New “Test-the-Waters” Securities Act Rule 241 Available for All Transactionally Exempt Offerings
February 15, 2021
In November 2020, the SEC used its general exemptive authority under Securities Act Section 28 to create new Securities Act Rule 241 (see below for full text of the Rule). See SEC, Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, Rel. No. 33-10884 (Nov. 2, 2020).
New Securities Act Rule 241 allows an issuer planning an exempt offering to solicit indications of interest, orally or in writing, from any prospective investor before determining which transactional exemption (e.g., Rule 506, Regulation Crowdfunding, etc.) it will rely on to conduct the offering. Technically, an issuer cannot rely on Rule 241 if the issuer has already decided on the transactional exemption it will use for its offering. Any communications under the Rule qualify as “offers” of a security for sale for purposes of the antifraud provisions of the Federal securities laws.
Rule 241’s “test-the-waters” allowance is more liberal than the ones available for public offerings. In the context of a public offering, emerging growth companies (EGCs) and non-EGCs can solicit indications of interest only from qualified institutional buyers (QIBs) or institutional accredited investors (IAIs) under Securities Act Section 5(d) and Securities Act Rule 163B, respectively.
A written communication under Rule 241 may include a means for the solicitee to indicate to the issuer that he or she is interested in a potential offering. Thus, the solicitee can provide his or her name, address, telephone number, and/or email address. However, no solicitation or acceptance of money or other consideration, nor of any commitment, binding or otherwise, from any solicitee is permitted (and if money or other consideration is sent in response, it must not be accepted) until the issuer determines which transactional exemption it will pursue and its exempt offering is actually commenced. Additionally, the issuer must satisfy any applicable filing, disclosure or qualification requirements required under the exemption it ultimately chooses.
In order to protect solicitees, any Rule 241 communication must state that: (1) the issuer is considering an exempt offering, but has not decided upon any particular exemption; (2) the issuer is not soliciting any money or other consideration and, if sent, will not be accepted by the issuer; (3) the issuer will not sell securities or accept commitments to purchase securities until the issuer decides on which exemption it will pursue and satisfies any required filing, disclosure or qualification requirements; and (4) all indications of interest made by solicitees are non-binding.
A given Rule 241 communication, depending on how it is made, may constitute general solicitation. Therefore, an issuer can’t identify investors through general solicitation under Rule 241 and then turn around and sell securities to those investors pursuant to a transactional exemption that does not allow for general solicitation (e.g., Rule 506(b)). The SEC stated in the adopting release that an issuer may reasonably conclude, depending on the particular facts and circumstances, that test-the-water communications limited only to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs) would not constitute general solicitation. Thus, issuers contemplating an offering that does not allow general solicitation may decide to test the waters solely with QIBs and IAIs. In the context of Regulation A and Regulation Crowdfunding, generic solicitation materials used under Rule 421 are required to be made publicly available as an exhibit to the offering materials an issuer files with the SEC if the Regulation A or Regulation Crowdfunding offering is commenced within 30 days of the generic solicitation.
The SEC makes clear that Rule 241 does not preempt any state “blue sky” laws. The SEC refused to preempt state “blue sky” laws in the context of Rule 241 out of concern about the novel nature of Rule 241 and concerns over its potential misuse.
Rule 241 in its entirety appears below:
Rule 241. Solicitations of interest.
(a) Solicitation of interest. At any time before making a determination as to the exemption from registration under the [Securities] Act under which an offering of securities will be conducted, an issuer or any person authorized to act on behalf of an issuer may communicate orally or in writing to determine whether there is any interest in a contemplated offering of securities exempt from registration under the [Securities] Act. Such communications are deemed to be an offer of a security for sale for purposes of the antifraud provisions of the Federal securities laws. No solicitation or acceptance of money or other consideration, nor of any commitment, binding or otherwise, from any person is permitted until the issuer makes a determination as to the exemption to be relied on and the offering, meeting the requirements of the exemption, is commenced.
(b) Conditions. The communications must state that: (1) The issuer is considering an offering of securities exempt from registration under the [Securities] Act, but has not determined a specific exemption from registration the issuer intends to rely on for the subsequent offer and sale of the securities; (2) No money or other consideration is being solicited, and if sent in response, will not be accepted; (3) No offer to buy the securities can be accepted and no part of the purchase price can be received until the issuer determines the exemption under which the offering is intended to be conducted and, where applicable, the filing, disclosure, or qualification requirements of such exemption are met; and (4) A person’s indication of interest involves no obligation or commitment of any kind.
(c) Indications of interest. Any written communication under this rule may include a means by which a person may indicate to the issuer that such person is interested in a potential offering. The issuer may require the name, address, telephone number, and/or email address in any response form included pursuant to this paragraph (c).
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Alicja Biskupska-Haas, an O’Melveny partner licensed to practice law in New York, Tracie Ingrasin, an O’Melveny partner licensed to practice law in New York, and Marina G. Richter, an O’Melveny counsel licensed to practice law in New York and Russia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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