Integration Issues Under The JOBS Act

by Stinson Leonard Street - Dodd-Frank and the Jobs Act

The integration doctrine must be considered when an issuer conducts multiple offerings in a short period of time.  If applicable, multiple offerings are collapsed to determine if a safe harbor or exemption still applied.  Under the JOBS Act, integration becomes important in the following situations:

  • An issuer uses general solicitation under Rule 506(c) and a short time later attempts to do an offering under 506(b) or Section 4(a)(2).
  • An issuer uses general solicitation under Rule 506(c) and also commences a public offering within a short period of time.
  • Completed Rule 506(b) or Section 4(a)(2) private offerings are followed by offerings using general solicitation under Rule 506(c) or are attempted concurrently.

Little is known about the position the SEC will ultimately take about integration of offerings under the JOBS Act but some clues can be gleaned from studying existing pronouncements set forth below.

Regulation D Safe Harbor

Securities Act Rule 502 provides a safe harbor for integration.  All sales that are part of the same Regulation D offering must meet all of the terms and conditions of Regulation D. Offers and sales that are made more than six months before the start of a Regulation D offering or are made more than six months after completion of a Regulation D offering will not be considered part of that Regulation D offering, so long as during those six month periods there are no offers or sales of securities by or for the issuer that are of the same or a similar class as those offered or sold under Regulation D, other than those offers or sales of securities under an employee benefit plan as defined in Rule 405 under the Securities Act.

If the issuer offers or sells securities for which the foregoing six-month safe harbor is unavailable, the determination as to whether separate sales of securities are part of the same offering (i.e., are considered integrated) depends on the particular facts and circumstances.  The following factors should be considered in determining whether offers and sales should be integrated for purposes of the exemptions under Regulation D:

  • Whether the sales are part of a single plan of financing;
  • Whether the sales involve issuance of the same class of securities;
  • Whether the sales have been made at or about the same time;
  • Whether the same type of consideration is being received; and
  • Whether the sales are made for the same general purpose.

Concurrent Public Offerings

The filing of a registration statement may be viewed as a general solicitation of investors.  The SEC announced in August 2007 that its view is that, while there are many situations in which the filing of a registration statement could serve as a general solicitation or general advertising for a concurrent private offering, the filing of a registration statement does not, per se, eliminate a company’s ability to conduct a concurrent private offering, whether it is commenced before or after the filing of the registration statement. Further, the SEC’s view is that the determination as to whether the filing of the registration statement should be considered to be a general solicitation or general advertising that would affect the availability of the Section 4(a)(2) exemption for such a concurrent unregistered offering should be based on a consideration of whether the investors in the private placement were solicited by the registration statement or through some other means that would otherwise not foreclose the availability of the Section 4(a)(2) exemption. This analysis should not focus exclusively on the nature of the investors, such as whether they are “qualified institutional buyers” as defined in Securities Act Rule 144A or institutional accredited investors, or the number of such investors participating in the offering; instead, the SEC believes the companies and their counsel should analyze whether the offering is exempt under Section 4(a)(2) on its own, including whether securities were offered and sold to the private placement investors through the means of a general solicitation in the form of the registration statement.

For example, according to the SEC, if a company files a registration statement and then seeks to offer and sell securities without registration to an investor that became interested in the purportedly private offering by means of the registration statement, then the Section 4(2) exemption would not be available for that offering. On the other hand, if the prospective private placement investor became interested in the concurrent private placement through some means other than the registration statement that did not involve a general solicitation and otherwise was consistent with Section 4(2), such as through a substantive, pre-existing relationship with the company or direct contact by the company or its agents outside of the public offering effort, then the prior filing of the registration statement generally would not impact the potential availability of the Section 4(2) exemption for that private placement and the private placement could be conducted while the registration statement for the public offering was on file with the Commission. The SEC also believes if the company is able to solicit interest in a concurrent private placement by contacting prospective investors who (1) were not identified or contacted through the marketing of the public offering and (2) did not independently contact the issuer as a result of the general solicitation by means of the registration statement, then the private placement could be conducted in accordance with Section 4(a)(2) while the registration statement for a separate public offering was pending.

Abandoned Offerings

Rule 155 provides a non-exclusive safe harbor from integration of private and registered offerings. Under Rule 155 a private offering of securities will not be considered part of an offering for which the issuer later files a registration statement if:

  • No securities were sold in the private offering;
  • The issuer and any person(s) acting on its behalf terminate all offering activity in the private offering before the issuer files the registration statement;
  • The preliminary and final prospectuses used in the registered offering disclose specified information about the abandoned private offering;
  • The issuer does not file the registration statement until at least 30 calendar days after termination of all offering activity in the private offering, unless the issuer and any person acting on its behalf offered securities in the private offering only to persons who were (or who the issuer reasonably believes were):
    • Accredited investors (as that term is defined in §230.501(a)); or
    • Persons who satisfy the knowledge and experience standard of Rule 506(b)(2)(ii).

In addition, under Rule 155, an offering for which the issuer filed a registration statement will not be considered part of a later commenced private offering if:

  • No securities were sold in the registered offering;
  • The issuer withdraws the registration statement in accordance with SEC rules;
  • Neither the issuer nor any person acting on the issuer’s behalf commences the private offering earlier than 30 calendar days after the effective date of withdrawal of the registration statement under SEC rules;
  • The issuer notifies each offeree in the private offering that:
    • The offering is not registered under the Act;
    • The securities will be “restricted securities” (as that term is defined in §230.144(a)(3)) and may not be resold unless they are registered under the Act or an exemption from registration is available;
    • Purchasers in the private offering do not have the protection of Section 11 of the Securities Act (15 U.S.C. 77k); and
    • A registration statement for the abandoned offering was filed and withdrawn, specifying the effective date of the withdrawal; and
  • Any disclosure document used in the private offering discloses any changes in the issuer’s business or financial condition that occurred after the issuer filed the registration statement that are material to the investment decision in the private offering.

DISCLAIMER: 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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