The U.S. House of Representatives is set to debate and vote today on The HALOS Act. This bill is identical to the bill the House passed last year.
What Does The Bill Do?
The bill instructs the SEC to revise Regulation D such that the ban on general solicitation or general advertising contained in Rule 502(c) does not apply to:
- a presentation or other communication made by or on behalf of an issuer which is made at an event–
- sponsored by certain specified categories of persons (see below);
- where any advertising for the event does not reference any specific offering of securities by the issuer;
- the sponsor of which follows certain rules (described below); and
- no specific information regarding an offering of securities by the issuer is communicated or distributed by or on behalf of the other, other than as expressly allowed (parameters described below).
What Does Rule 502(c) Say Right Now?
Here is what Section 502(c) of Regulation D says right now:
(c) Limitation on manner of offering. Except as provided in § 230.504(b)(1) or § 230.506(c), neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:
(1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and
(2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising; Provided, however, that publication by an issuer of a notice in accordance with § 230.135c or filing with the Commission by an issuer of a notice of sales on Form D (17 CFR 239.500) in which the issuer has made a good faith and reasonable attempt to comply with the requirements of such form, shall not be deemed to constitute general solicitation or general advertising for purposes of this section; Provided further, that, if the requirements of § 230.135e are satisfied, providing any journalist with access to press conferences held outside of the United States, to meetings with issuer or selling security holder representatives conducted outside of the United States, or to written press-related materials released outside the United States, at or in which a present or proposed offering of securities is discussed, will not be deemed to constitute general solicitation or general advertising for purposes of this section.
As currently drafted, 502(c) is problematic for a couple of different reasons. One, because whether something constitutes a general solicitation or general advertising is considered a question of fact. And two, because if you have generally solicited or generally solicited your offering, bad things can happen to you.
For example, if you generally solicit your offering:
- You can no longer rely on Rule 506(b); you will have to rely on Rule 506(c) and can only accept funds from “accredited investors.”
- If you have to rely on Rule 506(c), you will have to “verify” the accredited investor status of all of your investors in the round, which will mean going back to investors who have already subscribed under what was thought to be a Rule 506(b) offering without verification.
- You can no longer rely on Section 4(a)(2) as a fall back position (which is something that is theoretically possible with Rule 506(b) offering that doesn’t otherwise meet the requirements of Rule 506(b)).
- You have to indicate on your Form D that you file with the SEC and state securities regulators that you are raising money based on Rule 506(c), which may subject you to more regulatory scrutiny.
- If the SEC ever adopts its proposed regulations on 506(c) offerings, if you don’t file your Form D in advance, file your offering materials in advance, you can be disqualified from using Rule 506 for a year.
For these reasons, it is really important companies know what constitutes general solicitation or general advertising and what doesn’t. The consequences are significant if you inadvertently cross the line, and the line could be better defined. Hopefully when the HALOS Act passes, the SEC will more carefully define the parameters of general solicitation so that there are fewer questions about what trips the wire.
Which Types of Persons Or Groups Qualify?
For an event to qualify as an event which won’t trigger general solicitation, it has to be sponsored by one of the following types of persons:
- The United States or any territory thereof, by the District of Columbia, by any State, by a political subdivision of any State or territory, or by any agency or public instrumentality of the foregoing;
- a college, university, or other institution of higher learning;
- a nonprofit organization;
- an “angel investor group” (a defined term);
- a venture forum (not a defined term, but look for the regulations to potentially define this), venture capital association, or trade association; or
- any other group, person or entity the SEC determines by rule.
What Is an “Angel Group”?
For purposes of the HALOS Act, an “angel investor group” is a group that:
- is composed of accredited investors interested in investing personal capital in early-stage companies;
- holds regular meetings and has defined processes and procedures for making investment decisions, either individually or among the membership of the group as a whole; and
- is neither associated nor affiliated with broker, dealers, or investment advisors.
What a Sponsor Must Not Do?
- may not make investment recommendations or provide investment advice to event attendees;
- cannot engage in an active role in any investment negotiations between the issuer and investors attending the event;
- cannot charge event attendees any fees other than administrative fees; and
- cannot receive compensation with respect to the event that would require registration of the sponsor as a broker or a dealer under the Exchange Act, or as an investment advisor under the Investment Advisers Act.
What Can A Sponsor Communicate or Distribute?
The fourth requirement of the HALOS Act is that “no specific information regarding an offering of securities by the issuer is communicated or distributed by or on behalf of the issuer, other than”–
- that the issuer is in the process of offering securities or planning to offer securities;
- the type and amount of securities being offering;
- the amount of securities being offered that have already been subscribed for; and
- the intended use of proceeds of the offering.
A Step In the Right Direction?
The HALOS Act is a step in the right direction, but things would be a lot easier if we simply repealed the verification requirement. It wasn’t contemplated as part of the original text of the JOBS Act, and verification has essentially taken away what might have been one of the most important improvements in the law brought about by the JOBS Act.