The SEC recently adopted final rules relaxing the prohibition on general solicitation and general advertising for certain private placements under Rule 506 of Regulation D and for offerings pursuant to Rule 144A under the Securities Act of 1933, as amended, which will become effective on September 23, 2013. As a result, it is a good time now for foreign broker-dealers that rely for certain activities on Rule 15a-6 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to think carefully about their use of general solicitation and general advertising in Rule 506 offerings and Rule 144A offerings. Rule 15a-6 permits foreign broker-dealers to conduct certain limited activities in the United States and with U.S. persons without having to register as a broker-dealer under the Exchange Act. These activities include: (1) effecting "unsolicited" securities transactions; (2) providing research reports to major U.S. institutional investors (generally, enumerated institutional investors each owning or investing less than $100 million) and effecting transactions in the subject securities with or for those investors; (3) soliciting and effecting transactions with or for U.S. institutional investors (generally, persons that each own or invest $100 million or more) or major U.S. institutional investors through a "chaperoning broker-dealer" (i.e., a U.S.-registered broker-dealer intermediary); and (4) soliciting and effecting transactions with or for registered broker-dealers, banks acting in a broker or dealer capacity, certain international organizations, foreign persons temporarily present in the United States, U.S. citizens resident abroad and foreign branches and agencies of U.S. persons. However, the term "solicitation" has been interpreted broadly by the SEC to include any affirmative effort by a broker-dealer intended to induce transactional business for the broker-dealer or its affiliates; and solicitation includes both efforts to develop an ongoing securities business relationship and efforts by a broker-dealer to induce a single transaction, which would cover general advertising. Although the SEC has indicated that the concept of solicitation is expansive, fact specific and variable in nature, examples of conduct considered solicitation by the SEC include the following: (a) telephone calls from a broker-dealer to a customer encouraging the use of the broker-dealer to effect transactions, (b) advertising one's function as a broker, and (c) recommending the purchase or sale of particular securities with the anticipation that the customer will execute the recommended trade through the broker-dealer. The SEC also views a series of frequent transactions or a significant number of transactions between a foreign broker-dealer and a U.S. investor as being indicative of solicitation through the establishment of an "ongoing securities business relationship." In light of all of the above, foreign broker-dealers should carefully review and establish procedures to ensure that they are not inadvertently engaging in such prohibited solicitation (including advertising) themselves rather than through a chaperoning broker-dealer, given that general solicitation and general advertising are now permitted for Rule 506 offerings and Rule 144A offerings (although the impact on Rule 144A offerings is expected to be less extensive).
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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