TheCorporateCounsel.net

Last week, FINRA settled a case with a broker-dealer who allegedly solicited and sold shares to 16 investors in over half a dozen Rule 506(b) offerings – because they failed to establish a pre-existing, substantive relationships with the offerees prior to participating in the offering. Here’s an excerpt from the order (also see this Cadwalader blog):

For example, D.H. Hill began participating in a private offering of securities on behalf of Issuer No. 1 in 2015. The firm executed the placement agent agreement for that offering on April 29, 2015, and first began selling interests in the offering to investors on February 25, 2016. On or before these dates, the firm did not have a substantive relationship with Investor A. D.H. Hill subsequently established such a relationship with and sold Investor A interests in Issuer No. 1’s offering on July 12, 2017, but the firm’s substantive relationship did not pre-date D.H. Hill’s participation in that offering.

Similarly, D.H. Hill began participating in a private offering of securities on behalf of Issuer No. 2 in 2017. The firm executed the placement agent agreement for that offering on May 19, 2017 and first began selling interests in Issuer No. 2’s offering on April 10, 2018. On or before this date, the firm did not have a substantive relationship with Investor B. D.H. Hill subsequently established such a relationship with and sold Investor B interests in Issuer No. 2’s offering on May 28, 2019, but the firm’s substantive relationship did not pre-date D.H. Hill’s participation in that offering.

It’s hard to know whether the companies also got in hot water over this, since the FINRA order doesn’t name them. My guess, though, is that the offerings did not go smoothly. If you’re planning a “traditional” Reg D offering under Rule 506(b), remember to verify the existence of a placement agent’s network – before signing up an agreement or involving them in due diligence.

– Liz Dunshee