Primer On Doing Private Placements Over The Internet

Wednesday, May 26, 2004

Robert Robbins, Sylvia Mahaffey, and Lilyanna Peyser Shaw Pittman, Review of Securities & Commodities Regulation, http://

Better Business Management & Planning Practices

Abstracted from: Regulation D Offerings And The Internet

Washington, DC
Review of Securities & Commodities Regulation - Vol. 36, No. 22, Pgs. 259-267

Overview:
Describes the SEC guidelines for conducting Regulation D offerings on the Internet. Notes parallel developments in state law.
Online but private. The SEC, in releases and no-action letters, has embraced adapting the Internet­which is accessible to millions of computer users around the world­to Regulation D, the primary registration exemption for private placements of securities. Attorneys Robert Robbins, Sylvia Mahaffey, and Lilyanna Peyser describe guidelines for successfully doing a private placement on the Internet. Rule 502(c), the biggest barrier, prohibits "general solicitation or general advertising" in Rule 505 and 506 offerings. The most common indication of the lack of general solicitation is a preexisting, substantive relationship between the issuer or broker-dealer and each offeree. The relationship is substantive if it enables the issuer or broker-dealer to ascertain the offeree’s finances or sophistication, or if it has some significance or duration; and preexisting if it begins before the offering or the broker-dealer’s participation. Broker-dealers, but not others, can establish such a relationship on the telephone or (if they meet the detailed requirements of the IPONET no-action letter) on the Internet.

Offering information.
To satisfy Rule 502(b), electronic delivery of information to unaccredited investors in Rule 505 and Rule 506 offerings must meet three standards. The investor must receive notice of delivery that resembles paper notice. Delivery by e-mail, a computer disk, or a CD-ROM is sufficient; mere posting to a website is not. The information must be as easy to read and to preserve (or to access continuously) as information on paper would be. Making it downloadable or printable is acceptable. Finally, the evidence of delivery must be similar to that needed for information on paper. The several acceptable forms include the investor’s revocable and informed consent to receipt, indicating the kinds of information, the electronic medium, and the time frame. An electronic request for information usually implies consent.
Road shows, hyperlinks, and updates. Electronic road shows are probably allowable under Rule 504, the authors opine. This is the only rule in Regulation D that exempts from registration some offerings which use general solicitation or advertising (e.g., those conducted entirely in a state compelling registration or allowing general solicitation under an exemption). An issuer may use Rule 504 if it neither files reports under 1934 Act Section 13 or 15(d) nor offers over $1 million in securities. By hyperlinking an offering document to a third-party report on another website, the issuer might become liable for that report’s errors under one of two theories. Help in preparing the report indicates entanglement, while post-publication approval suggests endorsement and depends on, inter alia, the hyperlink’s context, its prominence relative to other hyperlinks, and the danger of investors being misled. Any of the issuer’s own website postings might also be deemed offering materials, so the issuer should delete outdated postings and label older, retained ones as such.

State law.
The North American Securities Administrators Association has decided that a communication on the Internet is addressed to everyone with Internet access and that an Internet offer of securities is therefore being made in all 50 states. Simultaneously, however, the NASAA passed a resolution recommending that each state exempt from registration an Internet offer if the offer indicates that none of that state’s residents are offerees and neither the issuer nor its agents otherwise make an offer to anyone in that state. The resolution also recommends that each state permit sales of securities pursuant to an Internet offer if a state exemption exists or if the offering is registered and the issuer makes no sales in that state before effectiveness of the registration and delivery of the final prospectus. Most states have adopted some version of this resolution.

Abstracted from Review of Securities & Commodities Regulation, published by Standard & Poor’s, 55 Water Street, New York, NY 10041.

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