Plastic2Oil Inc (PTOI)

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"For intentional selective disclosures of material information, a reporting company must make the information simultaneously available to the public through an SEC filing, by distributing a press release through a widely disseminated news or wire service, or by another method or combination of methods that is reasonably designed to provide broad, non-exclusionary distribution of the information."

http://www.thelebrechtgroup.com/tlg-publications/fair-disclosure-during-pipe-transactions/


"Fair Disclosure During PIPE Transactions

by Edward Weaver on February 9, 2009

Fair Disclosure During PIPE Transactions

With the current scarcity of credit, small public companies struggling to raise cash in either the debt or equity markets have been increasingly looking for alternative financing through private investments in public equity, also known as PIPEs. During PIPE transactions, reporting company executives may intentionally or inadvertently share material non-public information with PIPE investors, who, as a result, gain an informational edge over the company’s other shareholders and the ability to use that edge to profit. This type of selective disclosure is prohibited by Regulation FD. For executive officers of reporting companies who are contemplating PIPE financing, there is a simple solution to this problem. For executive officers who have made proscribed selective disclosures under Regulation FD in connection with a PIPE transaction, the Securities and Exchange Commission (“SEC”) has recommended a particular course of action.

PIPE Financing

In a PIPE transaction, investors typically purchase securities directly from a publicly traded company in a private placement – an offering of securities made only to a small group of interested buyers. A reporting company that sells securities in a private placement does not pre-register the securities with the SEC. Instead, the company relies on an exemption from registration, typically Rule 506 promulgated under Regulation D of the Securities Act of 1933 (the “Securities Act”). Because the sale of the securities is not pre-registered with the SEC, the securities are “restricted,” and, therefore, cannot be immediately resold by the investors into the public markets. Consequently, the reporting company will usually agree to register the restricted securities with the SEC shortly after the closing of the PIPE transaction. PIPE investors typically require a discount from the market price of the company’s common stock because of this period of illiquidity between the closing of the transaction and the effectiveness of the registration statement.

Countless private equity funds and hedge funds have been established over the past few years to invest in PIPEs. These investors like buying nearly liquid securities at a discount to the market price, which discount can range from 5% to 25%. Small public companies like PIPE financing because of the access to capital and the speed with which PIPE transactions can close – a few weeks in some cases.

Regulation FD (Fair Disclosure)

Overview

On August 10, 2000, the SEC adopted Regulation FD (Fair Disclosure), which requires a reporting company to disseminate all material nonpublic information publicly and not only to select persons. For purposes of Regulation FD, information is “material” if there is a substantial likelihood that a reasonable shareholder would consider it important in making an investment decision. Information is “nonpublic” if it has not been disseminated in a manner making it available to investors generally.

For intentional selective disclosures of material information, a reporting company must make the information simultaneously available to the public through an SEC filing, by distributing a press release through a widely disseminated news or wire service, or by another method or combination of methods that is reasonably designed to provide broad, non-exclusionary distribution of the information. A reporting company must make similar public disclosure of non-intentional disclosures of material nonpublic information promptly (no later than 24 hours) after it knows (or is reckless in not knowing) that the information selectively disclosed was both material and nonpublic.

Companies Subject to Regulation FD

Regulation FD applies to all companies that file periodic reports with the SEC, including closed-end investment companies. The regulation does not apply to other investment companies, foreign governments or foreign private issuers.

Disclosure By a Person Acting on a Company’s Behalf

Regulation FD only covers communications made by persons acting on a company’s behalf. This includes the following persons:

senior officials of a company (executive officers, directors, investor and public relations officers or other employees performing similar functions); and
any other officer, employee or agent of an issuer who regularly communicates with securities market professionals or securities holders.

The above listed persons cannot circumvent Regulation FD by directing non-covered persons to make the selective disclosures. Regulation FD also states that issuers are not liable for selective disclosures made by persons who breach a duty of trust or confidence to the company.

Persons to Whom Selective Disclosure is Prohibited

Regulation FD applies to communications made by or on behalf of an issuer to the following four categories of persons and persons associated or affiliated with those persons:

broker-dealers;
investment advisers and certain institutional investment managers;
investment companies and their hedge funds; and
holders of the issuer’s securities under circumstances in which it is reasonably likely the recipient will trade on the basis of the information.

The rule excludes ordinary-course business communications, such as communications with the media, customers or suppliers and government agencies. Additionally, the regulation expressly excludes the following four types of communications:

communications with temporary insiders, such as attorneys, investment bankers and accountants;
communications with persons who expressly agree to maintain the information in confidence;
communications with credit rating agencies who make their credit ratings publicly available; and
communications made in connection with most registered securities offerings.

Liability for Violations of Regulation FD

A failure to comply with Regulation FD may subject a company to an SEC enforcement action seeking a cease-and-desist order or a civil action seeking an injunction and/or civil monetary penalties. The SEC also may bring an action against the individual responsible for the violation as “a cause of” the violation or as an aider or abettor. Regulation FD expressly states that failure to make a public disclosure required solely by Regulation FD will not result in antifraud liability or private rights of action; however, disclosures made under Regulation FD containing false or misleading information, or omitting material information, will not be protected from traditional antifraud liability.

For Executives Who Are Contemplating PIPE Financing

In a typical PIPE transaction, due diligence generally consists of a review of the company’s press releases and filings with the SEC, and probing meetings and conference calls with the company’s management, counsel and accountants. During this due diligence period, particularly during meetings and conference calls, management is susceptible to making selective disclosures of material nonpublic information to PIPE investors, in violation of Regulation FD. However, Regulation FD excludes communications with persons who expressly agree to maintain the information in confidence. Thus, assuming management does not wish to publicly disclose the material information it discloses nonpublicly in the PIPE transaction, it must protect against the misuse of that information by having the PIPE investors and any other recipients of such information expressly agree to maintain it in confidence. The SEC has indicated that an express oral agreement will suffice. However, if a company intends to rely on a person’s agreement to maintain information in confidence, it should document the agreement in writing with legal counsel. Finally, a confidentiality agreement may also be obtained with a person or small group of individuals within a larger organization to prevent disclosure to the larger organization.

In addition, management of small reporting companies should consider adopting disclosure policies and procedures to avoid Regulation FD violations. Regulation FD does not explicitly require companies to adopt policies and procedures to prevent such violations, however, the SEC has indicated that the existence of appropriate disclosure policies and procedures to guard against selective disclosure, and a company’s adherence to them, may be relevant to determining the company’s intent with regard to a selective disclosure.

For Executives Who Have Made Proscribed Selective Disclosures

If management has made intentional selective disclosures of material nonpublic information to a PIPE investor, without a confidentiality agreement from the investor, it is the SEC’s view that public disclosure of that information under Regulation FD is appropriate, even if as a result, the Securities Act registration exemption may be unavailable.Rule 506, the registration exemption most often relied upon by companies for PIPE transactions, would be unavailable to a company that failed to comply with its rule prohibiting a company and any person acting on its behalf to offer or sell its securities by any form of “general solicitation” or “general advertising.”Public disclosure of the information disclosed nonpublicly in the PIPE offering might be deemed “general advertising.” Thus, a company that follows the SEC’s advice to publicly disclose under the above circumstances risks losing the Rule 506 exemption and raising a different set of undesirable legal consequences.

If management has made a non-intentional selective disclosure of material nonpublic information to a PIPE investor, without a confidentiality agreement from the investor, a confidentiality agreement may be obtained after the disclosure is made, but before the recipient of the information discloses or trades on the basis of such information. If a confidentiality agreement is obtained prior to the time that the company will be obligated to “promptly” (within 24 hours) file the information in accordance with Regulation FD and prior to the time that the recipient of the information discloses or trades on the basis of the information, then non-intentional disclosures of material nonpublic information do not need to be disclosed publicly. However, failure to obtain the confidentiality agreement on a timely basis will likely trigger the need to publicly disclose the material information privately shared with the PIPE investor.

A violation of Regulation FD places management in the no-win situation of choosing between losing the registration exemption or an ongoing violation of Regulation FD. A failure to file or otherwise make required public disclosure under Regulation FD will be considered a violation for as long as the failure continues, and the SEC may seek more severe sanctions for violations that continue for a longer period of time. Consequently, management must be aware of the potential complications that selective disclosure of material nonpublic information in PIPE transactions can create.

Conclusion

As discussed above, the currently frozen credit markets have made PIPE financing enticing for small reporting companies who are willing to exchange discounted securities for cash. However, because Regulation FD prohibits the selective disclosure of material nonpublic information by management to PIPE investors during PIPE offerings, executive officers who are contemplating PIPE financing must protect against the misuse of that information by having the PIPE investors expressly agree in writing to maintain the material information in confidence. For non-intentional selective disclosure, a confidentiality agreement may be obtained within 24 hours after the disclosure is made, but before the PIPE investor discloses or trades on the basis of such information. With respect to non-intentional and intentional selective disclosures of material nonpublic information to a PIPE investor, without a confidentiality agreement, the SEC wants public disclosure of that information, even at the expense of the company’s registration exemption.

This article is not a complete and thorough discussion of Regulation FD or the requirements, cases and rules applicable to Regulation FD. This article is intended only as a general discussion of these issues. It should not be regarded as legal advice.

Edward H. Weaver is an attorney with The Lebrecht Group, APLC, located in Irvine, California and Salt Lake City, Utah. He can be reached at [phone] [e-mail] . Please visit our website at www.thelebrechtgroup.com for further information."