February 27, 2004

General Solicitation Musings – New

In a no-action response dated February 9th, Corp Fin denied relief to Agristar Global Networks. Agristar hoped to use an existing database it maintained to mine for accredited investors in a private placement.

After speaking to John Jenkins at Calfee Halter & Griswold, I don’t view this as a significant development for private placements and general solicitation under Rule 502(c). On the other hand, it is a very interesting letter because it implicates one of the unresolved theoretical questions about private offerings – at what point do sheer numbers of offerees overwhelm the words of Reg D itself, and result in a proposed offering not being regarded as a private placement?

On the merits, Agristar appears to have a pretty decent argument about general solicitation. But it’s clear that Agristar’s original proposal to send invitations to complete questionnaires to “no more than 3%” of the top 250,000 Farm Principals would have resulted in the solicitation of 7,500 potential investors. Many of us have worked on public offerings with smaller red herring press runs than that. It’s interesting to see that Agristar cut it back to about 2,000 people in their second request to the staff, but that’s still a large number of potential offerees. Given the numbers, John was not surprised that the SEC didn’t want to give no-action relief on this issue, especially when the accredited investors in question were likely to be almost exclusively retail investors, and not institutions.

The Agristar letter is not likely intended to pare back existing interpretations of Reg D’s prohibition on general solicitation – it’s more of a case of the numbers of people potentially involved just getting too big for comfort. In dealing with small companies, general solicitation is ordinarily more of a theoretical than a practical concern. For most small companies, the only realistic sources of financing are friends and family or participants in local “angel networks” identified through the issuer’s lawyers and accountants. In these circumstances, general solicitation isn’t usually much of a concern. You should worry more about general solicitation when a placement agent is involved in the transaction or the client is a little too media friendly.

It would have been interesting to see what the response might have been if Agristar had asked the SEC to allow it to use this database to identify “Qualified Institutional Buyers” only. There are several no-action letters allowing the establishment of commercial databases to identify QIBs, and allowing sellers to rely on those lists for purposes of Rule 144A offerings.

IBM Adopts Premium-Priced Option Plan

On Tuesday, IBM restructured its option plans so that the 300 top executives will be denied a payoff unless the stock rises at least 10 percent. A second initiative will reward them for putting some of their own money at risk.

According to news reports, the changes drew a tepid response from institutional investors because IBM set the performance bar too low and limited it to only the top 300 of the 85,000 IBM employees who get options or restricted stock.

Blow Against Sharing Information with SEC and Attorney General

Last Friday, the California 1st District Court of Appeals held that McKesson waived the protections of the attorney-client privilege and the work product doctrine when it shared protected documents with the SEC and the U.S. Attorney. The case, McKesson v. San Francisco Superior Court, A103055, had been closely watched by the plaintiff’s bar.

The SEC and the Securities Industry Association filed amicus curiae briefs supporting McKesson. A similar case, also closely watched, is winding its way through federal courts. Fortunately, a bill is winding its way through the U.S. House of Representatives that would permit companies to share documents with the SEC and the DOJ without waiving the attorney-client privilege or the protection of the work product doctrine. See yesterday’s blog by Mike O’Sullivan for more on this bill.