United States: Corporate And Financial Weekly Digest - Volume IX, Issue 6

Last Updated: February 14 2014

Edited by Robert Weiss and Gregory Xethalis


SEC Division of Corporation Finance Issues Guidance on Rule 506(c) Private Placements

On January 23, the Securities and Exchange Commission's Division of Corporation Finance issued new Compliance and Disclosure Interpretations (C&DIs) with respect to Rule 506 exemptions from registration under the Securities Act of 1933. These C&DIs relate to the rules adopted by the SEC in September 2013 pursuant to Section 201(a) of the JOBS Act, which required the SEC to eliminate the prohibition on general solicitation as long as all investors are accredited investors and the issuer takes reasonable steps to verify that purchasers are accredited investors. The new C&DIs include the following interpretive guidance:

C&DI 260.33 clarifies that an issuer that commenced an offering before September 23, 2013 (the effective date of the new Rule 506(c) exemption), is not required to take reasonable steps to verify the accredited investor status of purchasers of securities in the offering before September 23, 2013. Once the issuer begins to make sales in reliance on Rule 506(c), it must take reasonable steps to verify that purchasers of securities in the offering are accredited investors. The issuer must also amend any previously filed Form D to reflect that it is relying on the Rule 506(c) exemption.

C&DI 260.34 provides that an issuer that commenced an offering before September 23, 2013, in reliance on what is now the Rule 506(b) exemption, may switch from the Rule 506(b) exemption to the Rule 506(c) exemption even if Rule 506(b) sales were made after September 23 and included non-accredited investors, provided that all securities thereafter sold in reliance on the Rule 506(c) exemption are sold only to accredited investors and the issuer takes reasonable steps to verify that such purchasers are accredited investors.

The guidance suggests there are reasonable grounds for allowing Rule 506(b) issuers that have an existing marketing ability and the ability to implement Rule 506(c) compliance procedures to switch to the Rule 506(c) exemption. The Rule 506(c) exemption applies to operating companies as well as private funds. Nevertheless, the relative rarity of Rule 506(c) offerings to date suggests that compliance experts have not yet updated compliance policies and procedures to deal with Rule 506(c) publicly solicited private placements or that the Rule 506(c) verification requirements are onerous.


SEC Issues No-action Relief Regarding Registration of M&A Brokers

The Securities and Exchange Commission Division of Trading and Markets (Division) issued no-action relief on January 31, in response to a request from attorneys on behalf of firms effecting securities transactions in connection with the transfer and control of a company to a buyer that will actively operate the company or its business (each, an M&A Broker). The no-action relief specifies that the Division would not recommend enforcement action to the SEC if an M&A Broker engages in certain activities in connection with the purchase or sale of privately held companies without registering as a broker-dealer pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act). A "privately held company" for purposes of the no-action letter is generally an operating company that does not have any class of securities registered, or required to be registered, with the SEC. Previously, the SEC and relevant court proceedings held that a person in the business of effecting the sale of operating businesses through the sale of securities was acting as a "broker," as such term is defined under Section 3(a)(4) of the Exchange Act. Accordingly, absent an exemption, such person would be required to register as a broker-dealer under Section 15(b) of the Exchange Act. The request letter distinguishes mergers, acquisitions, business sales and business combinations from traditional capital-raising securities transactions because, among other reasons, the buyer takes an active role in operating a company that is the subject of a merger or acquisition involving a change of control, as opposed to the passive investment objectives of an investor in an equity-raising transaction. The SEC's issuance of no-action relief to M&A Brokers that meet certain conditions (see below) represents a major shift in the SEC's position and a substantial change to the regulatory framework for M&A Brokers.

The SEC set a number of conditions in issuing the no-action relief, including, among other things, that (i) the buyer will control (e.g., own 25 percent or more of the company) and actively operate the company after the transaction, (ii) the M&A Broker will not provide financing and may not bind a party to the transaction, (iii) the M&A Broker may not assist in forming the group of buyers, (iv) the M&A Broker may not have custody of the funds or securities issued or exchanged in connection with the transaction and (v) the transaction will not involve a public offering.

The no-action letter only exempts M&A Brokers that meet the conditions of the letter from the registration requirement under the Exchange Act, but does not discuss any state registration requirements that may apply.

Click here to read the SEC's January 31, 2014 No-Action Letter.


CFTC Issues Guidance on New Filing Requirements

On February 5, the Division of Swap Dealer and Intermediary Oversight (DSIO) of the Commodity Futures Trading Commission issued guidance to futures commission merchants (FCMs) and depositories regarding procedures for complying with certain new filing requirements under the CFTC's enhanced customer protection rules, which were effective January 13. The guidance provides information to FCMs and depositories for filing (i) acknowledgement letters for accounts holding customer funds, (ii) "early warning" notices and (iii) certain financial and risk reports. Additionally, DSIO reminds FCMs to use the WinJammer Online Filing System when filing all letters, notices and reports covered in the guidance. A short summary of the new and amended regulations referenced by the guidance is available in the Corporate and Financial Weekly Digest edition of November 1, 2013.

The guidance is available here.

SEC Extends Exemptions for Security-based Swaps

On February 5, the Securities and Exchange Commission issued an extension of interim final rules that provide exemptions for security-based swaps from securities laws under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Trust Indenture Act of 1939. Originally set to expire on February 11, 2014, the exemptions will now remain effective an additional three years until February 11, 2017. The exemptions allow market participants to continue trading security-based swaps without interruption while the SEC finishes its regulatory regime for security-based swaps and evaluates the implications of including security-based swaps in the definition of "security."

The interim final rule extension is available here.


SEC Issues Risk Alert on Investment Advisers' Due Diligence Processes for Selecting Alternative Investments

The Securities and Exchange Commission's Office of Compliance Inspections and Examinations (OCIE) issued a risk alert on January 28 regarding the due diligence practices of investment advisers when they recommend or place clients' assets in alternative investments, including private funds such as hedge funds, private equity funds, venture capital funds, real estate funds and funds of private funds.

The risk alert was issued following OCIE staff examinations of the due diligence and related investment advisory processes of more than ten SEC-registered investment advisers that invested in or recommended private fund and fund of private fund investments. The staff evaluated how such advisers: (i) performed their due diligence; (ii) identified, disclosed and mitigated conflicts of interest (e.g., benefits to the adviser or its employees for allocations made to private funds) and (iii) utilized experienced investment teams when evaluating complex investment strategies and fund structures.

The risk alert reminds advisers that exercise discretion to purchase alternative investments on behalf of clients that they must determine whether such investments meet the clients' investment objectives and are consistent with the investment principles and strategies that were disclosed by the manager of the alternative investment to the adviser. With respect to the due diligence processes, the risk alert provides a roadmap of current industry trends and practices to comply with the Investment Advisers Act of 1940 and federal securities laws.

The risk alert cites certain deficiencies in the due diligence processes of several of the advisory firms examined, including: (i) omitting alternative investment due diligence policies and procedures from their annual reviews, even though these investments comprised a large portion of certain advisers' investments on behalf of clients; (ii) providing potentially misleading information in marketing materials about the scope and depth of due diligence conducted and (iii) having due diligence practices that differed from those described in the advisers' disclosures to clients.

Click here to read the SEC's January 28, 2014 Risk Alert.


District Court Upholds SEC's Partial Win in Bank Fraud Suit

The US District Court for the Southern District of Florida recently refused to reconsider its earlier decision granting partial summary judgment in favor of the Securities and Exchange Commission in a securities fraud case against BankAtlantic Bancorp, Inc.

The SEC alleged that BankAtlantic Bancorp, Inc., now known as BBX Capital Corporation (BBX or Bank), failed to disclose problems with its commercial real estate portfolio. After the court granted summary judgment in favor of the SEC on the issue of falsity, BBX moved for reconsideration.

In finding that BBX had not met the high standard necessary for a motion to reconsider, the court noted that the Bank did not disclose—and in some cases affirmatively misrepresented—"the existing trend of crumbling creditworthiness evident in the entire Commercial Residential Portfolio." The court rejected BBX's argument that it made adequate disclosures, explaining that the Bank "cannot inoculate [itself] from liability by informing investors about potential problems that might arise based on what the market may do in the future ... when, at the same time, they failed to disclose to investors current problematic trends [it] knew about."

The case is currently scheduled for trial in November.

SEC v. BankAtlantic Bancorp,. Inc. et al., Case No. 12-cv-60082 (S.D. Fla. Jan. 30, 2014).

SDNY Grants SEC's Final Summary Judgment Claim in Securities and Investment Advisor Fraud Case

The US District Court for the Southern District of New York granted the Securities and Exchange Commission summary judgment on its one outstanding securities fraud claim against Alberto Vilar and Gary Tanaka, co-founders of Amerindo Investment Advisors, Inc., after the US Court of Appeals for the Second Circuit clarified the meaning of a "domestic transaction in any security."

The SEC alleged that Vilar and Tanaka diverted millions from investors to their own businesses. In a related criminal proceeding, a jury found the pair guilty of securities fraud and investment advisor fraud in 2008. While the criminal case was pending on appeal, the district court granted the SEC's motion for summary judgment on all claims except one, finding that the criminal convictions had conclusively established three out of four elements for securities fraud, and thus the doctrine of issue preclusion barred Vilar and Tanaka from disputing those elements in the SEC's case. The court held that the final element—a "domestic transaction"—had not been conclusively established in the criminal case, and conducted its own analysis, ultimately concluding that all investors except one (the Mayer Family) had engaged in a "domestic transaction."

After the summary judgment decision, the Second Circuit issued its judgment and opinion for the appeal in the criminal case. In a footnote, the Second Circuit expressly disagreed with the district court's interpretation of "domestic transaction" as applied to the Mayer Family, and explained that the domestic nature of a transaction "concerns where, physically, the purchaser or seller" committed to buying or selling a security.

In light of the Second Circuit's opinion, both the SEC and Vilar and Tanaka moved for reconsideration of the district court's summary judgment decision. On that motion, the district court found that the Second Circuit's ruling in the criminal case was controlling, intervening law, and thus the court was required to reconsider its prior decision. Analyzing each of the investors, including the Mayer Family, the court concluded that all had engaged in domestic transactions because a preponderance of the evidence showed that each was physically present in the United States. Thus, the court reaffirmed its grant of summary judgment for earlier investors and granted summary judgment for the Mayer Family claims.

SEC v. Amerindo Inv. Advisors, Inc. et al., Case No. 05-cv-5231 (RJS) (S.D.N.Y. Jan. 31, 2014).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions