Securities Act Rule 147 does not prohibit general advertising or general solicitation. Any such general advertising or solicitation, however, must be conducted in a manner consistent with the requirement that offers made in reliance on Section 3(a)(11) and pursuant to its Rule 147 safe harbor be made only to persons resident within the state or territory of which the issuer is a resident.
Use of the Internet would not be incompatible with a claim of exemption under Rule 147 if the portal implements adequate measures so that offers of securities are made only to persons resident in the relevant state or territory. In the context of an offering conducted in accordance with state crowdfunding requirements, such measures would include, at a minimum, disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law, and limiting access to information about specific investment opportunities to persons who confirm they are residents of the relevant state (for example, by providing a representation as to residence or in-state residence information, such as a zip code or residence address). Of course, any issuer seeking to rely on Rule 147 for the offering also would have to meet all the other conditions of Rule 147.
Issuers generally use their websites and social media presence to advertise their market presence in a broad and open manner so that information is widely disseminated to any member of the general public. Although whether a particular communication is an “offer” of securities will depend on all of the facts and circumstances, using such established Internet presence to convey information about specific investment opportunities would likely involve offers to residents outside the particular state in which the issuer did business.
The SEC believes, however, that issuers could implement technological measures to limit communications that are offers only to those persons whose Internet Protocol, or IP, address originates from a particular state or territory and prevent any offers to be made to persons whose IP address originates in other states or territories. Offers should include disclaimers and restrictive legends making it clear that the offering is limited to residents of the relevant state under applicable law. Issuers must comply with all other conditions of Rule 147, including that sales may only be made to residents of the same state as the issuer.
In a reverse merger, the shareholders of a private company exchange their shares for a large majority of the shares of a public shell company. Although the public shell company survives the merger, the private company’s shareholders gain a controlling interest in the voting power and outstanding shares of stock of the public shell company. Also, the private company’s management typically takes over the board of directors and management of the public shell company. The assets and business operations of the post-merger surviving public company are primarily, if not solely, those of the former private company.
A shell corporation is a corporation without active business operations or significant assets. These types of corporations are not all necessarily illegal, but they are sometimes used illegitimately, such as to disguise business ownership from law enforcement or the public. Legitimate reasons for a shell corporation include such things as a startup using the business entity as a vehicle to raise, funds, conduct a hostile takeover or to go public.
A special purpose acquisition company (SPAC) is a type of investment fund that allows investors to invest in private equity type transactions, particularly leveraged buyouts. SPACs are shell or “blank-check” companies that have no operations but go public with the intention of merging with or acquiring a company with the proceeds of the SPAC’s initial public offering (IPO).
A PIPE (Private Investment in Public Equity) refers to any private placement of securities in an already-public company that is made to selected accredited investors. Specifically, PIPE transactions are privately placed and issued equity or equity-related securities that are sold to accredited investors under an exemption to registration (usually Rule 506(b), 506(c) or Section 4(a)(2)) by public companies.
PIPE Transactions provide numerous benefits to publicly traded companies, including:
- Flexibility – PIPEs accommodate a more flexible transaction size than public alternatives;
- Speed – PIPEs can be completed in a matter of weeks;
- Inexpensive – PIPE costs generally include just the legal and accounting costs;
- Simplicity – PIPE’s require a comparatively minimal preparation process;
- Liquidity – PIPEs increase a company’s trading liquidity while diversifying the shareholder base.