and covenants, including matters such as (a) which parties are authorized to make a general solicitation, (b) which parties must approve the content, and (c) which parties will take responsibility (indemnification) for their content.
Due Diligence (and Know Yourself)
For all offerings conducted under Regulation D (whether or not a general solicitation is to be made), issuers and distributors will need to ask each other (and review internally) whether there are any disqualifying events under new Rule 506(d) that must be disclosed in the offering documents. In order to do so, they are likely to impose upon one another representations that all such events have been disclosed, and covenants to inform one another about any future developments of this kind.
Many structured products dealers that offer these products under Regulation D or Rule 144A have groups that offer other types of securities under these rules. The new internal procedures for monitoring disqualifying events, including updates to D&O and shareholder questionnaires, will need to work in a manner that is consistent with all relevant product groups.
Issuers and distributors that offer securities under Regulation D will need to update their “know your dealer” procedures to be on the lookout for these types of events, and to respond accordingly to any that occur. Disqualifying events occurring after September 23, 2013 (which are not waived by the SEC) may result in a decision to terminate the offering. If the dealer is the subject of that event, perhaps the offering can go forward, but with a different dealer. For events that occurred before September 23, 2013, offering documents may need to be updated to add a description.
Congress’s primary intention in requiring the SEC to permit general solicitation was to help growing companies raise capital. But the new Regulation D and Rule 144A rules impact a wide variety of offerings of all size and purpose, and structured notes are no exception. Market participants have set the wheels in motion to address these new provisions.