One of our clients recently reached a significant milestone, and wished to share the news broadly with a press release. The client, a fund for investments in small businesses in the developing world, had just completed a first round close of historic proportions. The size of the closing represented an important achievement in the social enterprise space—signaling to the market the extent of demand for investment opportunities of this type. Our client, a foreign issuer, wished to distribute widely a press release about the accomplishment. Unfortunately, we had to advise our client that because it was continuing to raise money, distributing information publicly about the financing would place the organization at risk of violating U.S. securities laws .
In general, private offerings to accredited investors are exempt from registration requirements under U.S. securities laws. To take advantage of this exemption, however, the issuer must not engage in a “general solicitation.” The ban on general solicitation is construed broadly, and in certain instances, even bare “tombstone” ads can result in violations. In a 1983 SEC No-Action Letter to Alma Securities Corporation, Special Counsel to the SEC stated, “[W]here a sponsor or issuer conducts an ongoing program of private or limited offerings, tombstone announcements for the completion of each individual offering could be used to solicit investors to the program as a whole.” If a tombstone advertisement, simply stating the name of the issuer, the amount raised, and other bare facts may violate the ban on general solicitation, a press release would fare no better.
Fortunately for our client, there is a narrow exception to this general rule that applies to foreign private issuers. The SEC has established a safe harbor, Rule 135e, which allows foreign private issuers to provide both foreign and U.S. journalists with access to press conferences held outside the U.S., and to written press-related materials released outside the U.S., so long as four conditions are met:
(1) The offering is not being conducted solely in the U.S.;
(2) Access is provided to both U.S. and foreign journalists;
(3) Any written materials include certain statements that such materials are not an offer of securities for sale in the U.S., that securities may not be offered or sold in the U.S. absent registration or an exemption from registration, and that any public offering of securities to be made in the U.S. will be accompanied by a prospectus; and
(4) Any written materials must not include any purchase order or coupon that may be returned to indicate interest in the offering.
This rule only applies to press activities and materials provided to journalists, and not to materials or information provided to the general public. Materials made available on the internet are considered to be provided to the general public and generally would not qualify for this safe harbor. For a foreign private issuer to take advantage of this safe harbor while using the internet to share materials about such an offering, a system must be established whereby only people outside of the U.S. may access the materials. Of course, once a journalist publishes an article based upon the press conference or press materials, there is no limit to the extent to which such an article may be shared or forwarded.
In our current social media-driven world, this rule seems archaic. The distinction between journalist and blogger is increasingly hazy and the proliferation of content-sharing platforms (e.g., Twitter, Facebook, LinkedIn, Digg, etc.) means that information can cross borders instantly. The latest comprehensive SEC guidance on the use of electronic media by issuers was released in 2000, long before the social media revolution began in earnest. The SEC is currently revisiting the ban on general solicitation, so updated guidance on these issues may be released in the near future. In the meantime, we are stuck with rules that often don’t foot with reality.
Finally, keep in mind that the restriction on press releases and public dissemination of investment information applies only as long as the company or fund is actively raising money in the U.S.. Once the offering is completed in the U.S., the company or fund may announce the good news publicly.
Chris Hurtado wrote this post with some input from Bruce Campbell. Chris is working with Campbell Law Group as a law clerk during his final year of the JD/MBA program at Yale Law School and Yale School of Management. Prior to graduate school, he worked at the Bridgespan Group, where he advised private foundations and operating nonprofits on issues related to strategy, management, and organization. He started his career in corporate finance in the Silicon Valley.