Public Solicitation of Private Offerings: Implications of the SEC’s Repeal of the Marketing Ban for Reg D Deals

Monthly
Webinar
Series

presents

Public
Solicitation
of
Private
Offerings:

Implications
of
the
SEC’s
Repeal
of
the
Marketing
Ban
for
Reg
D
Deals

July
25,
2013

Panelists

John
Hogoboom,
Partner,
Lowenstein
Sandler
LLP

Mark
Wood,
Partner
and
Co-‐Chair,
Securities
Practice
Group,
Katten
Muchin
Rosenman
LLP

William
Hicks,
Member,
Mintz,
Levin,
Cohn,
Ferris,
Glovsky
and
Popeo,
P.C.

Moderator

Brett
Goetschius,
Editor
and
Publisher,
Growth
Capital
Investor

Thank
you
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participating
in
“Public
Solicitation
of
Private
Offerings:
Implications
of
the
SEC’s
Repeal
of
the

Marketing
Ban
for
Reg
D
Deals.”
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Growth
Capital
Investor.

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Conference Manual Page 1

General Solicitation in Private Placements
MarketNexus Media – July 25, 2013

2
JOBS Act General Solicitation Provisions
  Section 201(a) of the JOBS Act required the SEC to adopt final
rules on or before July 4, 2012 permitting widespread
advertising and other forms of “general solicitation” in private
offerings in reliance on Rule 506 under Regulation D or Rule
144A so long as all of the actual purchasers of the securities are
“accredited investors” (in the case of Regulation D) or “qualified
institutional buyers” (in the case of Rule 144A).
  SEC failed to meet the required deadline.
  On August 29, 2012, the SEC proposed amendments to Rule
506 of Regulation D and Rule 144A to implement the
requirements of Section 201(a).
  Final rules adopted July 10, 2013.

New General Solicitation Rules
  New Rule 506(c) provides a new and separate exemption under
the Rule that permit issuers to use general solicitation and
general advertising to offer securities, provided that the issuer
takes reasonable steps to verify that all purchasers of the
securities are accredited investors.
  Whether the steps taken by the issuer to verify the accredited
investor status of the purchasers are “reasonable” is an
objective determination, based on the particular facts and
circumstances of each offering and investor.
  SEC has declined to mandate specific methods of verification;
however, the final rule sets forth several non-exclusive, non-
mandatory methods that may be used to verify the status of
individual accredited investors.
3

Verification Procedures
  Whether the verification steps taken are “reasonable” will
be an objective determination by the issuer (or those acting
on its behalf), considering the particular facts and
circumstances of each purchaser and transaction,
including, among other things:
–  The nature of the purchaser and the type of accredited investor that
the purchaser claims to be.
–  The amount and type of information that the issuer has about the
purchaser.
–  The nature of the offering, such as the manner in which the
purchaser was solicited to participate in the offering, and the terms
of the offering, such as a minimum investment amount.
4

Nature of the Person
  SEC acknowledges that reasonable steps to verify the
accredited investor status of natural persons poses greater
practical difficulties as compared to other categories of
accredited investors.
  Natural persons may be accredited investors based on
either a “net worth test” or an “income test.”
  SEC recognizes that it may be more difficult for an issuer
to obtain information about a person’s assets and liabilities
than about a person’s income.
  Potential privacy concerns.
5

Purchaser Information
  The more information an issuer has indicating that a
prospective purchaser is an accredited investor, the fewer
steps it would have to take to verify the purchaser’s status,
and vice versa.
  If actual knowledge that purchaser is an accredited
investor, no additional steps required.
  Verification examples:
–  Publicly available information in filings with a federal, state or local
regulatory body.
–  Third-party verification of a person’s status as an accredited
investor, provided that the issuer has a reasonable basis to rely on
such third-party verification.
6

Natural Person Verification
  Under the “income test,” an issuer may rely on any IRS form that
reports income of the purchaser for the two most recent years,
along with a written representation from the purchaser that he or
she has a reasonable expectation of reaching the necessary
income level during the current year.
  Under the “net worth test,” an issuer may rely on certain
documentation disclosing the assets and liabilities of the
purchaser, dated within the prior three months:
–  Assets -- bank statements, brokerage statements, certificates of deposit,
tax assessments and appraisal reports issued by independent third
parties;
–  Liabilities -- a credit report from at least one of the nationwide consumer
reporting agencies, provided that purchaser represents in writing that all
liabilities necessary to make a determination of net worth have been
disclosed.
7

Natural Person Verification
  Under either test, issuers may rely on written confirmations
from broker-dealers, registered investment advisers,
licensed attorneys and/or CPAs that such entity or person
has taken reasonable steps to verify the purchaser’s
accredited investor status within the prior three months.
–  Statements by others may also be acceptable if the party takes
reasonable steps to verify the purchaser’s accredited investor status
and the issuer has a reasonable basis to rely on that verification.
  Issuers can verify existing investors who are natural
persons by having the person certify at the time of sale that
he or she qualifies as an accredited investor.
8

Nature and Terms of the Offering
  Issuers soliciting new investors from the general public (e.g.,
through a public website or a widely disseminated email) must
take additional steps to verify accredited investor status.
–  Not sufficient for the issuer only to require that a person check a box in
a questionnaire or sign a form, absent other information about the
purchaser indicating accredited investor status
–  Can’t rely solely on investor representations in subscription documents,
absent other information.
  Issuers soliciting new investors from a database of pre-screened
accredited investors created and maintained by a reasonably
reliable third party may rely on the database as long as they
have a reasonable basis for doing so.
9

Nature and Terms of the Offering
  Minimum investment amount.
–  If required minimum is sufficiently high that only accredited investors
could reasonably be expected to meet it, it may be reasonable for
the issuer to take no steps other than to confirm that the purchaser’s
investment is not being financed by the issuer or any other third
party.
–  No specific SEC guidance as to what minimum investment level is
high enough.
  Issuers may be able to check the accredited investor status
of potential investors with third-party services where the
services, rather than the issuers themselves, obtain
appropriate documentation or take other steps to verify
such status.
10

Issuer Burden
  Rule 506(c) continues to apply the “reasonable belief”
standard to the condition that all purchasers are accredited
investors.
  Issuer has the burden of demonstrating that its offering is
entitled to an exemption.
–  Issuers need to create and retain adequate records that document
the steps taken throughout the verification process.
–  SEC intends to monitor the development of verification practices,
and will review the impact of compliance with the verification
requirement on investor protection and capital formation.
  Verification process only one part of perfecting the Rule
506 exemption.
11

Other New Changes
  Rule 144A also amended to permit general solicitation so long as issuer reasonably
believes all purchasers are QIBs.
  Consistent with the historical treatment of concurrent Regulation S and Rule 144A/
Rule 506 offerings, concurrent offshore offerings that are conducted in compliance
with Regulation S will not be integrated with domestic unregistered offerings that
are conducted in compliance with Rule 506 or Rule 144A.
  Privately offered funds can make a general solicitation under amended Rule 506
without losing the ability to rely on Sections 3(c)(1) and 3(c)(7) of the Investment
Company Act, which provide commonly used exclusions from the definition of
“investment company”.
–  However, due to concerns about investor protection, the SEC intends to monitor and study the
development of private fund advertising and review whether any further action is necessary.
  SEC confirmed that securities issued in new Rule 506(c) offerings will be “covered
securities” for purposes of Section 18(b)(4)(E) of the Securities Act. As a result,
state blue sky registration requirements will not apply to securities offered and sold
in Rule 506(c) offerings.
12

Bad Actor Disqualification
  New Rule 506(d) precludes reliance on Rule 506 (subject to a reasonable care
exception) when a “covered person” has been the subject of a specified triggering
event.
  “Covered Persons”
–  the issuer and any predecessor or affiliated issuer;
–  any director, executive officer, other officer participating in the offering, general partner or
managing member of the issuer;
–  any beneficial owner of 20% or more of the issuer’s outstanding voting equity securities,
calculated on the basis of voting power;
–  any investment manager of an issuer that is a pooled investment fund and any director, executive
officer, other officer participating in the offering, general partner or managing member of the
investment manager, as well as any director, executive officer or participating officer of any such
general partner or managing member;
–  any promoter connected with the issuer in any capacity at the time of the sale;
–  any person that has been or will be paid (directly or indirectly) remuneration for solicitation of
purchasers in connection with sales of securities in the offering (a “compensated solicitor”); and
–  any director, executive officer, other officer participating in the offering, general partner, or
managing member of any compensated solicitor.
13

  New Rule 506(d) will apply if a covered person is subject to certain
disqualifying events, including:
–  a criminal conviction within ten years before the proposed sale of securities (or
five years, in the case of issuers) in connection with the purchase or sale of any
securities, involving the making of any false filing with the SEC or arising out of
the conduct of the business of certain financial intermediaries;
–  a court injunction or restraining order, entered within five years before the sale,
in connection with the purchase or sale of a security, the making of a false filing
with the SEC, or arising out of the conduct of certain types of financial
intermediaries;
–  an SEC stop order or order suspending use of the Regulation A exemption
issued within five years before the sale;
–  certain SEC cease and desist and disciplinary orders;
–  a suspension or expulsion from membership in a self-regulatory organization
(“SRO”) or from association with an SRO member; and
–  certain regulatory orders barring a covered person from certain associations or
that are based on fraudulent, manipulative or deceptive conduct and was issued
within 10 years of the proposed sale of securities.
14

  SEC waiver possible if:
–  SEC determines that the issuer has shown good cause “that it is not
necessary under the circumstances that an exemption be denied.”
–  Several factors noted that could be relevant in deciding whether to grant
a waiver, such as a change of control or a change of supervisory
personnel.
  506(d) only relates to events occurring after the effective date of
the new rule.
–  Issuer must provide investors written disclosure of prior events that
would have triggered disqualification.
–  Applies to all offerings under Rule 506, regardless of whether the
purchasers are accredited investors.
–  Must provide disclosure “a reasonable time prior to sale.”
–  Failure to comply with this disclosure requirement could result in loss of
the exemption.
15

New Rule Proposals
  In addition to amending Rule 506 to add new paragraphs
(c) and (d), the SEC proposed a number of additional
changes to Regulation D, Form D and Rule 156.
  Proposed changes intended to address concerns regarding
general solicitation and to permit the SEC to monitor
activity under Regulation D,
  Proposed rules are subject to comment.
  Unlikely to be effective before the effective date of new
Rules 506(c) and (d).
16

Advance Filing and Updating of Form D
  Rule 503 would be amended to require an issuer intending to engage in
general solicitation for a Rule 506(c) offering to file an initial Form D at
least 15 calendar days in advance of commencing any general solicitation
and to disclose certain information required by revised Form D.
  The initial Form D would be required to be updated within 15 calendar
days after the date of first sale of securities in the offering, to update the
initial Form D and to provide additional information.
  A final amendment would be required within 30 calendar days after the
termination of any offering conducted in reliance on Rule 506(b) or (c).
  Until the termination amendment is filed, the offering would be deemed to
be ongoing, and the issuer would be subject to the current Rule 503
requirements to file amendments to Form D at least annually and
otherwise as needed to reflect changes in previously filed information.
  SEC seeks comment on inadvertent general solicitation issue.
17

Additional Form D Information
  The proposal would amend Form D to require issuers to
provide additional information to enable the SEC to better
analyze the impact of general solicitation on the market for
Rule 506 offerings.
  Also would increase information available to the SEC
regarding the overall use of the Rule 506 exemption.
18

Penalties for Failure to File Form D
  SEC proposes to amend Regulation D to disqualify an issuer from
using Rule 506 in any new offering if the issuer, or any predecessor or
affiliate of the issuer, did not comply, within the past five years, with the
Form D filing requirements in a Rule 506 offering.
–  Five-year look-back period would not apply to offerings prior to the effective date
of the proposed amendment.
–  The disqualification period would end one year after the filing of all required
Form D filings in connection with each offering conducted in reliance on Rule
506.
–  Failure to comply with the filing requirements for a particular offering that has
been completed or is ongoing would not jeopardize the availability of the
exemption for that offering, as long as the conditions of Rule 506 continue to be
met.
  Rule would permit a 30-day cure period for the failure to timely file a
Form D or Form D amendment.
–  available only once per offering.
  SEC waiver possible.
19

General Solicitation Materials
  New Rule 509 would require an issuer to include specified
legends in all written general solicitation materials used in a Rule
506(c) offering.
  Compliance with the proposed legend requirements wouldn’t
affect issuer requirement to take reasonable steps to verify that
purchasers in a Rule 506(c) offering are accredited investors.
  The legend and other disclosure requirements of proposed Rule
509 would not be conditions to the Rule 506(c) exemption.
  Proposal would disqualify an issuer from relying on Rule 506 in
subsequent offerings if the issuer, or any of its predecessors or
affiliates, has been subject to any court order enjoining non-
compliance with proposed Rule 509.
20

Submission of General Solicitation Materials
  New Rule 510T would require an issuer conducting a Rule 506(c) offering
to submit to the SEC any written general solicitation materials prepared by
or on behalf of the issuer and used in connection with the offering.
–  Materials would have to be submitted to the SEC no later than the date of first use.
–  Materials submitted would not be treated as “filed” or “furnished” for purposes of the
Securities Act or the Exchange Act, including the liability provisions thereof
–  Submitted materials would not be made publicly available.
  SEC does not intend that submitted materials would be subject to the staff
review and comment process.
  SEC expects that the temporary rule would expire two years after its
effective date.
  Submission requirement would not be a condition to the Rule 506(c)
exemption.
–  issuer would be disqualified from relying on Rule 506 in subsequent offerings if it or
any of its predecessors or affiliates has been subject to any court order enjoining non-
compliance with proposed Rule 510T.
21

Private Funds
  Private funds making an offering under Rule 506(c) would be required to include
additional disclosures in their written general solicitation materials.
–  Any performance data provided would have to be given as of the most recent practicable date.
–  If performance data do not reflect the deduction of fees and expenses, the disclosure would have
to state that fees and expenses have not been deducted and that performance may have been
lower than presented had such fees and expenses been deducted.
  SEC proposes to extend Rule 156 (which provides guidance on manipulative
practices) to apply to all sales literature used by private funds, whether in offerings
under Rule 506(c) or otherwise.
–  Sales literature would include any communication used by any person to offer to sell or induce the
sale of securities of any investment company or private fund.
  SEC has asked for comment on whether additional restrictions on private fund
offerings are necessary in connection with Rule 506(c) offerings by private funds
–  Use of performance data
–  Should the SEC impose standardized calculation methodologies.
22

Legal Disclaimer
Although this presentation may provide information
concerning potential legal issues, it is not a substitute
for legal advice from qualified counsel. The
presentation is not created or designed to address the
unique facts of circumstances that may arise in any
specific instance, and you should not and are not
authorized to rely on the contents of this presentation
as a source of legal advice and this presentation
material does not create any attorney-client
relationship between you and Lowenstein Sandler LLP.
23

SPEAKER
BIOS
AND
CONTACT
INFORMATION

John
D.
Hogoboom
is
a
founding
member
of
the
Lowenstein
Sandler
Specialty
Finance
Group
and
is
co-‐chair
of
the
Life
Sciences
Group.
He

specializes
in
representing
clients
in
the
life
sciences
and
other
industries
in
mergers
and
acquisitions,
public
and
private
securities

offerings,
private
equity
investments
and
general
corporate
and
securities
law.
Mr.
Hogoboom
is
listed
inThe
Best
Lawyers
in
America
in

the
2007-‐2012
editions
of
the
publication,
in
both
the
corporate
law
and
securities
law
categories.

CONTACT

John
D.
Hogoboom

Founding
Member,
Specialty
Finance
Group

Lowestein
Sandler
LLP

646-‐414-‐6846

jhogoboom@lowenstein.com

Mark
D.
Wood
is
head
of
Katten
Muchin
Rosenman's
securities
practice
and
concentrates
in
corporate
and
securities
law.
He
represents

public
companies,
issuers
and
investment
banks
in
initial
public
offerings
(IPOs)
and
other
public
offerings,
private
investment
in
public

equity
(PIPE)
transactions,
debt
securities
and
other
securities
matters.
Mr.
Wood
is
a
leading
practitioner
in
representing
investors,
public

companies
and
placement
agencies
in
PIPE
transactions.

CONTACT

Mark
D.
Wood

Head,
Securities
Practice

Katten
Muchin
Rosenman

312-‐902-‐5493

mark.wood@kattenlaw.com

William
Hicks
is
a
Member
with
Mintz
Levin
Cohn
Ferris
Glovsky
and
Popeo.
He
has
extensive
experience
representing
placement
agents

and
underwriters
in
structuring
and
executing
initial
public
offerings,
alternative
public
offerings,
including
reverse
mergers,
Form

10/Resale
S-‐1
club
deals
and
confidentially
marketed
IPOs,
Confidentially
Marketed
Public
Offerings
(CMPOs),
registered
directs,
PIPEs
and

private
placements.
Mr.
Hicks
represents
venture
capital
firms
and
private
equity
firms
in
customized
investments
in
public
companies,

including
structured
PIPEs
and
registered
directs.

CONTACT

William
Hicks

Member

Mintz
Levin
Cohn
Ferris
Glovsky
and
Popeo

617-‐348-‐1799

WCHicks@mintz.com


Vol. II Issue 13 The Journal of Emerging Growth Company Finance July 15, 2013
Repeal of General Solicitation Ban
Brings New Era for Private Offerings
by Brett Goetschius
L
ast week’s long-anticipated repeal of the ban on public advertising of
private securities offerings either ushers in a new era of transparent, in-
formation-rich, digitally-greased, and crowd-vetted capital markets, or
it is a leap into the abyss that will pervert the most trusted capital markets in
the world into a carnival midway of investment hustlers, crowd madness pan-
derers and common thieves. That seems to be the consensus, or lack thereof, of
regulators and growth capital professionals surveyed in the wake of the SEC’s
action to implement the mandate set by Congress a year ago when it passed
the JOBS Act.
On July 10, the Securities and Exchange Commission held an open meet-
ing regarding its nine-month old proposal to repeal the ban on the advertis-
ing and general solicitation of Regulation D securities offerings. Although the
amendment, known as Rule 506(c), was ultimately adopted, concerns regard-
ing investor protection were raised by two commissioners, Elisse Walter and
Luis Aguilar.
Walter’s concerns about the risks of fraud and the promotion of invest-
ments inappropriate to less sophisticated investors came short of persuading
her to vote against the repeal. Aguilar was blunter in his criticism, decry-
ing the Commission’s move to repeal the ban before approving additional
Energy Exploration,Medical
Device Growth EPP Issuers Buck
Post-Deal Price Drops in Q2
by Joe Gose
T
he stock market’s bull run in the first half of 2013 that pushed the
Dow Jones Industrial Average and Standard & Poor’s 500 indexes to
all time highs failed to influence initial investor reaction to growth
equity private placements (EPPs).
Looking at stock price performance on an industry-by-industry basis, in-
vestors largely sold on the news of a private deal, and sentiment three days after
announcement was frequently more pessimistic than the response over the first
half of 2013, according to analysis by Growth Capital Investor.
Additionally, transaction activity slowed from a year earlier while the
IN THIS ISSUE
Sponsored Deals Recovering
from Slow Q1
After a slow 2013 first quarter,sponsored growth
equity private placements – deals taken by
long-onlyfundamentalinvestors–generatedmore
deals and more dollars in the second quarter....2
Rollup King Returns to SPAC Market
Jonathan Ledecky is making a big bet investing in
mobile advertising...............................................3
Judge LimitsYuhe Investor Suit
Against Underwriters
Underwriters of a $40 million secondary offering
from chicken breeder Yuhe International fight-
ing investor suit in alleged $12 million diversion
scheme................................................................4
ALSO INSIDE
Former Deephaven Manager Launches New Fund;
FINRA Readies Crowdfunding Portal Rules for
Comment;Oramed Pharm Raises $4.6M viaAegis;
OakRidgeMicro-EnergyRaises$2.5MfromPrecept
Fund,Insiders;other stories and deals of note.....5
EPP, PIPE & APO MARKET DATA
AggregateYear-to-Date MarketActivity...............9
Deal Performance – Growth Capital EPPs..........11
Growth Capital EPP Candidates........................15 See Repeal on page 13
See Q2 on page 16
Growth Capital Investor
Growth Equity Private Placement Activity
Source: PlacementTracker, a service of Sagient Research.
April data thru 7/15/13.
Investment ($B) Deals
0
$0.5
$1.0
$1.5
$2.0 billion
Feb. Mar. Apr. May June July*
2013
31
48
40
50
53
12

mitigating rules aimed at keeping “bad actors” out of the
market and strengthening disclosure requirements for pri-
vate offerings.
“It is a false proposition to suggest that the Commission’s
hands are tied — and that the JOBS Act prevents the Com-
mission from protecting investors and safeguarding the integ-
rity of the securities markets at the same time that it makes the
changes required to Rule 506,” Aguilar said in remarks before
casting the lone dissenting vote.
“The Commission is going ahead with the adoption of
Rule 506(c), but only proposing the changes that would help
to mitigate the harm to investors. The measures discussed in
the accompanying proposal should have been considered as
part of the amendments to allow general solicitation…. It is
reckless to create a known risk today, with just the hope of a
speculative remedy tomorrow.”
Seeking to deflect the criticism that removing the gener-
al solicitation ban would “open the floodgates of fraud,” the
commission staff proposed additional amendments to Rule
506 that would formalize the verification process for accredit-
ed investors. The commission also voted to publish for public
comment a proposal to impose several additional reporting
requirements on Form D to:
• require issuers and investors to provide additional in-
formation on Form D
• veliminate the ability of an issuer to use Rule 506 ex-
emptions if it failed to file a required Form D during
the prior five-year period (with certain cure provisions)
• require issuers to file a Form D at least 15 days prior
to engaging in any general solicitation and to file a fi-
nal amendment to that Form D not later than 30 days
from the end of the offering
• for an initial two-year period, require issuers engaging
in general solicitations under Rule 506(c) to submit
their solicitation materials to the SEC on a confidential
basis
• impose legending requirements on any general solicita-
tion materials
• extend the advertising guidance in Rule 156 applicable
to public funds to private funds.
Both Commissioners Paredes and Gallagher opposed
the Form D rule changes. Paredes said that the additional
disclosure requirements would “undermine the intent of the
JOBS Act,” and hurt the ability of small companies in par-
ticular to raise capital. According to the SEC, Reg D offer-
ings completed from 2009-2012 raised an average of $30M.
However, the median Reg D offering amount was $2M, il-
lustrating the large volume of smaller deals that occur in the
market.
In addition, the commission approved the long-proposed
“bad actor” provisions of the Dodd-Frank financial regulatory
reform act. The rules seek to exclude persons and corporate
entities which have been convicted of a felony or have been
involved in other disciplinary cases with the SEC from partic-
ipating in restricted securities offerings. This rule would nar-
row coverage to executive officers, beneficial owners of 20%
of an issuer, and investment managers involved in offerings.
Additionally, events triggering the “bad actor” designation
must occur after the adoption of the ruling, thus excluding
past events.
The final language, which narrowed the scope of the
rule dramatically from that originally proposed in early
2011, drew a sharp rebuke by Aguilar, who criticized chang-
es from the original proposal which excluded any actions
prior to adoption of the proposal from triggering bad actor
status (the original proposal had included activities dating
back five years.) Aguilar also criticized the expansion of the
beneficial owner threshold from 10% to 20%, and the nar-
rowing of covered persons from any officer of the issuer or
any officer of a person paid to solicit investors, to only ex-
ecutive officers of such entities and officers who participate
in the offering.
The General Solicitation repeal was approved by a 4-1
vote. Despite concerns raised by Aguilar, the Bad Actor Rule
passed unanimously, and the Form D proposal was approved
for release for comment by a 3-2 vote, with dissent from Gal-
lagher and Paredes. The new rules will be effective 60 days
after their publication in the Federal Register.
Market Reaction Split
Equity crowdfunding advocates who had waited more
than a year for the advertising ban, seen as the key obstacle to
accredited investor-based crowdfunding, to be repealed, uni-
formly hailed the action. However, the reaction among tradi-
tional Reg D market professionals was more mixed.
Cromwell Coulson, president of OTC Markets, the
primary quotation market for securities of unlisted public
companies, hailed the repeal as a blow for market transpar-
ency.
“I think it’s awesome that they lifted the ban on trans-
parency,” Coulson said. Until now, private companies have
been forced to raise capital in an information vacuum, he ex-
plained, in which the dissemination of information about the
company was severely proscribed.
“The general solicitation ban was really a ban on trans-
parency. That’s terrible for market efficiency and investor
education,” he added. Coulson believes the repeal of the
solicitation ban “will totally change the path that a compa-
ny will take toward becoming an exchange-listed company,”
by creating gradations of ever-greater public reporting and
Repeal continued from front page
July 15, 2013 Copyright © 2013 MarketNexus Media, Inc. 13

trading levels, much like the three designations now accord-
ed OTC stocks – the Pink, QB, and QX levels – at OTC
Markets.
Coulson believes the ability to solicit investment will
keep a lot of companies private that might otherwise have
gone public too early in their corporate and financial devel-
opment to truly benefit from fully public status. “There will
be lots of small companies that can exist as private companies,
because transparency is now allowed. Public versus private
distinctions should go away. ‘Sales restricted’ should be the
new description,” for private securities, he said.
OTC Markets is moving quickly to adapt to the new re-
gime. The firm plans to begin quoting 144A securities, and
introduce a service to announce and post Reg D offering pro-
spectuses.
Bill Hicks of Mintz Levin is similarly expansive on the
potential of letting slip the dogs of advertising upon the pri-
vate capital markets. Calling the change nothing less than
“transformative” for corporate capital formation, Hicks sug-
gested solicited 506(c) offerings could help fuel varieties of
alternative public offerings (APOs).
“This really opens the door,” said Hicks. The repeal of
the solicitation ban is “the real crowdfunding bill. It will allow
small companies to go out and market an offering broadly,”
helping to create a retail shareholder base that is critical to
maintaining liquidity in their shares.
“This will allow the kind of crowdfunding that is actually
useful,” said Hicks, adding that solicited offerings could be
used in conjunction with an institutional-investor led financ-
ing of a reverse merger, commonly called an “APO” or alter-
native public offering.
“When you add a Form 10 self-filing with a reverse merg-
er and a 506(c) filing, you have a very interesting possible
format,” he said. Adding in a publicly marketed offering to
the traditional APO process could broaden a newly public
company’s shareholder base, providing better liquidity to
initial APO investors, and offering institutions the trading
volume, share price support and public float they demand
before making significant long-term investments in emerging
growth companies.
Hicks said he believes that solicited offerings could
make the Form 10 APO a favored path for larger private
emerging growth companies seeking to go public without
an IPO but for which establishing a large retail investor base
quickly is critical. This path could be especially attractive
to companies that can tap sizable retail customer or affinity
group bases.
He added that the repeal will be highly disruptive to
the angel and venture capital markets, and that he sees the
506(c) offerings market developing more in parallel than
in conjunction with those markets in the near term. Tra-
ditional angel and venture fund models are clearly the in-
cumbents that will be disrupted by the new offerings, and
are reacting with the typical hostility toward innovation
that old-guard players express when their market hegemo-
ny is challenged.
Mindful of that hostility, Hicks believes those companies
seeking to raise capital will face a difficult choice between
traditional venture-style capital raising and 506(c) offer-
ings. Given the current lack of institutional venture investors
which are willing to consider investment in companies with
a dispersed shareholder base, “It will be more the exception
than the rule,” says Hicks, that a 506(c) or Title III crowd-
funded company will be able to attract institutional venture
capital later on.
Coulson agreed that the solicitation ban repeal and 50b(c)
will be a “game changer” for the venture capital market, which
in the past, “wanted all of their portfolio companies’ informa-
tion, but wanted to keep it to themselves,” he said. This gave
VC firms huge advantages in pricing and allocating capital
that other potential capital providers lacked. Now, companies
will be able to release financial information and projections
to any potential funding source, leveling the playing field and
expanding the potential investor pool.
Mark Wood of Katten Muchin Rosenman believes that
repeal of the solicitation ban will impact the traditional PIPE
market as well as private equity. Proposed requirements to
submit Form D filings 15 days prior to commencing 506(c)
offerings, and to require offering marketing documents to be
filed with the SEC ahead of offering marketing periods will be
“tricky” to navigate for issuers and PIPE agents, even when no
truly public solicitation is intended.
“SEC is taking the position that you are planning to do
a public solicitation anyway, why should you have a prob-
lem with telling the world about your plans ahead of time,”
said Wood. “But that assumes everyone is going to do it in
a truly public way, taking full advantage of the rule. I think
companies might seek to use [the 506(c) exemption] on the
margins, to get around concerns that when you broaden a
private placement beyond the investor group that you are
really comfortable with but say, are conducting an offering
pursuant to confidentiality agreements so that the offering re-
mains confidential, you couldn’t do that if these proposals go
through,” he said.
“The SEC seems to be saying you can either do it com-
pletely private in the old fashioned way, or fully public. The
Commission is not allowing for any middle ground. There is
all this arcane guidance on public solicitation that is difficult
to interpret and confusing for issuers. When you are doing a
private placement, you’re worried you are going to cross some

line. We had hoped these rules would allow companies that still
really intended to follow the old model of private placement
offerings to not worry so much about whether they’d uninten-
tionally crossed the line [into public solicitation.] That if they
found they had crossed the line, they could just declare it a
publicly solicited offering. But it’s not going to work like that,”
Wood said. “You are going to have to follow a different regime
from the outset to qualify for the exemption.”
Wood also thinks there will be a “great reluctance” among
issuers to submit their offering marketing materials to the
SEC, even in a confidential manner. “That’s more scrutiny
than most issuers want.”
Jack Hogoboom of Lowenstein Sandler was the most
pessimistic of those contacted about the repeal of the solici-
tation ban. Calling the repeal “completely misguided from a
policy perspective,” Hogoboom said he agreed with many of
Commissioner Aguilar’s criticisms, but wasn’t surprised giv-
en the pressure on Chairman Mary Jo White to adopt the
year-old Congressional mandate that the SEC took a princi-
ples-based rule making approach to implementing the repeal
while augmenting its monitoring and information gathering
capabilities.
Hogoboom, highly skeptical that public promotion of
private offerings will prove beneficial to the markets overall,
is particularly dismayed that the Commission moved in the
same breath to weaken proposals that would have helped pre-
vent fraud perpetrators from entering the market. He cited
the elimination of any grandfathering of trigger events in the
Bad Actor Rule as a prime example of the Commission’s poor
judgment and naiveté.
“I would really like to know why they didn’t include a
look-back on prior bad actors,” Hogoboom said. “That’s a
loophole that people are going to be able to exploit.” He was
also surprised that the threshold for applying the bad actor
test to investors was raised from the proposed 10% or larger
beneficial ownership in an issuer, the long-established thresh-
old for affiliate and insider status in a public company, to 20%
beneficial ownership.
Yet like Wood, Hogoboom took issue with several of the
Form D filing requirements, calling the requirement to file 15
days prior to a 506(c) offering too restrictive, and the one-year
penalty prohibition from using 506(c) for issuers who have failed
to file a Form D in the past five years, too punitive. Overall, he
says he is taking a “wait and see” stance on the Form D proposals,
expecting additional revisions before any final rules are adopted,
which will come at the earliest in late September.
Jack Hogoboom
Lowenstein Sandler
Mark Wood
Katten Muchin
Rosenman
Public Solicitation of Private Offerings:
Implications of the SEC’s Repeal of the Marketing Ban for Reg D Deals
July 25, 2013 2:00 – 3:30 pm EDT
The SEC’s recent repeal of the ban on general
solicitation and advertising of Reg D private
placement offerings will transform the private
and public equity capital markets. Join our
discussion of the immediate impacts on private
Reg D offerings, alternative public offerings
(APOs), and the private placement of public
equity (PIPE) market, featuring a panel of top
Reg D securities offering experts.
This is a 90-minute live interactive webcast with
online and post-program Q&A hosted by Brett
Goetschius, Editor & Publisher of Growth
Capital Investor.
Free for subscribers to Growth Capital Investor. $199 for non-subscribers.
This program will be submitted for
CLE credit eligibility in NY and CA.
For more information or to register: http://growthcapitalist.com/events
Growth Capital Investor Monthly Webinar Series
Bill Hicks
Mintz Levin
Panelists:

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