The latest issue of our Socially Aware newsletter is now available here.

In this issue of Socially Aware, our Burton Award-winning guide to the law and business of social media, we analyze a groundbreaking FTC complaint alleging deceptive practices online that could turn website Terms of Use into federal law; we summarize a U.S. Supreme Court copyright case that could impact existing technologies and future technological innovation; we discuss a ruling from Europe’s highest court that will aid copyright owners in the fight against illegal streaming sites; we report on new SEC guidance on social media use by investment advisers as it relates to testimonials; we take a look at the development of the Internet of Things and the many regulatory, privacy and security issues that go along with it; and we highlight a recent class action decision that potentially impacts any company that hosts videos on its website.

All this—plus a collection of thought-provoking statistics about digital music…

The staff of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (SEC) recently provided guidance on applying its rules regarding communications in connection with securities offerings, tender offers, business combinations and proxy contests when statements are made utilizing certain social media channels. The staff’s guidance permits the use of a hyperlink to information required by certain rules when a character- or text-limited social media channel such as Twitter is used for a regulated communication, and also confirms that, at least in the context of a securities offering, a communication that has been re-transmitted by a third party that is not an offering participant or someone acting on behalf of the issuer is not attributable to the issuer for the purposes of the rules that apply to such communication. Continue Reading SEC Staff Guidance on the Use of Social Media in Securities Offerings, Tender Offers, Business Combinations and Proxy Contests

Acknowledging the growing demand by consumers for information through social media, the Division of Investment Management set some ground rules on how investment advisers can use social media and publish advertisements featuring public commentary about them from social media sites.

Under the new rules, investment advisers may refer to commentary published in social media without violating the rule prohibiting publication of client “testimonials” if the content is independently produced and the adviser has no “material connection” with the independent social media site. While not a bright line in the sand, the distinction goes a long way to clear up this murky area of the law. Continue Reading New Regulatory Guidance on Use of Social Media by Investment Advisers

Today’s consumers want to engage in a new way with the companies from which they buy goods and services.  Although some UK financial services organisations are leading the way in terms of their use of social media, on the whole, engagement in social media by UK financial services firms is still relatively limited. This is particularly evident when compared against activity in other sectors and when compared against the level of social media engagement by U.S. and Asian firms. Are legal and regulatory concerns to blame?

Current State of Market

How financial services (FS) organisations engage with social media can help differentiate them from their peers. Particularly when dealing with younger consumers such as the student market, FS organisations need to engage with consumers in the most effective way, which could be by placing a topical blog on Pinterest, a fun video on YouTube or interacting with consumers via Twitter or Facebook (rather than running a traditional print or broadcast campaign). Simply having a Twitter account or Facebook page which pushes out information is no longer enough. Genuine interactive engagement is what consumers are looking for and is the key to the most successful social media strategy.

The best users of social media in the FS sector appreciate that harnessing of social media is as much about raising your brand profile, as promoting specific products or services. Consider the huge success of Comparethemarket.com’s Russian meercat brand ambassador who has almost 60,000 followers on Twitter. Also, consider that the winner of the Shorty Award 2013 for Best Use of Social Media for Financial Services  was Citi for its Citi-Connect: Professional Women’s Network on Linked-In. Neither of these campaigns directly relates to the products and services offered by the relevant firm, but both have been very successful in terms of brand awareness. Social media can also be used to good effect to highlight organisations’ corporate social responsibility and philanthropy initiatives – to help counteract the ‘fat cat’ perception of bankers and financiers. Given that social media enables disgruntled consumers to find a louder voice and journalists are increasingly using social media to get stories, firms need to use social media to try to change the online conversation about their organisations. In fact, the best social media strategies can go beyond engaging consumers and actually convert them into advocates for a brand. The perceived benefits of brand advocacy are huge. According to research, recommendations from personal acquaintances or opinions posted by consumers online are the most trusted forms of advertising. But social media is not just a marketing tool – it can bring wider business value. For example, it can be used in recruitment, customer insights, research and development, issue/crisis management and customer services.  (It is also worth pointing out that social media is not just for retail banks and consumer-focused FS firms. It can also be harnessed by firms in the B2B sector. For example, some companies are creating networking and educational communities for their target audience (e.g. SMEs, IFAs, etc.) within more business-focused social media platforms such as LinkedIn.)

However, despite the myriad of opportunities that social media offers and the size of the UK FS sector compared to other sectors, the use of social media by FS organisations still appears to be in its infancy. The reluctance by UK financial organisations to fully engage with social media may be down to general conservatism on the part of the sector, a fear of public dialogue with customers and a lack of understanding and expertise in-house in terms of social media and its value. However, it also appears in no small part to be down to uncertainty as to the application of financial laws and regulations to social media. So, what are the legal and regulatory considerations that UK FS organisations have to consider when embarking on a social media strategy and, with the recent replacement of the Financial Services Authority (FSA) by the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA), will we see any change?

Financial Rules

In the U.S. various regulatory guidance, including from FINRA, FFIEC and the SEC, on the use of social media has been published. However, to date, in the UK, there has been very limited regulatory guidance regarding social media and the FCA has recently reiterated that it has no current plans to issue any further guidance on the basis that it believes that its rules are media neutral. So it remains up to firms to evaluate their activities carefully against the applicable rules. Some of the key issues for firms to consider include the following.

Principles for Business

In terms of overarching obligations, when operating online, a firm must pay attention to the fundamental principles contained in the FCA Handbook, in particular, to treat customers fairly and provide information that is clear, fair and not misleading.

Communications and Promotions

Firms need to ensure that all social media activities comply with the applicable rules concerning communications and promotions (“FCA Promotion Rules”). Per Section 21 of the Financial Services and Markets Act, a financial promotion is a communication that is an invitation or inducement to engage in investment activity that is communicated or approved by an authorized person. Financial promotions must comply with all of the applicable FCA Promotion Rules, with the overriding requirement that promotions must be ‘fair, clear and not misleading.’

As indicated above, the FCA believes that its rules apply in a way that is media neutral; the rules focus on the content of communications and not on the medium used. Therefore, in its opinion, applying the rules to financial promotions using new media is no different to financial promotions made using any other medium. (However, this is easier said than done – the FCA Promotion Rules were created to apply to traditional forms of advertising, but now, for example, need to be interpreted in terms of a 140 character tweet!)

Organisations should note that:

  1. banner ads, tweets, sponsored links, hyper-text links, posts on LinkedIn and Facebook and other communications made using social media may all be considered promotions. (There are certain exceptions in relation to image advertisements (see below));
  2. tweets posted by customer would not be financial promotions, but re-tweets by a firm could be;
  3. just because products or services are not explicitly mentioned in a communication does not mean that the communication is not a promotion;
  4. in terms of references to past performance, firms will need to include a 5-year chart plus suitable risk warning;
  5. risk warnings must be displayed prominently and clearly. (Be aware that roll-over type risk warnings will not be sufficient as the FCA considers that many people may read an advert without hovering over it);
  6. there is no ‘one-click’ rule; being one-click away from the necessary information does not automatically make a promotion requirement. Each promotion must be ‘standalone compliant’ – it is not acceptable for a firm to omit important information or risk statements from promotions on the basis that the information will be provided later on in the process; and
  7. even if a communication is not classed as a promotion (e.g., it’s a response to a query, complaint or general correspondence, etc.) it will still need to be clear, fair and not misleading.

An image advertisement will not be considered a promotion in terms of investment and mortgage products, but there is no equivalent exception for insurance products. However, note that an image advertisement is narrowly construed and is limited to an advertisement which contains (i) the name of the firm, (ii) a logo or other image, (iii) contact details and (iv) a reference to the types of regulated activities the firm provides or its fees or commissions (investments) or a brief factual statement of the firm’s main occupation (mortgages). Anything more and the communication will fall into the category of promotion.

The potential consequences for breaching the FCA Promotion Rules include: (a) criminal penalties; (ii) agreements entered into as a result of the promotion being unenforceable and compensation payable; and/or (iii) the promotion being banned.

To ensure compliance with the FCA Promotion Rules, firms should:

  1. have appropriate policies and procedures in place;
  2. consider whether social media is a suitable method for the communication, taking into account the nature and complexity of the product or service (e.g., given the space limitations of the particular channel);
  3. consider whether the promotion meets the requirements for standalone compliance;
  4. be mindful of the rules when purchasing (or instructing third parties to purchase) search terms from search engine providers;
  5. keep appropriate records of all financial promotions; and
  6. review communications regularly to ensure that promotions posted via social media remain up-to-date (new media may date more quickly than traditional media).

Complaints Handling

Per the Financial Conduct Authority Handbook, when handling complaints, firms must: (i) investigate each complaint competently, diligently and impartially, (ii) assess each complaint fairly, consistently and promptly, (iii) provide fairly and promptly a clear assessment of the complaint and an offer of redress or remedial action, if appropriate and (iv) ensure any offer of redress or remedial action that is accepted is settled promptly. The FCA classes a complaint as any oral or written expression of dissatisfaction, whether justified or not, about the provision of, or failure to provide, a financial service or a decision by a firm in relation to a consumer redress scheme.  Generally the complaint must allege that the complainant has suffered (or may suffer) financial loss, material distress or material inconvenience. In the context of social media, the challenge for firms is whether they can identify when complaints are being made via social media and whether their complaint handing procedures capture such complaints.

Outsourcing

If a firm outsources any critical activities as part of its social media strategy it will need to take account of the applicable outsourcing rules and guidance contained in SYSC 8 of the FCA and PRA Handbook.

Market Abuse

A firm is required to comply with applicable market abuse and related rules, including:

  1. not make false or misleading statements or omit material information;
  2. not disclose any inside information or commit any other form of market abuse;
  3. not disclose inside information;
  4. keep the market reasonably informed; and
  5. comply with its obligations in terms of announcements;

To avoid falling foul of the applicable rules via social media communications, firms should: (i) put in place appropriate social media policies, procedures and training for employees, (ii) synchronize any social media release with any formal release to the market; and (iii) carry out appropriate internal and external monitoring (e.g., of employees statements on social media and any statements made on linked third-party sites).

FCA Monitoring

Firms should note that even if they are not monitoring what is being said about them online, the regulator might be. When the Bank of Scotland was fined £4.2 million in 2012 for failing to keep accurate mortgage records, this failure was spotted by the regulator through monitoring complaints posted on a consumer forum website. Indeed, in March 2013, the new FCA chief executive indicated that the FCA plans to carry out pro-active monitoring of firms via social media, both for spotting illegal promotional activity and for wider market trends. “…What’s new is that we won’t just be relying on regulatory reports back from firms, but on reports from consumer bodies, internet monitoring, the media and even on Twitter. In the past, the emphasis was on firms’ regulatory reporting. We will be much broader in our approach.”

General Issues

Of course, there are a whole host of general legal issues arising from social media that will also need to be considered, e.g., in terms of:

  • employees’ use of social media (monitoring, policies, training, liability, disclosure of confidential/proprietary information, etc.);
  • use of social media in recruitment;
  • privacy;
  • security;
  • crisis management and damage to reputation;
  • protection & infringement of intellectual property rights;
  • general advertising and marketing rules;
  • consumer protection/unfair terms & trading rules;
  • user generated/third party content (user terms & conditions, notice & takedown policies and procedures, disclosure of material connections with third party bloggers, etc.); and
  • insurance.

Lastly, many firms are global institutions and so it is always going to be important for firms to ensure that individuals outside of the UK are not unintentionally targeted by any UK social media campaigns, or if they are intended to be targeted, for firms to consider any specific rules that they will need to comply with in the applicable jurisdiction.

Strategy

Above all, if financial organisations want to fully harness the potential of social media, they need to spend time and effort creating a social media strategy which has the full backing of relevant stakeholders. When pulling together their strategy, firms will need to take into account all relevant legal & regulatory issues, but they will also need to consider wider factors such as:

  • what they want to stand for in social and what they want to use social media for? What value will it bring to the company? What value will it bring to their customers?
  • understanding social media across all business lines – it’s no longer just a marketing issue;
  • understanding their audience and relevant influencers (e.g., bloggers, journalists, forums, etc.);
  • putting in place adequate and appropriate resources, policies and procedures to manage social media activities;
  • thinking like a publisher – what is engaging content for customers and influencers?; and
  • how they can respond quickly and appropriately to online criticism.

Conclusion

As a result of the recent financial crisis, consumers’ trust in financial organisations is at an all-time low and so it is increasingly difficult for financial organisations to get the positive attention of consumers. New competitors (e.g., from retail and telecoms, as well as start-ups) are moving into the FS market, many of which may be more agile and better equipped in terms of a digital strategy than the traditional finance brands. Social media provides great opportunities for firms to engage with customers in a new and interactive way and whilst organisations need to be careful to comply with the relevant laws and regulations, they need to get on board, and fast, if they want to be one of the winners in the new digital world.

When the Securities and Exchange Commission lifted the ban on general solicitation and general advertising for private offerings of securities, can marketing blitzes on Twitter and other social media sites be far behind?

It is not likely that we will see hedge funds aggressively touting investments on Twitter, or on bus shelters or milk cartons any time soon, because federal regulations will limit what issuers can say in these media.  Even then, hedge funds and other issuers will want to proceed cautiously, because they must comply with specific rules designed to prevent fraud.

Lifting the ban on general solicitation.  For decades, start-ups, hedge funds and other companies seeking capital could only solicit investors in private offerings.  These issuers could only publicly offer their shares if they registered such shares with the SEC.  Further, commingled funds could only publicly offer their shares by registering with the SEC under the Investment Company Act.  In either case, registration involved significant capital, disclosure, reporting and operational restrictions that start-ups and hedge funds found prohibitive.

The Jumpstart Our Business Startups Act (JOBS Act), which Congress enacted in April 2012,  ordered the SEC to relax the ban on general solicitation and general advertising in certain private offerings.  Among other things, this law required the SEC to adopt rules to allow issuers to make a general solicitation of investors, and to advertise, without registering with the SEC.

On July 10, 2013, the SEC published regulations implementing the JOBS Act’s mandates to ease the ban on general solicitations.  While this development is welcome news to start-ups and small hedge funds that want new investors but can’t afford the costs of registering with the SEC, the rules come with some important catches.  Most notably, issuers relying on the new exemption can only sell shares to “accredited investors,” that is, investors that meet minimum annual income or net worth thresholds.  They must also file with the SEC “Form D,” which contains specific information about the issue and the issuer.  Click here to read our client alert, Goldilocks, Porridge and General Solicitations.

General Advertising. The SEC proposed rules that would require issuers to disclose prominently certain warnings in “any written communication that constitutes a general solicitation or general advertising” of any offering that relies on the new exemption from registering shares with the SEC.  Social media entries and blogs fall squarely within this category, thus creating compliance challenges for issuers that want to find investors in social media.  For example, all issuers must disclose in all written communications and advertising that:

  • the securities may be sold to “accredited investors;”
  • the securities are being offered in reliance on an exemption from the registration requirements of the federal securities laws and thus do not have to comply with those disclosure requirements;
  • the SEC has neither passed upon the merits nor approved the offering;
  • the securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and
  • the investment involves risk.

To be sure, it will be difficult to cram these disclosures into a 140 character tweet.

Private funds.  Private funds, such as hedge funds and private equity funds, must also disclose that the offering is not subject to the protections of the Investment Company Act, which regulates investments in mutual funds, ETFs and other registered pooled investment vehicles.  Further, private funds that want to mention performance would also be required to disclose, in any written communication, that, among other things:

  • performance data represents past performance;
  • past performance does not guarantee future results;
  • current performance may be lower or higher than performance data presented;
  • the private fund is not required by law to follow any standard methodology when calculating and representing performance data;
  • the performance of the private fund may not be directly comparable to the performance of other funds; and
  • investors can call a phone number or visit a website for more current performance data.

The SEC believes that private funds should be subject to the same rules for advertising and written communications that apply to mutual funds, whether or not the private funds rely on the exemption from registration.  Click here to read about the SEC’s performance advertising guidelines.

The SEC is watching.  The SEC will monitor general solicitations, general advertising and social media entries posted by issuers, including private funds.  This area is fertile ground for SEC enforcement proceedings.  Accordingly, you should proceed with cautiously when discussing private offerings, especially in social media, where cramming in all required disclaimers may be difficult.

Federal securities regulators have published guidance for issuers, investment advisers, broker-dealers and investment companies that use social media.  Click here to read our Guide to Social Media and the Securities Laws, which contains a comprehensive summary of this regulatory guidance.  Click here to read our post about a recent FINRA compliance examination sweep of broker-dealer use of social media.  You can listen to our presentation about use of social media by investment advisers, broker-dealers and investment companies by clicking here.

Article courtesy of Morrison & Foerster’s MoFo Tech

As financial institutions and investors turn to social media to instantly share snippets of news and potential clues about market trends, the FBI and SEC are monitoring such postings for evidence of insider trading and improper investment information. Companies must comply with pre-Internet federal securities laws covering antifraud, advertising, record keeping, and more, even though the use of Facebook and Twitter is far outpacing the development of federal regulations aimed at social media.

Late last year, two FBI agents told Reuters that they see social media as a breeding ground for insider trading and securities fraud. “If there is any way to exploit it, these individuals will,” one agent said. The FBI also began a public search for an application that would scan social media for national security threats. “In trying to establish whether a trader who made significant gains in advance of market-moving news got nonpublic information from a company insider, the FBI might be interested in a list of the trader’s friends and contacts on social media sites,” says J. Alexander Lawrence, a Morrison & Foerster partner who works in securities law. “Evidence on Facebook, LinkedIn, or other sites could help the FBI connect the dots.”

Government investigators have been pursuing insider traders with growing intensity, according to Morrison & Foerster’s 2012 Insider Trading Annual Review. One reason could be the relative lack of success in bringing cases related to the financial crisis. “While the SEC and DOJ have been criticized, fairly or not, for not bringing more cases arising from the financial crisis—especially against individuals—both agencies have received abundant praise for their crackdown on insider trading,” the report concluded.

When communicating information through social media channels, companies have had to carefully consider whether material nonpublic information is being selectively disclosed in violation of Regulation FD. The SEC recently clarified its views regarding the applicability of Regulation FD to social media in a Report of Investigation which concluded that disclosure of material nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the social media site may be used for this purpose, is unlikely to qualify as an acceptable method of disclosure under the securities laws.

However, the SEC indicated that companies using social media to communicate information could apply existing guidance on the use of corporate websites in determining if that information is adequately being disseminated through social media channels so that a company won’t run afoul of Regulation FD, which would include taking steps to notify the market that material information about the company can be gleaned from those social media channels.

There are legal uncertainties about how far investigators can go in seeking information that is not publicly available on social media. Courts have ruled that certain messages sent on social media are protected under the Stored Communications Act, which limits the government’s power to force Internet service providers to disclose customer information. In addition, “friending” someone for the sole purpose of uncovering evidence may go against Facebook’s terms of service. States differ as to whether investigations led by attorneys can use deception, such as “friending” someone to uncover evidence, says Carl H. Loewenson Jr., a Morrison & Foerster partner and co-chair of the firm’s Securities Litigation, Enforcement, and White-Collar Defense Group. “If a prosecutor directs agents to do that, there is the risk of ethical violations resulting from engaging in misrepresentation under some state bar rules,” he says.

On April 2, 2013, the U.S. Securities and Exchange Commission (SEC) issued guidance in the form of the Report of Investigation under Section 21(a) of the Securities Exchange Act of 1934 which indicates that social media channels—such as Twitter and Facebook—could be used by public companies to disseminate material information, without running afoul of Regulation FD. Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc., and Reed Hastings, Release No. 34-69729 (April 2, 2013) (the “21(a) Report”). The SEC emphasized that companies should apply the guidance from its 2008 interpretive release regarding the disclosure of material information on company websites when analyzing whether a social media channel is in fact a “recognized channel of distribution,” including the guidance that investors must be provided with appropriate notice of the specific channels that a company will use in order to disseminate material nonpublic information.

The SEC confirmed in the 21(a) Report that Regulation FD applies to social media and other emerging means of communication used by public companies in the same way that it applies to company websites as discussed in the 2008 Guidance, which clarified that websites can serve as an effective means for disseminating information if investors have been made aware that they can locate the company information on the website.

The 21(a) Report indicates that, while every situation must be evaluated on its own facts, disclosure of material nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the social media site may be used for this purpose, is unlikely to qualify as an acceptable method of disclosure under securities laws. In this regard, the SEC notes that it would not normally be assumed that the personal social media sites of public company employees would serve as channels through which the company discloses material nonpublic information.

In analyzing the applicability of Regulation FD to any communications, the SEC notes that while the Regulation FD adopting release highlighted concerns about “selective” disclosure of information to favored analysts or investors, “the identification of the enumerated persons within Regulation FD is inclusive, and the prohibition does not turn on an intent or motive of favoritism.” The SEC also emphasizes that nothing in the Regulation FD would suggest that disclosure of material nonpublic information to a broader group that includes both enumerated and non-enumerated persons, but that still would not constitute a public disclosure, would somehow result in Regulation FD being inapplicable. Rather, the SEC states that “the rule makes clear that public disclosure of material nonpublic information must be made in a manner that conforms with Regulation FD whenever such information is disclosed to any group that includes one or more enumerated persons.” As a result, whenever a company makes a disclosure to an enumerated person, including to a broader group of recipients through a social media channel, the company must consider whether that disclosure implicates Regulation FD, including determining whether the disclosure includes material nonpublic information and whether the information was being disseminated in a manner “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” in the event that the issuer did not choose to file a Form 8-K.

Drawing on the reference to “push” technologies (such as email alerts, RSS feeds and interactive communication tools, such as blogs) in the 2008 Guidance, the SEC acknowledged that social media channels are an extension of these concepts, and therefore the guidance should apply equally in the context of social media channels. Given the “direct and immediate communication” possible through social media channels, such as Facebook and Twitter, the SEC expects companies to examine whether such channels are recognized channels of distribution. In particular, the SEC emphasized the need to take steps to alert the market about which forms of communication a company intends to use for the dissemination of material nonpublic information. The SEC notes that without this sort of notice, the investing public would have to keep pace with a “changing and expanding universe of potential disclosure channels.” The ways in which such notice could be provided would include: (1) references in periodic reports and press releases on the corporate website and disclosures that the company routinely posts important information on that website and (2) disclosures on corporate websites identifying the specific social media channels a company intends to use for the dissemination of material nonpublic information (thereby giving people the opportunity to subscribe to, join, register for, or review that particular channel).

In light of the SEC’s guidance, companies should consider whether to specifically address the use of social media in Regulation FD policies, including whether prohibitions, restrictions or editorial oversight should be implemented to govern the use of social media by those persons authorized to speak for the company. This will remain an evolving area that must be continually monitored, as the methods for interacting with shareholders, analysts and others continue to evolve. As with the 2008 Guidance, companies may not be in a position to implement the 21(a) Report’s guidance in such a way that they could do away with more traditional forms of public dissemination, but the guidance may provide more comfort for companies using social media to supplement other more traditional forms of communication. Companies should carefully evaluate what social media channels may be useful for communicating information, and begin providing notice that information about the company may be found on those social media channels, while using those channels as a regular source of information. At the same time, companies should advise individual officers, directors and employees that posting information about the company on social media channels could potentially implicate Regulation FD, and therefore such persons must exercise caution when communicating through social media.

Following this morning’s meeting, the Commission has published its proposed rules:

http://www.sec.gov/rules/proposed/2012/33-9354.pdf

Summary

The SEC published its guidance today as a proposed rule, with a comment period, and not as an interim final rule.

The SEC proposes to amend Rule 506 to provide that the prohibition against general solicitation contained in Rule 502(c) shall not apply to offers and sales of securities made pursuant to Rule 506 provided that all purchasers are accredited investors and the issuer takes reasonable steps to verify their status.

Form D will be amended so that an issuer will be required to indicate whether it has used general solicitation.

The SEC is not proposing to amend the Section 4(a)(2) exemption.

Rule 506 offerings

Release implements a bifurcated approach—that is an issuer can conduct a Rule 506 offering without general solicitation, or a Rule 506(c) offering using general solicitation

A new Rule 506(c) is introduced, which would permit general solicitation provided:  issuer takes reasonable steps to verify investor status; purchasers are accredited investors; and other conditions of Rule 501 and 502(a) and 502(d) are satisfied.

The Staff is not prescribing a verification approach, but recognizing that the reasonableness of the steps taken to verify status will be based on particular facts and circumstances.  The Staff sets out a number of measures (in the form of a non-exclusive list) that could be used in order to assess investor status.

Rule 144A

Rule 144A will be amended to remove the reference to “offer” and “offeree” from Rule 144A(d)(1), requiring only that securities be sold only to a QIB or person reasonably believed to be a QIB.

Integration

Rule 144A/Rule 506 offerings will not be integrated with contemporaneous Regulation S offerings—however, the language used in the release may not be as clear as market participants would like.

At a meeting this morning, the SEC voted to propose rules relaxing the ban on general solicitation for certain offerings conducted pursuant to Rule 506 and resales under Rule 144A.  In a meeting that lasted approximately 45 minutes, the Staff outlined the principal aspects of the proposed rules.  The Staff indicated that it was proposing rules for comment, and not proposing an interim final rule.  As a result, market participants will have an opportunity to comment on the proposal and the Staff will have an opportunity to consider these comments prior to the adoption of final rules.  As anticipated, close attention will be required in relation to the Staff’s proposals regarding the “reasonable steps” to be taken to verify accredited investor status for offerings in which general solicitation is used.  The Staff discussed generally the verification process.  The Staff also discussed proposed changes to Form D.  The Staff also noted that the proposal would address the “directed selling effort” prong of Regulation S.  We will provide a detailed analysis of the proposal shortly.

The Commissioners provided interesting perspectives on the proposed rules and on the rulemaking process.

Commissioner Walter noted her support for modification of the communications rules in order to make these rules more contemporary.  She noted that allowing general solicitation is “a profound change,” which likely will have “unintended consequences.”  Commissioner Walter noted that comments on the proposal should help to identify these potential unintended consequences.  She also suggested that the Staff consider updating Form D in order to make it a source for more information regarding the types of offerings in which general solicitation is used and that the Staff should study the uses of general solicitation.  Commissioner Walter asked how the Staff intended to monitor the use of Rule 506 offerings involving general solicitation.  Meredith Cross noted that a multi-divisional task force would be formed in order to identify offerings in which general solicitation was used and to understand the verification processes used in these offerings.

Commissioner Aguilar noted he did not support the proposal and he would issue a separate statement which would be forthcoming.  He expressed concerns about investor protection.

Both Commissioners Paredes and Gallagher expressed their support for the proposal, while noting their significant concerns with the rulemaking process itself.  The two Commissioners noted that the original rulemaking course, which had been to release an interim final rule (not a proposal), had been changed in midstream.  This change had been occasioned after significant concerns had been expressed by various groups, including state regulators.  Both Commissioners Paredes and Gallagher noted their concern regarding the change in course and the resulting delays.