RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE
Re: IPONET
Incoming letter dated July 23, 1996
Based on the facts presented, the Division's views are as follow:
(1) The reference in Rule 134(d) to "an enclosed or attached coupon or card, or in some other manner" would be equally applicable to the acceptance of indications of interest via electronic coupon or card as well as paper coupon or card by W.J. Gallagher & Company, Inc. ("Gallagher"). In this regard, we note your representation that the other requirements of Rule 134(d) will be satisfied in connection with the acceptance of such indications of interest.
(2) The qualification of accredited or sophisticated investors in the manner described and the posting of a notice of a private offering in a password-protected page of IPONET accessible only to IPONET members who have qualified as accredited investors would not involve any form of "general solicitation" or "general advertising" within the meaning of Rule 502(c) of Securities Act Regulation D. In reaching this conclusion, we note that (a) both the invitation to [*2] complete the questionnaire used to determine whether an investor is accredited or sophisticated and the questionnaire itself will be generic in nature and will not reference any specific transactions posted or to be posted on the password-protected page of IPONET; (b) the password-protected page of IPONET will be available to a particular investor only after Gallagher has made the determination that the particular potential investor is accredited or sophisticated; and (c) a potential investor could purchase securities only in transactions that are posted on the password-protected page of IPONET after that investor's qualification with IPONET. In this regard, we take no position as to whether the information obtained by Gallagher is sufficient to form a reasonable basis for believing an investor to be accredited or sophisticated.
Because these positions are based on the representations made to the Division in your letter, it should be noted that any different facts might require a different result.
Sincerely,
Joseph Babits
Special Counsel
INQUIRY-1: RADCLIFF, FRANDSEN, TRICKER & DONGELL
LAWYERS
FORTIETH FLOOR
777 SOUTH FIGUEROA STREET
LOS ANGELES, CALIFORNIA 90017-5800
TELEPHONE (213) 614-1900 [*3]
FACSIMILE: LOS ANGELES: (213) 489-9263
Securities Act of 1933, as amended, Sections: 2(10), Rule 230.134
4(2)
Regulation D, Section 502(c)
July 23, 1996
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
Washington, D.C. 20549
Re: IPONET
Ladies and Gentlemen:
I am submitting this request for a No Action Letter pursuant to Release No. 33-6269. Accordingly, please find enclosed seven copies of this letter, together with the original.
Summary of Request
The specific requests for no action assurance are set forth in detail later in this letter. As an introduction, IPONET seeks assurance on the following issues:
1. Indications of Interest may be Accepted Electronically. In connection with a public offering, W.J. Gallagher & Company, Inc., may accept indications of interest via electronic coupon or card as well as a paper coupon or card, if the requirements of Rule 134(d) are otherwise met.
2. The Posting of a Notice of a Private Offering in a Password-protected Page of IPONET Accessible Only to IPONET Members Who Have Previously Qualified as Accredited Investors [*4] Does Not Involve Any Form, of General Solicitation or General Advertising Within the Meaning of Regulation D Section 502(c). W.J. Gallagher & Company, Inc., through the IPONET web site, will solicit individuals who meet the "accredited investor" or sophisticated investor standards of Regulation D to register as "Accredited Investors" as a means of building a customer base and data base of accredited and sophisticated investors for W.J. Gallagher & Company, Inc. After an individual has been determined to meet the requirements of an Accredited Investor, the Accredited Investor may review offers for private offerings of securities from companies that have posted private offerings with IPONET in accordance with the rules otherwise applying under Regulation D. The solicitation for Accredited Investors will be independent of and will not be linked to or made specifically with reference to any pending private offering. Accredited Investors may not invest in private offerings that were posted on IPONET before the Accredited Investor registered. Under these circumstances, an offer of securities otherwise satisfying the requirements of Regulation D to accredited or sophisticated investors [*5] who have been independently and previously solicited as customers of W.J. Gallagher & Company, Inc. will not constitute a general solicitation or general advertising within the meaning of Regulation D Section 502(c).
The Facts
1. IPONET is a sole proprietorship, wholly owned by Leo J. Feldman ("Feldman"), an individual. W.J. Gallagher & company has established and will maintain a system to supervise the activities of Feldman, including those pursued through IPONET, that is reasonably designed to achieve compliance with all applicable securities laws and regulations, and with the rules of the NASD and any other applicable self-regulatory organization.
2. Feldman is a registered principal of W.J. Gallagher & Company, Inc. W.J. Gallagher & Company, Inc., conducts a general securities business, including participation in public offerings as a "selected dealer".
3. IPONET has established a home page and other linked pages (collectively "Site") on the World Wide Web located at http://www.zanax.com.iponet. IPONET intends to post on its Site "tombstone" advertisements meeting the requirements of Rule 134, together with the red herring prospectus meeting the requirements of Rule 430. [*6] Such "tombstone" advertisements and the red herring prospectus will set forth the names of the underwriters,. In cases where W. J. Gallagher & Co., Inc. will not act as an underwriter, the name of W.J. Gallagher & Company, Inc., will not appear on the "tombstone" or on the red herring prospectus. The distribution of the "tombstone" advertisement and the red herring prospectus by the issuer and its underwriters through the Site will be in accordance with Release 33-7233, dated October 6, 1995. The Site will also set forth a separate statement substantially as follows: "The securities offered by [Name of Issuer] pursuant to the Preliminary Prospectus dated [insert date] are available through W.J. Gallagher & Company, Inc." In addition, in the case where W.J. Gallagher & Company, Inc., will not act as an underwriter, the Site will contain a statement substantially as follows: "W.J. Gallagher & Company, Inc., is not an underwriter of the securities of [Name of Issuer], but is authorized to accept customer orders for the purchase of the securities." In such cases, W.J. Gallagher & Company, Inc., will not purchase any of the securities from the Issuer for resale, will not participate in [*7] any such undertaking directly or indirectly, will not participate in the management of the distribution of the issue or any part of the issue, and will not perform any function normally performed by an underwriter or underwriting syndicate. IPONET is not asking for the Division's view on whether IPONET or W.J. Gallagher & Co., Inc., is acting as an underwriter, since such determinations are made on a case by case basis.
4. The IPONET Site will also link to any "tombstone" advertisements or red herring prospectus the following statements from Rule 134(b)(1) and (d), respectively:
"A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This (communication) shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State."
"No offer to buy the securities [*8] can be accepted and no part of the purchase price can be received until the registration statement has become effective and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance given after the effective date. An indication of interest in response to this advertisement will involve no obligation or commitment of any kind."
5. The Site will also contain an electronic "coupon" or
"card" linked to each red herring prospectus. A visitor to the Site will be
invited to complete and send this electronic "coupon" or "card", via e-mail or
communications link in the Site itself or by printing the coupon or card and
sending it by regular carrier, indicating an interest in purchasing the
security.
6. In cases where W.J. Gallagher & Company, Inc., will not
act as an underwriter, but the securities will be sold through W.J. Gallagher
& Company, Inc., as one of the "selected dealers", W.J. Gallagher &
Company, Inc., will receive a commission which will not exceed the usual and
customary distributors' or sellers' commission.
7. The Site contains a
section entitled "Accredited Investor". Persons who have previously [*9] registered as a member of IPONET are invited to request
registration with IPONET as an "Accredited Investor".
These Accredited Investors will be added to W.J. Gallagher & Company, Inc.'s
customer and data base. In order to register, the member must complete an
on-line questionnaire substantially in the form of Exhibit A, which is designed
to allow W.J. Gallagher & Company, Inc., and any potential issuer to
determine, or to have a basis for a reasonable belief; that a member is an
"accredited investor" within the meaning of Regulation D, Rule 501(a) or a
sophisticated investor under Rule 506. The questionnaire may be completed
on-line in a secured manner or printed out and returned in hard copy. W.J.
Gallagher & Company, Inc., will verify the information in the questionnaire
to determine that the member is an Accredited Investor. Once a Member is
qualified and registered as an "Accredited Investor", then the Accredited
Investor will be given a password which will allow the Accredited Investor to
access a password-protected page where private offerings will be posted and the
Accredited Investor may access further information. However, the IPONET site will only allow an
Accredited Investor [*10] access
to those private offerings which are posted subsequent in time to the Accredited
Investor qualification with IPONET. If the Accredited Investor has
consented, then IPONET may contact the Accredited
Investor in the future about new private offerings that are posted on IPONET.
8. The name of the
Accredited Investor will be kept confidential by IPONET and W.J. Gallagher &
Company, Inc., and will not be released to the issuers making the private
offerings unless the Accredited Investor specifically consents to such release
to a particular issuer. This consent may be given on-line.
9. Private
issuers may post their private offerings in the password-protected section of
IPONET. No mention or description of
the issuer of any nature will be available on IPONET to any person, other than those
who have previously qualified as Accredited Investors, who must use their
password to enter the password-protected part of IPONET.
10. In cases where W.J.
Gallagher & Company, Inc., is not acting as a broker-dealer, IPONET will charge a "listing fee," of
a set amount. The listing fee will cover such items as design and graphics work,
technical consulting regarding the listing, and historical popularity [*11] of the Site (analogous to the circulation
history of newspapers). The listing fee will be independent of the size of the
private offering any investment made by Accredited Investors, and the number of
hits to the Site after listing. (In such cases, W.J. Gallagher & Company,
Inc., will be completely independent of the issuer and W.J. Gallagher &
Company, Inc., will receive no compensation of any nature.) In cases where W.J.
Gallagher & Company, Inc., is acting as a broker-dealer, IPONET will still receive only the
listing fee and nothing more. Neither W.J. Gallagher & Company, Inc., nor
IPONET will have an affiliation with or
any interest of any kind in the issuer prior to or at the time of the offering
of the private offering.
11. An Accredited Investor may invest only in
private offerings which are posted on IPONET subsequent in time to the
registration of the Accredited Investor with IPONET, and then only after a
sufficient time has elapsed between the IPONET member's registration as an
Accredited Investor and the inception of a private offering so that the
registration as an Accredited Investor is not deemed to be a solicitation for a
particular private offering.
12. Each issuer [*12] desiring to list a private offering with
IPONET will covenant to issues
securities in a private offering in strict accordance with Regulation D. The
obligation to assure compliance with Regulation D will rest upon the issuer.
Legal Analysis
1. W.J. Gallagher
& Company, Inc. May Accept Indications of Interest Via E-Mail.
Rule 134(d) provides as follows:
(d) A communication sent or delivered to any person pursuant to this rule which is accompanied or preceded by a prospectus which meets the requirements of Section 10 of the Act at the date of such communication, may solicit from the recipient of the communication an offer to buy the security or request the recipient to indicate, upon an enclosed or attached coupon or card, or in some other manner (emphasis added), whether he might be interested in the security, if the communication contains substantially the following statement:
"No offer to buy the securities can be accepted and no part of the purchase price can be received until the registration statement has become effective, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance [*13] given after the effective date. An indication of interest in response to this advertisement will involve no obligation or commitment of any kind."
As described above in Facts,
paragraphs 3 and 4, the Site will contain the notices required by Rule 134(b)(1)
and (d) linked to any tombstone advertisement and red herring prospectus.
Rule 134(d) specifically contemplates that indications of interest may
be accepted by a "coupon or card, or in some other manner". IPONET's electronic "coupon" or "card"
may be sent directly from the Site or independently via e-mail, or printed in
hard copy and sent via regular carrier. An electronic or e-mail indication of
interest as described should qualify as a card or coupon in harmony with Release
No. 33-7233, October 6, 1995, and certainly qualifies under the phrase "some
other manner" and is entirely consistent with the 1933 Act and the Rules
thereunder. See the excerpt from Release No. 33-7233 set forth
below.
2. The Posting of a Notice of a Private Offering in a
Password-protected Page of IPONET Accessible Only to
IPONET Members Who Have
Previously Qualified as Accredited Investors Does Not Involve Any Form of
General Solicitation or [*14]
General Advertising Within the Meaning of Regulation D Section
502(c).
In H.B. Shaine & Co., Inc., No
Action Letter dated May 1, 1987, the staff indicated that a distribution by
Shaine of questionnaires to prospective accredited and sophisticated investors
to determine their suitability to participate in private offerings would not be
deemed a "general solicitation or general advertisement". This view was premised
upon several factors including the use of a generic questionnaire and upon the
elapse of a sufficient period of time between the completion of the
questionnaire and the contemplation or inception of any particular offering.
As described above in Facts, paragraphs 7-11, W.J.
Gallagher & Company, Inc., will follow substantially the same procedure as
Shaine. The primary distinction appears to be simply that the questionnaire will
be distributed electronically through the IPONET Site and the questionnaire may
be returned either electronically through a link in the Site, through e-mail, or
by hard copy, and one assumes that Shaine sent and received the questionnaires
through traditional means. Similarly, the documents relating to a private
offering to the Accredited [*15]
Investors would be distributed electronically through the IPONET Site password protected page
available only to Accredited Investors. The No Action letter did not address the
means of communications.
In Release No. 33-7233, the Commission stated:
The Commission appreciates the promise of electronic distribution of information in enhancing investors' ability to access, research, and analyze information, and in the provision of information by issuers and others. The Commission believes that, given the numerous benefits of electronic distribution of information and the fact that in many respects it may be more useful to investors than paper, its use should not be disfavored. * * * Given the numerous benefits of electronic media, the Commission encourages further technological research, development and application. The Commission believes that the use of electronic media should be at least an equal alternative to the use of paper-based media. Accordingly, issuer or third party information that can be delivered in paper under the federal securities laws may be delivered in electronic format. (Emphasis added.)
Accordingly, since W.J. Gallagher
& Company, Inc., will be soliciting [*16] questionnaires for Accredited Investors
and will be distributing information on private offerings electronically that it
could otherwise properly do by paper, the posting of private offerings in a
password protected page of IPONET would not involve general
solicitation or general advertisement within the meaning of Rule 502(c) under
the circumstances discussed above.
Conclusion
We request that you concur with the conclusions set forth above. If you
have questions or comments, please contact me directly.
Very
truly yours,
Russell M. Frandsen, of
RADCLIFF, FRANDSEN,
TRICKER
& DONGELL