”Gunjumping” is the dissemination of information regarding the Issuer before a complete prospectus has been filed with the Securities and Exchange Commission (“SEC”). Communications prior, during and immediately following the filing of a registration statement are strictly regulated to prevent an Issuer from hyping the market in association with an offering. In addition, the SEC wants to ensure that investors decisions to participate in an offering are based on information that has been reviewed by the SEC and meets the disclosure standards set forth in the securities laws.

Registration Requirements for Sales

During the pre-filing period, Section 5(c) of the Securities Act of 1933, as amended (the “Securities Act”) makes it “unlawful for any person, directly or indirectly, to… offer to sell or offer to buy… any security, unless a registration statement has been filed as to such security.” An offer to sell or offer to buy are broadly defined to include every attempt or offer to dispose of a security for value, including any effort to simulate investor interest in such security.

Moreover, the SEC considers all communications with the public as potential gunjumping violations. A famous example is associated with the IPO of Google, Inc. In a pre-IPO interview with founders Sergey Brin and Larry Page, published in Playboy magazine, Brin and Page made favorable comments about Google – of course. The interview did not include any mention of the offering or the securities of the Company. Moreover, the statements appeared innocuous including such generalities as “people use Google because they trust us.”

SEC’s Stance on Public Communications

The SEC determined that the interview resulted in gunjumping and required Google to: (1) revise its prospectus to include a risk factor warning that the Playboy interview may have violated Section 5; (2) include the full text of the Playboy article in the prospectus (thus subjecting its contents to the strict liability standards for the truth and accuracy of information filed with the SEC); and (3) address certain discrepancies between statistics in the article and prospectus.

Prospectus Content

In Google and several other cases the SEC has found that gunjumping is any information that is not contained in the prospectus and that could stimulate investors’ interest. In addition to requiring revisions to a prospectus, as a result of gunjumping, the SEC can require an Issuer to offer to buy back its already issued stock, to delay an offering to allow a cooling off period, or can initiate enforcement proceedings seeking both injunctive and monetary penalties.

There are exceptions and safe harbors to the gunjumping prohibition. Rule 135 of the Securities Act allows for limited notices of proposed offerings. The notice must clearly indicate that it is not an offer to buy or sell securities. The content of the notice is limited to: (i) the name of the issuer; (ii) intention to make a public offering; (iii) amount and type of security and basic terms of the offering; (iv) anticipated timing of the offering; (v) whether the offering is limited to a certain class of investors (such as only accredited or only existing security holders); and (vi) any other required statement required by a certain state or foreign governmental body.

Thirty Day Blackout on Public Communications

Rule 163A of the Securities Act provides a thirty (30) day safe harbor for communications made at least 30 days prior to the filing of a registration statement and which communications do not mention or refer to the proposed offering.

Rule 169 allows an Issuer to continue with the release of regular factual information in the ordinary course of business related to the goods and services of the company. The communications cannot mention the offering or securities of the Company and cannot contain forward looking statements regarding the Company.

Communications from Broker Dealers

Rules 137, 138 and 139 address communications by or to broker dealers. Basically, communications and negotiations between a potential underwriter or participating broker dealer and an Issuer, as long as confidential, will not be deemed gunjumping.

Section 5(b) of the Securities Act makes it unlawful to transmit or use a prospectus which does not meet the requirements of Section 10 of that Act. Moreover, a prospectus is broadly defined to include any communication, including radio and tv broadcasts and, of course, written communications. Section 10 and the rules promulgated thereunder, set forth the information and content requirements for a prospectus.

The “waiting period” of an offering is the time following the filing of a registration statement with the SEC and its being declared effective. Oral offers to sell and certain limited communications are allowed during this time, though no sales can be consummated until after the prospectus is declared effective. Moreover, and obviously, no communications may be made that go beyond the contents of the prospectus as set forth above.

Quiet Period

Finally, the quiet period is the time following the effectiveness of a registration statement and is generally considered to be 30 days. As investors may still be buying into an IPO for this period, Company communications are limited to the contents of the prospectus, updates filed with the SEC and communications regarding products, in the ordinary course of business.

Securities Attorney Laura Anthony

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

Initial Public Offerings (IPO’s) are on the rise once again. I have potential clients calling me daily interested in going public through an IPO, most have little or no prior knowledge of the public company arena – so back to basics. An IPO is an initial public offering of securities. Prior to proceeding with an IPO, an Issuer should consider the advantages, disadvantages and alternatives.

The advantages of an IPO include:

• Access to capital
• Liquidity of stock
• Public image and prestige; and
• Ability to attract and retain better personnel

The disadvantages of an IPO include:

• Expense – both of the initial transaction and ongoing compliance;
• Public disclosure of business information – public companies are required to be transparent which can give private competitors an edge;
• Limitations on long term strategic decisions
• Civil and criminal liability of executive officers and directors; and
• Takeover danger

The alternatives to an IPO for an Issuer seeking capital include:

• A Section 4(2) and/or Regulation D private offering;
• Section 3(11) Intrastate offering;
• Regulation A registered offering;
• Other private financing such as a venture capital or angel investor; or
• Conventional financing such as bank loans and receivable factoring.

Alternatives to an IPO for an Issuer seeking to go public include:

• Merger or reverse merger with a public shell

Securities Attorney Laura Anthony

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

Section 4(2) of the Securities Act of 1933, as Amended (“Securities Act”) provides the statutory basis for private placement offerings. In particular, Section 4(2) exempts “transactions by an issuer not involving any public offering.” The key components of this statutory exemption are that the offering must be by the Issuer, not an affiliate, agent or third party, and that the transactions must not involve a public offering. In order to determine if there is a public offering, practitioners must consider Section 2(11) of the Securities Act which defines an underwriter. The Securities and Exchange Commission (“SEC”) and courts limit the scope of Section 4(2) by preventing indirect public offerings by issuers and control persons through third parties. Accordingly, if an investor acts as a link in the chain of transactions resulting in securities being distributed to the public, they are an underwriter, and the exemption under Section 4(2) is not available.

The Ralston Purina Standard

The leading case interpreting Section 4(2), SEC v. Ralston Purina Corp., was decided in 1953 and still stands as the judicial framework for interpreting private placements today. In a nutshell, Ralston Purina holds that the availability of Section 4(2) turns on whether the particular class of persons affected need the protection of the Act, considering the totality of the circumstances. The Court goes on to provide guidance by setting forth four factors to be considered. To wit:

 
Regulation D and Section 4(2)

In Regulation D promulgated under the Securities Act, the SEC sets forth its interpretation of Section 4(2) and likewise under Rule 144, the SEC sets forth its interpretation of the underwriter definition found in Section 2(11).

Consistent with Regulation D, an issuer in a private placement may not sell securities through any manner of general solicitation or general advertising. Further SEC interpretative releases and courts have found that to meet this standard an Issuer may only approach potential investors to which it has a prior relationship. However, with that said, it is commonly agreed that an Issuer can approach as many institutional investors as it wants without violating this prohibition; presumably because institutional investors can fend for themselves and do not require the protection of the Securities Act.

Securities Attorney Laura Anthony

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!