SEC provides interpretive guidance regarding the integration of concurrent public and private offerings

By Cydney Posner

In the SEC's recent release proposing revisions to Reg D and reduction of the Reg D integration safe harbor to 90 days, Section II C of the release also provides surprisingly benevolent interpretive guidance regarding the integration of concurrent public and private offerings.

In the report of the SEC's Advisory Committee on Smaller Public Companies (see my email dated April 20, 2006, copied below), the Committee recommended that the SEC clarify the interpretation of or amend Rule 152 to permit companies to conduct a valid private placement immediately before the filing of a registration statement without concern that the two offerings would be integrated and address continuing integration concerns regarding concurrent private placements conducted while a registration statement is pending with the SEC. Because of the critical nature of these issues, in this release, the SEC provides guidance on these integration issues. The SEC makes clear, however, that the guidance does not affect the risk that the SEC or a court could find a violation of Section 5 where, outside of the requirements of Rule 155, a company does not comply with the "private offer/ private sale, public offer/public sale" doctrines (i.e., begins an offering as a private placement and seeks to complete that offering under a registration statement or commences a registered offering and seeks to complete that offering through a private placement).

Rule 152--Completed Private Placement. Under Rule 152, a completed private placement that was exempt from registration under Section 4(2) will not be integrated with a public offering of securities that is registered on a subsequently filed registration statement. In interpreting that rule, the SEC is also of the view that, "a company’s contemplation of filing a Securities Act registration statement for a public offering at the same time that it is conducting a 4(2)-exempt private placement would not cause the 4(2) exemption to be unavailable for that private placement." However, the SEC cautions that, in these circumstances, companies should be careful to avoid any pre-filing communications regarding the contemplated public offering that could taint the private placement and thereby render the 4(2) exemption unavailable.

Contemporaneous Public Offering and Private Placement. Generally, the filing of a registration statement has often been viewed as a general solicitation that may make a 4(2) exemption unavailable. The issue is especially pronounced today because, upon the filing of a registration statement, information about the company is immediately available on EDGAR. In reviewing filings, the SEC staff have typically requested a discussion (and sometimes a legal opinion) regarding potential integration issues and the availability of 4(2). In the Black Box and Squadron Ellenoff no-action letters, the SEC staff advised that, notwithstanding filing of the registration statements, the companies could continue to conduct concurrent private placements and need not integrate those offerings with ongoing public offerings under the facts of those letters (which involved, among other things, offers and sales limited to QIBs and a few institutional accredited investors). The guidance in those letters continues to be available and is not affected by the guidance in the release. However, the SEC recognizes that those letters do not address all fact patterns that may arise in connection with concurrent private placements.

In analyzing whether concurrent public and private placements must be integrated in other factual contexts, the SEC's view is that, instead of focusing solely on the number or nature of the investors, the inquiry should focus on whether securities were offered and sold in the private placement through the registration statement. The SEC does not view the filing of the registration statement, per se, to preclude a company from conducting a concurrent private offering, regardless of whether it precedes or follows the filing of the registration statement; however, 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. In that regard, the SEC believes 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(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(2) exemption." (emphasis added) As a result, the 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, companies and their counsel should analyze whether the offering is exempt under Section 4(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."

Certainly, 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 4(2) exemption would not be available. However, investors may become interested in the concurrent private placement in a number of ways that do not implicate the registration statement or otherwise involve a general solicitation. In that event, the prior filing of the registration statement generally would not affect the potential availability of the 4(2) exemption for that private placement, and the private placement could be conducted while the registration statement was on file. To illustrate the framework for analyzing these issues, the SEC provides several examples of ways that potential investors might be solicited in this context consistent with 4(2):

• through a substantive, pre-existing relationship with the company;
• through direct contact by the company or its agents outside of the public offering effort; and
• through contacts by the company of prospective investors who
  • were not identified or contacted through the marketing of the public offering and
  • did not independently contact the issuer as a result of the general solicitation by means of the registration statement.

For opinion purposes, as is typically the case, those wishing to take advantage of the new guidance will need to establish an appropriate factual basis. Please note in addition that the guidance has application in the context of concurrent public and private offerings and, at this point, has not been extended to other contexts.

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