On August 29, 2012, the SEC issued proposed rules to implement Congress' mandate, under the Jumpstart Our Business Startups Act (the "JOBS Act"), that the agency eliminate the existing ban on use of general solicitation and/or general advertising for Rule 506 and Rule 144A offerings. The proposed amendments, if adopted as proposed, would significantly impact the marketing of all private issuers. 

Click here for a discussion of the SEC proposed rules under the JOBS Act by Reed Smith partners Alexandra Poe, Gerard DiFiore and Eulalia Mack.

This post was written by Matthew Pitman and Abigail Jones.

A recent case serves as a useful reminder that careful consideration should be given to what happens in practice when considering whether arrangements amount to a collective investment scheme, irrespective of the wording of the relevant contractual documentation.

Although the case of Brown v InnovatorOne did not contain any new insight into the application of FSMA, it highlighted the danger of relying purely on contractual documentation when seeking to avoid classification as a collective investment scheme. This case challenged the validity of a failed tax relief scheme and in turn, considered whether the arrangements constituted by the scheme amounted to a CIS. Section 235(2) of FSMA underpins the crux of the issue whereby if the participants have no day to day control of the investments then they will constitute a CIS.

Reliance was asserted upon the contractual documentation in this case, in that the participants were given the right to control in accordance with their terms. However, it was found that in practice they did not assert such rights sufficiently to be regarded as being in effective control. The point to take away here is that the contractual documentation in itself will not be enough; there needs to be substantial evidence of practical exercise of control to avoid CIS classification.

In this case there had been a clear breach of the general prohibition under section 19 of FSMA. A scheme had been established without the requisite FSA authorisation.

There was also no doubt that the arrangements involved regulated activities and specified investments for the purposes of the financial promotion regime, therefore the judge found that the financial promotion restriction under section 21 of FSMA had also been breached. Not only did the judge not agree with the argument that the restriction did not apply because the promotions were made through IFAs, there was a mistaken assumption that the article 48 Financial Promotion Order exemption for marketing to high net worth individuals could be relied upon. Caution should be exercised when using this exemption as it does not apply to communications in respect of an investment in units in a collective investment scheme (other than one which invests wholly or predominantly in stocks and shares in an unlisted company or instruments acknowledging indebtedness in such a company). What’s more, even where that condition is satisfied, promoters must see the relevant certificate (signed 12 months prior to the communication) in advance to ensure that the recipient meets the requirements to be a certified high net worth individual under FSMA.

This post was written by Alexandra Poe, Paul Bond, Keri Bruce, and Frederick Lah

Last week, the SEC proposed amendments (PDF) to Rule 506 of Reg D to lift a long-standing ban on advertising for hedge funds and certain other investments in the United States. Over the course of the next few weeks, Reed Smith will be releasing a series of blog posts about the various implications this proposed rule may have if it goes into effect. For this post, we consider the potential data privacy implications with the proposed rule.

Hedge funds and other issuers seeking to conduct private offers under Rule 506 of Reg D have long been banned from advertising in public forums like billboards, newspapers, television, or publicly-accessible websites in the United States. Previously, such issuers could only offer their securities to persons with whom they had a pre-existing substantive relationship based on which the issuer was able to conclude that the offeree was likely to be an appropriate offeree (i.e., a sophisticated person capable of bearing the financial risk). The ban was designed to prevent issuers that were not subject to full burden of the Securities Act's disclosure and registration requirements from targeting investors whose relative lack of sophistication or bargaining power might prevent them from having all the information necessary to make an informed investment decision. But under the new rules hedge funds and other issuers would be able comply with Rule 506 and still publicly advertise to anyone, so long as the actual purchasers of the securities are “accredited investors,” as that term is defined in the Rule.

While hedge funds and other Rule 506 companies are now technically permitted to advertise widespread and publicly, it is dubious that we’ll see hedge funds competing with major consumer brands for prime advertising real estate. A more likely scenario will be that hedge funds will become more aggressive buyers in the information market and use that information to tailor their advertising efforts to customers likely to be “accredited investors.” Perhaps this will take the form of email marketing campaigns, direct phone marketing, or possibly even online targeted advertising, for example, on a mutual fund or brokerage firm’s website. Each of these types of advertising comes with its own unique set of privacy considerations. It should also be noted that this new avenue of information sharing then becomes a compliance consideration for both the hedge fund and the information provider. For example, if a financial institution ends up providing such information to a hedge fund, the financial institution may need to update its privacy policy accordingly to make sure it is complying with regulatory requirements.

The extent to which hedge funds and other issuers seeking to comply with Rule 506 will take advantage of these proposed rules (once and as adopted), if at all, remains to be seen. The resultant data privacy implications will vary depending on the exact advertising measures employed. We will be monitoring this situation for developments.

A Reed Smith team lead by John Wilkinson and Oliver s'Jacob, partners in our life sciences and investment funds teams respectively, has advised specialist investment manager Sixth Element Capital (6EC) and Cancer Research Technology (CRT) on the launch of a ground-breaking £50m investment fund, to bridge the funding gap in the U.K. between cancer drug discovery and early development!

The CRT Pioneer Fund, in which CRT and the European Investment Fund (EIF) are the principal investors, will advance potential oncology drugs from discovery through to entry to mid-stage Phase II clinical trials. 

It was launched at a press conference on 28 March, hosted by Dr Harpal Kumar (Chief Executive of Cancer Research UK), Dr Keith Blundy (Chief Executive of CRT), Richard Pelly (Chief Executive of the EIF) and David Willetts (UK Minister for Universities and Science).

Dr Keith Blundy said: “The creation of this landmark fund addresses the problem of funding the development gap which is restraining cancer drug development in the UK."

The Fund was structured as a limited partnership, in line with most venture capital and private equity funds. However, unlike most such funds, the Fund is designed primarily to invest directly in oncology drug development projects and make returns through royalties, rather than through the investment in and subsequent divestment of portfolio companies. This kicked up some interesting structuring and tax issues, in particular given the specific and very different tax treatments of the fund's initial investors, namely the EIF, CRT and management team.

We acted as sole legal counsel on the establishment of the Fund while Brodies LLP acted on the establishment of certain Socttish entities as part of the overall structure.

Click on this video link for more details!