SEC Lifts Ban on General Solicitation and Advertising: What OTCQX, OTCQB and OTC Pink Companies Should Know
On September 23, the JOBS Act-mandated SEC rule permitting general solicitation and advertising of private offerings conducted under SEC Rules 506(c) and Rule 144A went into effect, opening a key door to capital for U.S. and global companies. We explain what the new rule means for OTCQX, OTCQB and OTC Pink companies, some issues companies should consider before engaging in general solicitation of a Rule 506(c) or Rule 144A offering, and what rules have still to be approved.
What do the new rules mean for OTCQX, OTCQB and OTC Pink companies?
Companies that are raising money in offerings under Rule 506(c) of Regulation D or Rule 144A of the Securities Act will now be able to share information publicly, including offering documents. This is a great step forward for improving access to capital and making secondary markets more efficient.
Previously, companies were banned from publicly disclosing information relating to securities offerings unless the offerings were registered with the SEC. Lifting the ban lifts the veil of secrecy that has existed in private offerings, allowing companies to be transparent about the money they are looking to raise in private offerings. In short, an S-1 registration statement is no longer the only means by which a company can raise money transparently.
Lifting the ban on transparency in private offerings will also aid in producing more efficient pricing for private and publicly-traded companies, as investors will be able to price in the performance of a private offering into a company’s valuation. It could create a standard for more companies to share information in the public markets, creating a virtuous circle for issuers and investors. Companies that are providing insight into their business operations and financials for the first time may be inclined to continue providing ongoing news and disclosure, whether on their website or through a public disclosure service like OTC Markets Group’s OTC Disclosure & News Service. This should lead to more efficient markets and a lower cost of capital for companies.
As an advocate for transparency in our public markets, OTC Markets Group strongly supports the added transparency these new rules bring to the private offering process, and we have proposed that the SEC mandate minimum disclosure requirements in Rule 506(c) offerings to create a baseline of disclosure for all companies.
To what companies does this apply?
The new rule applies to any qualifying U.S. or global company looking to raise money in a Rule 506(c) or Rule 144A offering. Rule 506 has traditionally been the most popular method by which companies raise capital in unregistered offerings. The SEC’s recent rule change created a new Rule 506(c) for companies seeking to take advantage of general solicitation and advertising in their offerings.
Rule 144A offerings are related to the resale of securities to qualified institutional buyers (“QIBs”), which are typically large institutions with over $100 million in assets under management. Rule 144A offerings are frequently used by international companies doing private offerings to U.S. investment managers. Lifting the restrictions on general solicitation in Rule 144A offerings should make global companies more comfortable distributing information into the U.S. market.
What is a verified, accredited investor and how do I verify if an investor is accredited?
While general solicitation of Rule 506(c) offerings is now permitted, purchasers in a Rule 506(c) offering must be “accredited investors.” The SEC defines the term “accredited investor” in Rule 501(a). Generally, individuals are considered accredited investors if they have a net worth greater than $1 million (excluding their primary residence) or incomes in excess of $200,000 in the last two years with the expectation of the same in the current year (or $300,000 with a spouse).
Under the new rule, companies are required to take “reasonable steps” to verify an investor is accredited by doing things like reviewing W-2 Forms or other personal financial statements of investors. This is likely to be an onerous process for companies and off-putting to many investors, so a number of investor accreditation-verification services have arisen to help companies surmount this challenge. Companies should talk to a qualified securities attorney prior to determining an investor’s accredited status.
How can I publicize my offering on the OTC Markets Group website and through the OTC Disclosure & News Service?
Companies that are current subscribers to our OTC Disclosure & News Service have the ability to publish company disclosure, including offering documents, prospectuses, investor presentations and other materials via www.otciq.com, our investor relations and market intelligence portal, which directly feeds to their quote page on www.otcmarkets.com and is distributed to market data distributors, financial information providers and our broker-dealer community. Companies should talk to a qualified securities attorney prior to posting any offering documents through the OTC Disclosure & News Service or otherwise.
OTC Disclosure & News Service subscribers that are also customers of PR Newswire or Marketwired may also use these news distribution services to issue press releases about news and offerings, which will be fed automatically to the company’s news page on OTC Markets Group’s websites, eliminating duplication and expanding distribution for these companies. These companies may also use www.otciq.com to distribute press releases through PR Newswire’s expansive network of local, national and Reg. FD compliant news portals – all at discounted rates.
Companies that are not current subscribers to our OTC Disclosure & News Service can find out more about the service here.
What rules have still to be approved?
In connection with the new rules permitting general solicitation and advertising, the SEC has proposed some amendments that would place theseplace additional restrictions and notification requirements on Rule 144A and Rule 506(c) offerings.
Among these is a proposal requiring companies to file an advance notice on a “Form D” with the SEC 15 days prior to engaging in general solicitation in a Rule 506(c) offering. This is in addition to an existing rule that requires companies file a Form D within 15 days after the date of the first sale of securities.
Another proposal would ban from Rule 506(c) offerings for one year any issuer that has failed to comply with Form D filing requirements within the past five years.
OTC Markets Group believes these restrictive rule proposals undermine Congress’ intent as expressed in the JOBS Act. The “Advance Form D” requirement and the complex nature of the Form D process may also leave companies in technical non-compliance with the rules, effectively shutting them out of the capital markets for a year. We detailed our objections to the new rule proposals in a comment letter to the SEC which you can read here.
Who should I talk to if I am considering generally soliciting investors in a Rule 506(c) or Rule 144A offering?
Companies should talk to a knowledgeable securities attorney if they are considering generally soliciting investors under the new rule.
Companies that have questions about how to publish offering documents and prospectuses on the OTC Markets Group website or through our OTC Disclosure & News Service after speaking with their attorney should contact OTC Markets Group’s Issuer Services division at +1 (212) 896-4420 or is@otcmarkets.com.
