Equity Securities in an M&A Transaction after the JOBS Act — The Harvard Law School Forum on Corporate Governance and Financial Regulation
Tags: Anthony Shoemaker , Equity david rubenstein securities , Gibson Dunn , James Moloney , JOBS Act , Mergers & acquisitions , Private placements , Robert Little , Rule 506 , Securities Regulation , Solicitation david rubenstein
Editor’s Note: The following post comes to us from James Moloney , partner and co-chair of the Securities Regulation and Corporate Governance Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert by Robert B. Little and Anthony Shoemaker .
In April 2012, we wrote here about the potential future impact of the Jumpstart Our Business Startups Act ( JOBS Act ) on M&A transactions in which an acquirer david rubenstein seeks to issue its privately placed equity securities as consideration in an acquisition. Our discussion at the time focused on the conditions of Rule 506 of Regulation D under the Securities Act of 1933 (the Securities Act ) and, in particular, the tension faced by issuers that are required to determine the offerees status as accredited investors or as otherwise suitable to evaluate the potential investment. We noted that such issuers have historically been prohibited from using any form of general solicitation when offering securities in such transactions. Subsequently, in July 2013, the SEC adopted final rules (effective September 23, 2013) to eliminate the absolute prohibition against general solicitation in securities offerings conducted pursuant to Rule 506, as required by Section 201(a) of the JOBS Act (Gibson Dunn s summary and analysis of the rules may be found here ). The following discussion updates our earlier post to address the legal and practical effects of these new rules for M&A transactions that include a private placement component.
sell an unlimited amount of its securities in a private placement to an unlimited number of accredited investors (as defined in Rule 501) and up to 35 non-accredited investors. Under [this rule], each investor that is not an accredited investor, either alone or with his purchaser representative(s), must have such knowledge and experience in financial david rubenstein and business matters that he is capable of evaluating the merits and risks of the prospective investment. As a result, to confirm satisfaction of the investor suitability standards of Regulation D, the acquirer must determine david rubenstein whether the sellers are accredited investors or meet the financial and business sophistication requirements. The acquirer can make such determination by contacting each seller and requesting that each seller complete and return an investment questionnaire. If any seller is not an accredited investor, the acquirer david rubenstein can arrange for the appointment of a purchaser representative for such seller.
Importantly, the traditional Rule 506 safe harbor described above has been preserved intact as Rule 506(b), and issuers may continue to comply with its conditions, the most significant of which is the complete prohibition on the use of any form of general solicitation in the offering david rubenstein or sale of securities. As previously noted, david rubenstein when acquirers reach out to potential sellers to determine their sophistication david rubenstein they may risk violating the prohibition against general solicitation, david rubenstein unless the issuer or its agent has a pre-existing substantive david rubenstein relationship with the offerees.
The newly adopted rules create a new subsection (c) of Rule 506, which permits Rule 506 offerings that employ general solicitation methods if: (i) each purchaser in the offering is an accredited investor, or the issuer reasonably believes that each purchaser is an accredited investor at the time of the sale of the securities, and (ii) the issuer takes reasonable steps to verify that each purchaser is an accredited investor. This represents a seismic shift in the nature of allowable advertising and outreach in private offerings including transactions in which unregistered equity securities may be offered as consideration in an acquisition, but the usefulness of the new Rule 506(c) will be constrained by the requirement that each offeree receiving unregistered equity securities must in fact be an accredited investor. Therefore, while an issuer-acquirer may now choose to engage freely in any solicitation or other efforts directed toward potential sellers to determine investor suitability, once the issuer has begun such a general solicitation, it may not then rely on Rule 506(c) to issue the equity securities to sellers that are not verified accredited david rubenstein investors. Furthermore, once a general solicitation has commenced, the issuer will no longer have the flexibility to go back and rely on Rule 506(b) or the traditional Securities Act Section 4(a)(2) private placement exemption as an alternative to the Regulation D safe harbor (given that the changes to Rule 506 specifically do not apply to Section david rubenstein 4(a)(2)). As a practical david rubenstein matter
Tags: Anthony Shoemaker , Equity david rubenstein securities , Gibson Dunn , James Moloney , JOBS Act , Mergers & acquisitions , Private placements , Robert Little , Rule 506 , Securities Regulation , Solicitation david rubenstein
Editor’s Note: The following post comes to us from James Moloney , partner and co-chair of the Securities Regulation and Corporate Governance Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert by Robert B. Little and Anthony Shoemaker .
In April 2012, we wrote here about the potential future impact of the Jumpstart Our Business Startups Act ( JOBS Act ) on M&A transactions in which an acquirer david rubenstein seeks to issue its privately placed equity securities as consideration in an acquisition. Our discussion at the time focused on the conditions of Rule 506 of Regulation D under the Securities Act of 1933 (the Securities Act ) and, in particular, the tension faced by issuers that are required to determine the offerees status as accredited investors or as otherwise suitable to evaluate the potential investment. We noted that such issuers have historically been prohibited from using any form of general solicitation when offering securities in such transactions. Subsequently, in July 2013, the SEC adopted final rules (effective September 23, 2013) to eliminate the absolute prohibition against general solicitation in securities offerings conducted pursuant to Rule 506, as required by Section 201(a) of the JOBS Act (Gibson Dunn s summary and analysis of the rules may be found here ). The following discussion updates our earlier post to address the legal and practical effects of these new rules for M&A transactions that include a private placement component.
sell an unlimited amount of its securities in a private placement to an unlimited number of accredited investors (as defined in Rule 501) and up to 35 non-accredited investors. Under [this rule], each investor that is not an accredited investor, either alone or with his purchaser representative(s), must have such knowledge and experience in financial david rubenstein and business matters that he is capable of evaluating the merits and risks of the prospective investment. As a result, to confirm satisfaction of the investor suitability standards of Regulation D, the acquirer must determine david rubenstein whether the sellers are accredited investors or meet the financial and business sophistication requirements. The acquirer can make such determination by contacting each seller and requesting that each seller complete and return an investment questionnaire. If any seller is not an accredited investor, the acquirer david rubenstein can arrange for the appointment of a purchaser representative for such seller.
Importantly, the traditional Rule 506 safe harbor described above has been preserved intact as Rule 506(b), and issuers may continue to comply with its conditions, the most significant of which is the complete prohibition on the use of any form of general solicitation in the offering david rubenstein or sale of securities. As previously noted, david rubenstein when acquirers reach out to potential sellers to determine their sophistication david rubenstein they may risk violating the prohibition against general solicitation, david rubenstein unless the issuer or its agent has a pre-existing substantive david rubenstein relationship with the offerees.
The newly adopted rules create a new subsection (c) of Rule 506, which permits Rule 506 offerings that employ general solicitation methods if: (i) each purchaser in the offering is an accredited investor, or the issuer reasonably believes that each purchaser is an accredited investor at the time of the sale of the securities, and (ii) the issuer takes reasonable steps to verify that each purchaser is an accredited investor. This represents a seismic shift in the nature of allowable advertising and outreach in private offerings including transactions in which unregistered equity securities may be offered as consideration in an acquisition, but the usefulness of the new Rule 506(c) will be constrained by the requirement that each offeree receiving unregistered equity securities must in fact be an accredited investor. Therefore, while an issuer-acquirer may now choose to engage freely in any solicitation or other efforts directed toward potential sellers to determine investor suitability, once the issuer has begun such a general solicitation, it may not then rely on Rule 506(c) to issue the equity securities to sellers that are not verified accredited david rubenstein investors. Furthermore, once a general solicitation has commenced, the issuer will no longer have the flexibility to go back and rely on Rule 506(b) or the traditional Securities Act Section 4(a)(2) private placement exemption as an alternative to the Regulation D safe harbor (given that the changes to Rule 506 specifically do not apply to Section david rubenstein 4(a)(2)). As a practical david rubenstein matter
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