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What a Company Should Know About Participating
in an Investment Forum
By Sarah Tune
[Feb. 2002]
Is your company trying to raise capital in the private market?
If so, you will likely participate in some type of an investment
or venture forum. In today's market, where the money is not flowing
as freely as it did 2 years ago, the ability of a company to present
to a single audience of angel investors, venture capitalists and
others in the field can be critical in raising capital. Therefore,
participating in an investment forum is all the more appealing and
sometimes necessary. However, given the current Enron debacle and
the heightened scrutiny by the Securities and Exchange Commission
("SEC"), companies should not forget that their capital raising
activities are subject to the SEC rules and regulations and the
individual states in which their investors live.
In order to offer securities for sale or sell securities, a company
must either register the securities with the SEC and the applicable
states, or the company must find an exemption for the specific transaction
or security. Many private securities offerings are exempt from the
registration and filing requirements under Regulation D of the Securities
Act of 1933 (the "Act") and the corresponding state statutes. In
addition to meeting the specific requirements of a Regulation D
exemption, a company must obey the rules in Rule 502 of Regulation
D, one of which directly affects how a company can participate in
an investment forum. Specifically, Rule 502(c) prohibits a company,
or any person acting on its behalf, from offering or selling securities
in 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.1
Actions constituting "general solicitation" cause an issuer to
be ineligible to rely on a Regulation D exemption and may cause
the issuer to be in violation of federal and state registration
requirements. In that situation, any investors may be entitled to
rescind their investment. Discussed below are some basic guidelines
that should be considered when a company is participating in an
investment forum.
A. Participate in the Right Forum.
1. Ask Who the Attendees Will Be and How They
Will Be Invited.
Much of the advertising and organization will not be under the
presenting company's control. Therefore, the company should inquire
how the event will be organized and who the attendees will be so
as not to run afoul of the prohibition on general solicitation in
Rule 502(c). The most cautious course of action would be for the
forum to limit the solicitation to accredited investors or those
with whom an issuer or its representative has a pre-existing relationship.
In addition, an event organizer would be prudent to prequalify its
attendees with a questionnaire drafted to elicit sufficient information
to evaluate whether a potential attendee/investor is an accredited
investor or a "sophisticated" investor.
Beyond limiting solicitation to known accredited investors, an
event organizer should follow at least the few rules that have emerged
from SEC No-Action letters:
- The advertisements or solicitations of the event should not
include information regarding the investment opportunities in
specific presenters or companies.
- Direct mail solicitation of those persons known to be accredited
or sophisticated investors is preferable.
- Leaving informational brochures in public places (i.e. - Starbucks,
banks, etc.) is not permissible.
Beyond guidelines on the direct solicitation of investors, the
SEC has provided little guidance on general advertising for the
forums, and the little that has been provided is vague and contradictory.
For example, in one No-Action letter, the SEC permitted "generic
advertising" of the Michigan Growth Capital Symposium in the Venture
Journal, but the letter provided no detail about what the generic
advertising was other than an advertisement for the symposium.2 In
another, the SEC allowed a computer matching service to "receive"
media coverage and place small classified ads in newspapers.3 On
the other hand, the SEC declined to issue a No-Action letter in
a case in which a computer matching service planned to place advertisements
in print and on television and radio.4 Therefore, an event organizer
should proceed with extreme caution in placing ads in general media
venues.
2. Ask How the Event Organizers Will Participate
Beyond Organizing the Event.
Event organizers should remain a neutral third party and its activities
should be limited to organizing the presentations, selecting the
investors and instructing the presenters on what they can or cannot
do at the presentation. In addition, the event organizer should
distance itself as much as possible from the resulting transactions
between the presenters and attendees. The following are some basic
guidelines for the relationship between the event organizer, the
presenters and the investors:
- The event organizer, any entities affiliated with the event
organizer or its employees, directors or officers should be prohibited
from presenting at the event.
- The event organizer should never give investment advice to the
investor/attendee or make representations as to the worth or legality
of the investment opportunities.
- The event organizer should never facilitate or participate in
the transaction.
- The event organizer should not collect any commissions or fees
other than administrative fees.
B. Dos and Don'ts at the Forum.
After the presenting company has determined (with the help of its
legal counsel) that the organization of the forum will most likely
not jeopardize its compliance with the securities laws, the company
needs to ensure that its employees, consultants and others who will
appear at the forum are aware of the implications of violating Rule
502 and other securities laws and how to conduct oneself so as to
limit the potential for violations. The following guidelines, adapted
from the Michigan Growth No-Action Letter, should be considered
appropriate guidelines for most companies participating in an investment
forum:
- Consult with the company's legal counsel to ensure that any
sale of securities should be made in compliance with applicable
state and federal securities laws.
- Do not accept any funds or subscriptions for stock at the event.
- Do not distribute private placement memoranda or similar offering
documents at the event.
- During the company's presentation or in discussions at the event,
do not mention specific financing details (i.e. - offering price).
- Do not rely on the event organizer to establish whether an investor
is an accredited investor. The company should undertake its own
independent evaluation of an investor's accreditation.
- Funds accepted as the result of introductions at the event should
be accepted only from accredited investors.
- Be aware that a violation of the general solicitation rules
could cause the company to (a) lose its exemption under Regulation
D, and (b) be in violation of the registration requirements in
§ 5(a) and (c) of the Securities Act of 1933.
- Do not advertise the event, unless directed by and in conjunction
with the event organizers.
FOOTNOTES:
1 A small exception
to the 502(c) prohibition exists for offers made pursuant to Rule
504 which applies to sales of securities up to $1,000,000 in a twelve-month
period for certain issuers under limited circumstances.
2 Michigan Growth
Capital Symposium, SEC No-Action Letter, 1995 WL 264883 (S.E.C.).
3 Texas Capital
Network, Inc., SEC No-Action Letter, 1994 WL 52739.
4 Colorado Capital
Alliance, Inc., SEC No-Action Letter, 1995 WL 271123.
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