Beyond the general aspects of the U.S. Securities and Exchange Commission (SEC)’s new JOBS Act rules previously discussed in this series of articles, issuers who rely on new Rule 506(c) for an onshore offering and Regulation S and foreign private placement rules for a simultaneous offshore offering need to consider the impact of solicitation and advertising activities on the Regulation S exemption and on the private placement exemption under pertinent foreign rules.
Regulation S under the Securities Act of 1933 (the Securities Act) establishes an exemption from U.S. securities registration for certain offerings targeting non-U.S. investors. It provides an exemption from Securities Act registration requirements for offerings that (i) involve securities sold only in offshore transactions, and (ii) do not involve any directed selling efforts in the United States. Since inception of the Regulation S regime, the SEC has permitted a U.S. issuer to make a bifurcated offering, with (i) one part in the United States that is either registered under the Securities Act or exempt under Regulation D or Section 4(a)(2) of the Securities Act, and (ii) the second part outside of the United States in compliance with the above requirements under Regulation S. The SEC has not integrated the two distinct aspects of such an offering for purposes of the federal securities laws, so long as each part was in compliance with the relevant rule.
In its release adopting new Rule 506(c) and related regulatory changes, the SEC explicitly reiterated its position that concurrent offerings under Regulation D (as amended by the JOBS Act rules) and Regulation S will not be integrated. Thus, activities that involve general solicitation or general advertising under new Rule 506(c) will not preclude the issuer from relying on Regulation S for its non-U.S. offering. However, the SEC did not grant a request by multiple commenters that the SEC confirm that the use of general solicitation under new Rule 506(c) would not be deemed to constitute “directed selling efforts” by the same issuer in connection with a contemporaneous offering under Regulation S.
In practical terms, considering the nature of modern electronic communications, online marketing methods, and ubiquitous media coverage, it is reasonable to wonder whether it is possible for an issuer utilizing Rule 506(c) to control its communications in such a way that they are not deemed also to relate to the issuer’s simultaneous offering activities under Regulation S. If the firewall is not properly constructed, it is conceivable that the issuer could be deemed to have conducted directed selling efforts in the United States as part of its offshore selling efforts, thereby losing its Regulation S exemption. This means that issuers will need to maintain separate Web portals that allow U.S. URLs to access the Rule 506(c) offering and non-U.S. URLs to access the Regulation S offering. A heavy dose of prominent disclaimers would also appear to be in order.
In addition to the concerns presented under applicable U.S. laws, an issuer engaging in a general solicitation under Rule 506(c) will also need to consider how its communications will impact the laws of the foreign jurisdictions in which it may be deemed to have offered securities. Similar to the United States, many foreign jurisdictions have private placements regimes somewhat similar to Regulation D. In particular, the European Economic Area (EEA) has, over the past several years, revamped its member states’ laws governing private placements and the operations of managers of alternative investments funds. This effort has culminated in the recent promulgation of the Alternative Investment Fund Managers Directive (AIFMD).1 We are in the AIFMD transition years.
Managers may generally continue to rely for the time being on the private placement regimes in the applicable EEA jurisdictions, but will need to migrate to the AIFMD registration and authorization regime over the next few years. U.S. fund managers who engage both in broad-based general solicitation activities under Rule 506(c) in the United States and who seek EEA-based investors under the private placement regimes applicable abroad will need to be concerned: have the EEA jurisdictions loosened their private placement regimes to match the U.S.’ loosening of the general solicitation and advertising rules? The AIFMD’s focus on “marketing” as an activity that brings a foreign manager under the AIFMD regulations and outside the private placement regimes may inadvertently cause fund managers who solicit or advertise publicly under new Rule 506(c) to need to comply with AIFMD much sooner than originally anticipated. The U.S. manager may find itself quite literally stuck between the United States’ loosening regime and the tightening of general solicitation prohibitions in one or more EEA member states.
And not to be overlooked is the fact that the EEA does not speak for the rest of the world and general solicitation activities could potentially violate the laws of other relevant countries outside of the EEA.
A final word of caution is appropriately directed to non-U.S. managers who market their funds to U.S. investors. Many such managers rely on the exemption from registration under the Investment Advisers Act of 1940, as amended, known as the “foreign private adviser exemption.” Among the requirements of that exemption is that the non-U.S. manager does not hold itself out to the public in the United States as an investment adviser. If a non-U.S. manager were to engage in a general solicitation of one of the funds that it manages under Rule 506(c), it could undercut the manager’s ability to claim that it is not “holding itself out” as an investment adviser, and may therefore preclude the manager from relying on the foreign private adviser exemption. This may inadvertently trip a registration requirement under the Advisers Act, or at least cause the adviser to explore what other exceptions may be available.
An issuer engaging in a general solicitation under new Rule 506(c) and a simultaneous non-U.S. offering exempt under Regulations S should take appropriate steps to maintain the separate nature of communications under Regulation D from those under Regulation S.
Managers engaged in general solicitation will need to be more diligent about including global securities offering legends in their funds’ offering documents in case their barriers to globally free communications are not successful.
An issuer planning to engage in simultaneous offerings under Regulation D and Regulation S should take care to make the relevant Form D filings in advance of commencing initial marketing activities under either Regulation D or Regulation S in case the activities of one are ascribed to the other. If a U.S. investor receives information as part of the Regulation S initiative, it is generally difficult to establish where and how such person received the relevant offering materials.
Note: This problem pre-dates the JOBS Act rules, but is exacerbated by the lifting of relevant legal restrictions.
The filing of the Form D will also make these securities “covered securities” and that will help avoid “blue sky registration” in most states, although notice filings may still be required.
Despite the JOBS Act’s stated goal of making capital-raising more efficient, it is conceivable that the JOBS Act rules may ultimately result in increased non-U.S. legal and compliance costs and burdens for issuers engaged in a general solicitation under Rule 506(c) with respect to the legal implication of such activities in non-U.S. jurisdictions.
There are some who say AIFMD is retaliation for the JOBS Act and/or that AIFMD’s burdens will give rise to a new era of isolationism where cross-Atlantic offerings are rare and limited to mega-firms that can afford the enhanced compliance costs – only time will tell.
The JOBS Act rules could also result in an increase in legal and compliance costs and burdens to non-U.S. fund managers offering their funds in the United States under Rule 506(c) to the extent such managers are no longer able to rely on the foreign private adviser exemption from SEC registration as an investment adviser.
While many in the private placement and investment fund communities have enthusiastically welcomed the fact that manager and fund Web sites will no longer need to be as generic or secretive as they have historically been once the JOBS Act rules become effective, ironically, fund managers should now consider whether their Web sites (and those of their funds) need to be secured in order to prevent EEA investors from gaining access in violation of the AIFMD marketing restrictions.
1 A comprehensive discussion of the AIFMD and its impact on non-EEA managers is beyond the scope of this brief article. A more in-depth summary of the AIFMD’s impact on non-EEA managers will be published by Pepper Hamilton. The AIFMD applies to most managers of alternative investment funds (other than UCITS funds and certain other exceptions) that are marketed in the EEA, regardless of the manager’s or the fund’s location.