Generally speaking, the federal securities laws were drafted with the purpose of limiting the kind and amount of pre-offering publicity permitted in registered public offerings. Pursuant to Section 5(c) of the Securities Act of 1933, it is unlawful to offer to sell or offer to buy any security unless a registration statement has been filed. The term “offer” is defined and interpreted very broadly, with the effect that any pre-filing publicity constitutes gun jumping if it cannot be justified on the grounds that it was made for a permissible purpose, such as regularly released factual business information. As demonstrated by a recent SEC Staff comment letter repeated below, the Staff continues to consider gun jumping rules in connection with its filing reviews.
Evolution of Gun Jumping Laws
The rules related to gun jumping have evolved over time, and in 2005 the SEC substantially modernized many of the offering communication rules in its Securities Offering Reform release. Other recent updates to the offering communication rules include the following examples from the JOBS Act of 2012 and related SEC rules:
- No Quiet Period in Regulation A+ Offerings: An issuer may “test the waters” with all potential investors before and after the filing of the offering statement to determine whether there is any interest in the contemplated securities offering, subject to certain conditions.
- Limited Quiet Period for Emerging Growth Companies (EGCs): EGCs may “test the waters” with certain institutional investors before and after filing a registration statement to determine whether such investors might have an interest in the contemplated securities offering.
- Rule 506(c) Private Placements Permit General Solicitation: Issuers may broadly solicit and generally advertise an offering, provided that all purchasers in the offering are accredited investors, the issuer takes reasonable steps to verify purchasers’ accredited investor status, and certain other conditions in Regulation D are satisfied.
Lately, there has been quite a bit of discussion about the desire to further relax the SEC’s rules on offering communications. For example, just last week Chairman Jay Clayton gave a speech where he mentioned efforts in JOBS Act 3.0 to expand to all issuers the ability to test-the-waters like an EGC, and he noted this topic was on the SEC’s agenda for 2019 rulemaking.
Recent SEC Comment on Gun Jumping
Despite the trend toward a more relaxed approach on offering related communications, gun jumping in some form or another is still alive and well for most offerings conducted, and securities lawyers continue to provide counsel to management on how to navigate the potential minefield. For example, in monitoring SEC comment letters I came across this SEC comment letter recently made public, which asks the issuer to explain why gun jumping laws were not violated when two of its shareholders issued press releases with respect to the issuer’s confidential IPO submissions and an article on the same matter was published in the Israeli business newspaper Globes. Although the issuer and its counsel were able to satisfactorily address the SEC Staff’s concerns (it appears no follow-up comments were issued), I suspect the receipt of the comment probably caused a bit of a fire drill for those involved. Perhaps someday there will be no quiet period, but that day is not here yet.
Gun Jumping Considerations
Please explain why the two press releases with respect to the Company’s confidential submission of the Draft Registration Statement issued by direct or indirect shareholders of the Company (the “Shareholders“) Elbit Imaging Ltd. (in English) on August 31, 2018 and by Clal Biotechnology Industries Ltd. (in Hebrew) on September 2, 2018 (the “Releases“), and the article regarding, among other things, the same matters that was published in the Israeli business newspaper Globes on September 2, 2018 (the “Globes Article“), do not constitute violations of the U.S. gun jumping rules.
The Company does not believe that the issuance of either Release nor the publication of the Globes Article constituted violations of the gun jumping rules under federal securities laws that prohibit publicity, subject to certain limited exceptions, by an issuer and its agents of a securities offering while the issuer is in registration.
The Company was not responsible for their publication; in fact, the Company advised the Shareholders against issuing the Releases. However, counsel for both Shareholders represented to the Company and to us that the Releases were required to be issued under Israeli law, since the Shareholders are each Israeli companies that are listed on the Tel Aviv Stock Exchange, in order to ensure that their own public reporting disclosures in Israel was accurate and complete (including as to the nature of their investments in the Company) at the respective dates of the Releases in light of corporate transactions affecting each of the Shareholders unrelated to the Company that were then impending. Nevertheless, the Company believes that both Releases complied with the strictures of Rule 135 promulgated under the Securities Act of 1933, as amended (the “Act“), which provides in relevant part that an issuer and any person acting on its behalf that publishes through any medium a notice of a proposed offering to be registered under the Act will not be deemed to offer its securities for sale through that notice if the content of the publication is limited to the items specified by the rule and the publication contains a legend to the effect that it does not constitute an offer of any securities for sale.
Neither the Company nor its investor relations or public relations firm was responsible for, and did not participate in, the publication of the Globes Article. The Company is not aware that any of its directors, officers or employees was responsible for, or that any of them participated in, the publication of the Globes Article. Neither were the underwriters of the Company’s proposed initial public offering of its ordinary shares in the United States (the “IPO“) responsible for, nor did they participate in, the publication of the Globes Article. Since the Company began to prepare for the IPO, the Company has maintained strict publicity rules in compliance with gun jumping rules and has only engaged in ordinary course disclosure, as permitted by the federal securities laws. The Company has also warned its directors, officers and employees not to engage in any publicity surrounding the offering and to relay all incoming messages to designated Company spokespersons. Specifically, following the issuance of the Releases, the Company e-mailed its employees a reminder not to respond to press inquiries or to say “no comment” upon any such inquiry. Since none of the offering participants appear to have participated in the publication of the Globes Article, the Company does not believe that the publication of the Globes Article concerning the IPO by an independent business newspaper would violate the U.S. gun jumping laws.