Issuers often require capital during the going public process for their operations until their registration statement on Form S-1 is declared effective. The SEC’s integration doctrine addresses the circumstances under which an issuer can raise capital while a registration statement under the Securities Act of 1933, as amended is pending.
The integration doctrine under was created to prevent companies from improperly avoiding registration by dividing a single securities offering into multiple offerings to take advantage of Securities Act exemptions that would not be available for the combined offering. The SEC has takes the position that the filing of a registration statement does not eliminate a company’s ability to engage in a concurrent private offering,
whether it is commenced before or after the filing of a Form S-1 registration statement if certain conditions are met.
The SEC’s position is that the filing of a registration statement is a general solicitation of investors including in a going public transaction where an issuer uses a Form S-1. The SEC’s position on integration has created some confusion for issuers who conduct a concurrent private offering while there is a registration statement pending with the SEC since until Rule 506(c) under the JOBS Act became effective, the absence of general solicitation and advertising was a fundamental condition to an unregistered offering.
The SEC addressed integration of concurrent public and private offerings in a 2008 Compliance and Disclosure Interpretation providing guidance concerning its 2007 release addressing integration.
The Compliance and Disclosure Interpretation provides useful guidance in determining whether a private offering will be exempt from registration under the Securities Act while a registration statement is pending.
Under limited circumstances, issuers can conduct a private offering under Rule 506 while a registration statement is pending. The issuer must identify the Rule 506 investors by means other than its Form S-1 registration statement.
Whether a particular securities offering is integrated with another offering requires an analysis of the facts and circumstances of the particular offerings. The focus is on how the Rule 506 investors are solicited – whether by the registration statement or through some other methods.
Issuers should determine if an offering is exempt under Section 4(2) of the Securities Act without independent of the registration statement. The SEC’s release provided useful guidance for common scenarios in going public transactions.
If a company files a registration statement on Form S-1 and then offers and sells securities in a Rule 506 offering to an investor that invests because of the registration statement, then the registration statement was a general solicitation and the Section 4(2) exemption would not be available for the issuer’s private offering. Conversely, if the investor invested in the concurrent Rule 506 offering because of some means other than the Form S-1 registration statement such as through a substantive, pre-existing relationship with the company or direct contact by the company outside of the registration statement process then the pending registration statement will not impact the potential availability of the Rule 506(c) exemption.
Pre-existing relationship include vendors, customers and suppliers as well as existing existing investors and shareholders. Under these circumstances, an investors is not identified as a result of the public offering and did not contact the issuer as a result of the general solicitation by means of the registration statement. As such, the Rule 506 offering can be conducted while the registration statement is pending.
Rule 506(c) should streamline integration issues since general solicitation can be used in connection with a Rule 506(c) offering. Even where Rule 506(c) is relied upon, issuers in going public transactions should remember that an offering that starts as a public offering must be completed as a public offering and a private offering must be completed as a private offering, except in those circumstances specified in Rule 155.