Does Rule 15a-6 Apply to Private Placements UnderRegulation D?
Introduction
Foreign financial institutions frequently wish to place securities with U.S. investors through exempt private offerings conducted under Regulation D. Two questions often arise: (1) if the offering itself is exempt under Regulation D, does a foreign firm soliciting U.S. investors still require an exemption from broker-dealer registration and (2) is the exemption from broker-dealer registration provided by Rule 15a-6 available to the foreign firm for private placements? The short answer to both questions is yes.
Two Exemptions, Two Different Statutes
Regulation D provides a "safe harbor" that, when followed, ensures compliance with the exemption provided by Section 4(a)(2) under the Securities Act of 1933. Section 4(a)(2) exempts certain private offerings from the requirement to register the sale of securities with the SEC under Section 5 of the Securities Act.[1] In other words, Regulation D describes the requirements under which the issuer is able to avoid registering the offering.
Rule 15a-6 provides foreign securities firms with an exemption from broker-dealer registration with the SEC under Section 15(a) of the Securities Exchange Act of 1934. The rule provides the conditions under which a foreign firm is able to avoid registration while soliciting U.S. institutions.
Does Rule 15a-6 Apply by its Terms to Private Placements?
The express terms of Rule 15a-6 apply primarily to securities brokerage transactions. Its provisions are framed around the vocabulary of secondary-market trading — the distribution of research reports, the delivery of trade confirmations and account statements and the extension of credit for trades, rather than items like offering memoranda and subscription agreements that characterize a Regulation D private placement.
The SEC has never specifically stated that private placements fall within the rule. The language of the rule, however, permits a foreign firm to “[induce or attempt] to induce the purchase or sale of any security” without further describing the kinds of securities or types of offering that would be permitted. Soliciting a U.S. investor to subscribe to a private placement is an inducement to purchase a security in the same way as soliciting a listed-stock trade.
The SEC staff's own guidance reflects the view that Rule 15a-6 covers private placement transactions. The staff, in its Frequently Asked Questions on Rule 15a-6, refer to private placements directly, addressing the net-capital requirement for a chaperone whose foreign broker-dealer clients limit their activities to providing private placement services to U.S. institutional investors.[2] Accordingly, the staff acknowledges that private placement services fall within the scope of the rule, without saying so outright.
Which Part of Rule 15a-6 Applies to Private Placements?
Because marketing a private placement is inherently a solicitation, the pathway most relevant to Regulation D offerings is Rule 15a-6(a)(3) — the "chaperoning" provision. This section is most often relied upon by foreign financial institutions that intend to actively solicit U.S. investors for securities transactions. It permits a foreign firm to induce or attempt to induce securities transactions by U.S. institutional investors and major U.S. institutional investors as long as the conditions of the rule are satisfied.[3]
The other provisions of the rule are narrower and rarely the right fit for an active placement:
Rule 15a-6(a)(1) exempts unsolicited transactions. If a U.S. investor independently seeks out the foreign firm and initiates the transaction, no chaperone is required — but this is difficult to rely on in the context of an offering the foreign firm is marketing, and the SEC construes "solicitation" broadly enough that most placement activity falls outside it.[4]
Rule 15a-6(a)(2) covers the distribution of research reports to major U.S. institutional investors. This is a research provision, not a mechanism for distrib uting private placement offering materials.
For the typical scenario — a foreign firm reaching out to U.S. institutions to raise capital in a Regulation D offering — chaperoning under Rule 15a-6(a)(3) is the operative framework.
Who Can a Foreign Firm Solicit in a Regulation D Deal?
Here is where the interplay between the two rules becomes especially important, because each imposes its own limits on the pool of eligible investors — and the limits are not the same.
Regulation D generally permits sales to accredited investors, a category that includes both certain entities and certain natural persons who meet income or net-worth thresholds. Rule 15a-6, however, restricts a foreign firm's solicitation to U.S. institutional investors and major U.S. institutional investors.[5] That definition does not include natural persons.
The practical consequence is that, even if an individual qualifies as an accredited investor and the issuer could lawfully sell to that person under Regulation D, a foreign firm relying on Rule 15a-6 chaperoning generally cannot solicit that individual. The narrower of the two investor limitations controls.
What are the Activities of a Chaperone in a Private Placement?
When a foreign financial institution places Regulation D securities with U.S. institutional investors through a chaperoning arrangement, Rule 15a-6(a)(3) requires the chaperone to:
“Effect” the transaction and oversee execution and settlement;
Maintain books and records relating to the transactions;
Comply with applicable U.S. net capital and recordkeeping requirements; and
Participate in communications with U.S. institutional investors that do not qualify as major U.S. institutional investors.[6]
Because the rule was written with securities trading in mind, these duties are mapped onto the placement rather than applied specifically. The requirement to "effect" transactions is met by routing the subscription and closing mechanics through the registered firm; the confirmation and recordkeeping obligations attach to the subscription documents rather than to a trade confirmation; and the duty with respect to communications applies to the distribution of offering materials just as it would to the distribution of a research report.
For solicitations of major U.S. institutional investors (those owning or managing in excess of $100 million), the chaperone need not participate in every phone call or email, and representatives of the foreign firm may visit those investors in the U.S. for up to thirty days per calendar year without chaperoning. The recordkeeping, confirmation, and transaction-effecting requirements of Rule 15a-6(a)(3) continue to apply regardless.
In addition to providing the above services, at Enclave Capital we review the underlying offering and subscription documents to help confirm that a foreign partner's Regulation D placement complies with applicable U.S. securities laws.
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Enclave Capital is the premier chaperoning firm in the U.S. We bring nearly 20 years of chaperoning experience and a deep understanding of U.S. securities laws, rules and regulations to provide comprehensive chaperoning services to our foreign financial partners.
This article is provided for general informational purposes only and does not constitute legal advice. Foreign financial institutions should consult qualified U.S. securities counsel regarding their specific circumstances.
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[1] Regulation D (17 CFR 230.500 et seq.) provides exemptions from the registration requirements of Section 5 of the Securities Act of 1933 for certain limited offerings, including the widely used private placement exemption under Rule 506.
[2] See Frequently Asked Questions Regarding Rule 15a-6 and Foreign Broker-Dealers, SEC Division of Trading and Markets, Question 11.1 (Mar. 21, 2013) (addressing the minimum net capital requirement for a chaperoning broker-dealer where the foreign broker-dealer's business under Rule 15a-6 is limited to providing private placement services to a U.S. institutional investor or major U.S. institutional investor).
[3] Rule 15a-6(a)(3) permits a foreign financial institution to solicit U.S. institutional investors and major U.S. institutional investors provided, among other conditions, that all resulting transactions are “effected” through a U.S.-registered broker-dealer acting as chaperone and that the foreign firm engages in no soft-dollar arrangements with the U.S. investor.
[4] Rule 15a-6 (17 CFR 240.15a-6) was adopted under the Securities Exchange Act of 1934 in the Rule 15a-6 Adopting Release, Exchange Act Release No. 27017 (July 11, 1989). In that release, the SEC describes solicitation broadly to include any affirmative effort by a broker or dealer intended to induce transactional business for the broker-dealer or its affiliates — for example, telephone calls encouraging use of the firm, advertising directed into the U.S., and recommendations to buy or sell particular securities with the expectation that the trade will be executed through the firm.
[5] "U.S. institutional investor" is defined in Rule 15a-6 to include a registered investment company; a bank, savings and loan association, insurance company, business development company, small business investment company, or employee benefit plan defined in Rule 501(a)(1) of Regulation D; a private business development company defined in Rule 501(a)(2); an organization described in Section 501(c)(3) of the Internal Revenue Code, as defined in Rule 501(a)(3); or a trust defined in Rule 501(a)(7). "Major U.S. institutional investor" means a U.S. institutional investor with assets, or assets under management, in excess of $100 million, together with the categories the SEC recognized in its "Nine Firms" no-action letter.
[6] For solicitations of U.S. institutional investors that do not qualify as major U.S. institutional investors, the chaperoning broker-dealer must participate in the communications between the foreign financial institution and the investor, including phone calls, emails, and in-person visits (subject to a carve-out for communications made outside New York Stock Exchange trading hours).
