Tag: safe harbor

Unlucky 13: FTC Settles Charges under International Safe Harbor Framework

Thirteen companies have agreed to settle with the Federal Trade Commission (FTC) charges relating to their participation in the U.S.–EU and U.S.–Swiss Safe Harbor Frameworks. Seven companies allegedly failed to renew their Safe Harbor self-certifications, including a sports marketing firm, two software developers, a research organization, a business information firm, a security consulting firm, and an e-discovery service provider. Another six allegedly failed to seek certification under the Frameworks, but nevertheless claimed in their privacy policies to be certified, including an amusement park, two sporting companies, a medical waste service provider, a food manufacturer, and an e-mail marketing firm. Last year, fourteen companies settled with the FTC over similar claims, and advocacy group named 30 companies in a complaint alleging that they were out of compliance with the Safe Harbor Frameworks.

The European Commission’s Directive on Data Protection prohibits the transfer of personal data to non-EU countries that do not meet the EU standard for privacy protection, so the U.S. Department of Commerce (DOC) negotiated the Safe Harbor Frameworks to allow U.S entities to receive such data provided that they comply with the Directive. To participate in the Safe Harbor Frameworks, companies must annually self-certify that they comply with seven key privacy principles for meeting EU’s adequacy standard: notice, choice, onward transfer, security, data integrity, access, and enforcement. Only appropriately self-certified companies may display the Safe Harbor certification mark on their websites, and the FTC is charged with enforcing violations.

This enforcement action is a reminder of the importance of maintaining current Safe Harbor status for those who elect to participate the program. It is also a reminder that companies must act in accordance with their published privacy policies, and periodically review their privacy policies to ensure that they remain current and reflect companies’ actual practices.

ARTICLE BY Sheila A. Millar, Tracy P. Marshall & Nathan A. Cardon of Keller and Heckman LLP

© 2015 Keller and Heckman LLP

Patent Safe Harbor Applies To Supplemental New Drug Applications

On May 13, 2015, the Federal Circuit confirmed in Classen Immunotherapies, Inc. v. Elan Pharmaceuticals, Inc. that the safe harbor provisions of 35 U.S.C. § 271(e)(1) can shield post-FDA approval activities from liability for patent infringement when the activities generated information that was submitted to the FDA to support a supplemental New Drug Application andCitizen’s Petition. However, the Federal Circuit remanded the case to the district court to determine whether other allegedly infringing activities, such as using the information to file a patent application, also were shielded by the statute.

The Claims At Issue

The patent at issue was Classen’s U.S. 6,584,472, directed to a method for accessing and analyzing data on a commercially available drug to identify a new use of that drug, and then commercializing the new use. Claim 36 (which depends from claim 33, which was canceled during reexamination) is representative of the asserted method claims, and claim 59 is representative of the asserted kit claims:

33. A method for creating and using data associated with a commercially available product, wherein the method comprises the steps of:
accessing at least one data source, comprising together or separately, adverse event data associated with exposure to or use of the product and commercial data regarding marketing, sales, profitability or related information pertaining to the product;
analyzing the accessed data to identify (i) at least one new adverse event associated with exposure to or use of the product, (ii) at leastone new use for the product responsive to identification of the at least one new adverse event, and (iii) the potential commercial value of the at least one new use for the product; and
commercializing the newly identified product information based upon the analyzed data.

36.  The method of claim 33, wherein the commercializing step comprises formatting the data relating to at least one new adverse event associated with exposure to, or use of the product, or documenting same, such that a manufacturer or distributor of the product must inform consumers, users or individuals responsible for the user, physicians or prescribers about at least one new adverse event associated with exposure to or use of the product.

59.  A proprietary kit comprising (i) product and (ii) documentation notifying a user of the product of at least one new adverse event relating to the product, wherein determination of the new adverse event is based upon the data provided by the method of claim 36.

Footnote 1 of the Federal Circuit decision states, “Because issues of validity are not before us in this appeal, we express no opinion as to whether the asserted claims cover patent ineligible subject matter in light of the Supreme Court’s decision in Alice Corp. v. CLS Bank International, 573 U.S. __, 134 S. Ct. 2347 (2014).”

Procedural Background

Classen asserted U.S. Patent No. 6,584,472 against Elan, alleging that Elan infringed the patent by (i) studying the effect of food on the bioavailability of the FDA-approved muscle relaxant Skelaxin, (ii) using the clinical data to identify a new use for the drug, and (iii) commercializing the new use. In particular, after Skelaxin was approved, Elan conducted clinical studies on the effect of the drug when administered with or without food, and then submitted the results to the FDA when seeking approval of a supplemental New Drug Application (“sNDA”) to revise the labeling for Skelaxin and in a Citizen’s Petition proposing changes to the approval requirements for generic versions of Skelaxin. Additionally, Elan filed patent applications based on the new clinical data and sold kits with the revised label containing information derived from the data.

The U.S. District Court for the District of Maryland granted Elan’s motion for summary judgment of non-infringement, finding that Elan’s activities were “reasonably related to the submission of information” under the Federal Food, Drug, and Cosmetic Act (FDCA), and were therefore protected by the safe harbor provision of 35 U.S.C. § 271(e)(1). Classen appealed to the Federal Circuit.

The Federal Circuit Decision

The Federal Circuit decision was authored by Judge Lourie and joined by Chief Judge Prost and District Judge Gilstrap (of the Eastern District of Texas) sitting by designation.

On appeal, Classen argued that Elan’s activities are not exempt under the safe harbor because they involved merely “routine” post-approval reporting to the FDA, which the Federal Circuit held in its 2011 decision in Classen Immunotherapies, Inc. v. Biogen IDEC lies outside the scope of the § 271(e)(1) safe harbor.

This statute provides in relevant part:

It shall not be an act of infringement to make, use, offer to sell, or sell within the United States or import into the United States a patented invention . . . solely for uses reasonably related to the development and submission of information under a Federal law which regulates the manufacture, use, or sale of drugs . . . .

In Classen v. Biogen, the court indicated that the safe harbor applies only to pre-marketing activities, and held that the safe harbor “does not apply to information that may be routinely reported to the FDA, long after marketing approval has been obtained.” However, a year later in Momenta Pharmaceuticals, Inc. v. Amphastar Pharmaceuticals, Inc., the Federal Circuit held that the safe harbor can shield post-approval activities from giving rise to liability for patent infringement where the information submitted to the FDA “is necessary both to the continued approval of the ANDA and to the ability to market the … drug.” Thus, it is not surprising that in this case the Federal Circuit noted that the statutory language does not “categorically exclude post-approval activities from the ambit of the safe harbor.”

Turning to the activities at issue, the Federal Circuit found that post-approval studies conducted to support an sNDA “serve similar purposes as pre-approval studies in ensuring the safety and efficacy of approved drugs.” Thus, the court reasoned, “As an integral part of the regulatory approval process, those activities are ‘reasonably related to the development and submission of information’ under the FDCA, 35 U.S.C. § 271(e)(1), and are therefore exempt from infringement liability.” The court  therefore concluded that the post-approval clinical trials, sNDA and Citizen’s Petition “clearly fall within the scope of the safe harbor.”

Although the Federal Circuit remanded to the district court to determine whether Elan’s activities related to “reanalyzing the clinical data to identify patentable information and filing patent applications are commercial activities outside the scope of the safe harbor,” and whether “selling Skelaxin with the revised label that contained the information derived from the clinical study” infringed the Classen kit claims, the court took it upon itself to “assist the district court in its analysis of infringement . . . [by] mak[ing] the following observations of the record:”

  • Filing a patent application is generally not an infringement of a patent

  • Filing a patent application is not commercialization of an invention, and so a method claim requiring commercialization is likely not infringed by Elan’s actions

  • Placing information submitted to the FDA on a product label generally cannot be an act of infringement.

Given these “observations,” it seems unlikely that the district court will find that Elan infringed the claims at issue.

The Wide Mouth of the Safe Harbor

This decision is one of many Federal Circuit decisions that broadly construe the safe harbor of § 271(e)(1). Indeed, less than one year after the court seemed to draw a bright line around the scope of the safe harbor that excluded post-approval activities, the court blurred that line in Momenta and now it has erased it further in this case.

The Commercial Value of Patent Applications

Although the Federal Circuit’s “observation” that filing a patent application generally is not an act of infringement may be correct, we question its suggestion that filing a patent application is not a commercial activity. To the contrary, filing a patent application can be an essential step of a commercialization plan, and can increase the commercial value of the invention. On the other hand, we would agree that it is unusual that a patent could be infringed by “commercializing … information,” as recited in the Classen patent.

Dealing with Personal Information at the Water’s Edge… Re: U.S. Safe Harbor Program

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Privacy and data security issues and concerns do not stop at the water’s edge. Companies needing to share personal information, even when the sharing will take place inside the same “company,” frequently run into challenges when that sharing takes place across national borders. In some ways, the obstacles created by the matrix of federal and state data privacy and security laws in the U.S. are dwarfed by the matrix that exists internationally. Most countries regulate to some degree the handling of data, from access, to processing, to disclosure and destruction. And, the law continues to develop rapidly, sometimes due to unexpected events. Take, for example, the U.S. Safe Harbor programthat was designed to facilitate the transfer of personal data of individuals in the European Union (EU) to the United States. Because the EU believes that the law in some countries, including the U.S., fails to provide “adequate safeguards,” the general rule is that personal data of EU persons cannot be sent to the U.S. unless an exception applies. One exception is based on a negotiated deal between the EU and the U.S., commonly known as the U.S. Safe Harbor, a program which currently is in some jeopardy due to the recent reports of NSA monitoring, Snowden, etc.

data information EU European Union world

Currently, to meet the Safe Harbor, a company must take certain steps, including (i) appointing a privacy ombudsman; (ii) reviewing and auditing data privacy practices; (iii) establishing a data privacy policy that addresses the following principles: notice, choice, onward transfer of data, security, integrity, access and enforcement; (iv) implementing privacy and enforcement procedures; (v) obtaining consents and creating inventory of consents for certain disclosures; and (vi) self-certifying compliance to the U.S. Department of Commerce.

A recent statement from Viviane Reding, European Commissioner for Justice, Fundamental Rights and Citizenship, quoted in The Guardian, October 17, 2013, signals some changes may be in store for the Safe Harbor:

The Safe Harbour may not be so safe after all. It could be a loophole because it allows data transfers from EU to US companies, although US data protection standards are lower than our European ones,” said Reding. “Safe Harbour is based on self-regulation and codes of conduct. In the light of the recent revelations, I am not convinced that relying on codes of conduct and self-regulation that are not policed in a strict manner offer the best way of protecting our citizens.

At the same time, the EU continues to update and strengthen its protections for personal data. Companies that operate globally need to be sensitive to not only complying with the laws specific to activities within a jurisdiction, but also to activities between jurisdictions. Common business decisions such as deciding where data will be stored, setting up global databases for employees medical, personnel and other information, arranging for enterprise-wide employee benefits or monitoring programs, can face significant obstacles relating to the interplay of the data privacy and security laws of the countries involved.

Article by:

Joseph J. Lazzarotti

By:

Jackson Lewis P.C.

SEC Proposes to Permit General Solicitation in Private Offerings

An article, SEC Proposes to Permit General Solicitation in Private Offerings, by Alan Singer of Morgan, Lewis & Bockius LLP was recently featured in The National Law Review:

 

Proposed rule amendments permit general solicitation and general advertising in Rule 506 and Rule 144A offerings but raise challenges for verification of accredited investor status of Rule 506 purchasers.

On August 29, the Securities and Exchange Commission (SEC) issued a release[1] proposing rule amendments designed to satisfy the legislative mandate of Sections 201(a)(1) and 201(a)(2) of the Jumpstart Our Business Startups Act (JOBS Act), which are focused on permitting general solicitation and general advertising (collectively, general solicitation) in offerings under Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933 (Securities Act), respectively. These amendments would enable issuers to utilize offering methods that previously have not been permitted in the private offering context.

Rule 506 is a “safe harbor” rule that, if its conditions are satisfied, provides for the exemption from registration of the offer and sale of securities based on Section 4(a)(2) of the Securities Act, which exempts transactions by an issuer not involving any public offering. Currently, an issuer or any person acting on the issuer’s behalf cannot engage in general solicitation in connection with a Rule 506 offering. Rule 144A is a “safe harbor” rule that, if its conditions are met, provides for the exemption from registration of resales of restricted securities based on Section 4(a)(1) of the Securities Act, which exempts transactions by persons other than an issuer, underwriter, or dealer. Under current Rule 144A, offers and sales must be limited to qualified institutional buyers (QIBs) or to persons the seller and any person acting on behalf of the seller reasonably believe are QIBs. This limitation has the practical effect of prohibiting general solicitation.

Section 201(a)(1) of the JOBS Act requires that the SEC amend Rule 506 to permit general solicitation in Rule 506 offerings, provided that all purchasers are accredited investors. Section 201(a)(2) requires the SEC to adopt amendments to Rule 144A to permit offers, including offers by means of general solicitation, to persons other than QIBs, provided that securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe are QIBs. Significantly, Section 201(a)(1) also mandates that rules promulgated by the SEC require the issuer to take “reasonable steps to verify” that all purchasers of securities in a Rule 506 offering involving general solicitation are accredited investors. In contrast, a verification requirement does not apply with respect to determining that a purchaser in a Rule 144A offering subject to general solicitation is a QIB.

The Proposed Amendments to Rule 506 and Rule 144A

The rule amendments proposed by the SEC principally are designed to implement the JOBS Act’s statutory mandate. Proposed new Rule 506(c) provides an exemption from registration for offerings that meet some of the conditions traditionally applicable to Rule 506 offerings, but Rule 506(c) offerings need not meet conditions prohibiting general solicitation and requiring dissemination of specified information in offerings to persons other than accredited investors, provided that all purchasers in the Rule 506(c) offering are accredited investors. In addition, Rule 506(c) would require that the “issuer . . . take reasonable steps to verify that purchasers of securities sold in any offering under [the proposed Rule 506(c) exemption] are accredited investors.” Rule 144A, as proposed to be amended, would no longer restrict offers to QIBs or to persons that the issuer or persons acting on the issuer’s behalf reasonably believe are QIBs. The QIB requirements would apply only to sales under Rule 144A. Because Rule 144A does not expressly prohibit general solicitation, the proposed amendment would effectively enable general solicitation in Rule 144A offerings.

Verification Requirement Under the Proposed Rule 506(c) Exemption

Most of the SEC’s release addresses the verification requirement with respect to accredited investors under new Rule 506(c). The SEC did not propose to require any specified methods of verification, or even provide a nonexclusive list of specified methods of verification. Instead, the SEC provided general guidance as to what constitutes “reasonable steps to verify.” Although the SEC stated that it “anticipate[s] that many practices currently used by issuers in connection with existing Rule 506 offerings would satisfy the verification requirement,” the SEC’s guidance is limited and does not provide much tangible information regarding the verification steps it would deem reasonable, subject to certain obvious exceptions.

The SEC stated that whether steps are reasonable would be based on a number of factors issuers “would consider.” The SEC then addressed what it characterized as “some examples” of these factors, namely the nature of the purchaser and the type of accredited investor the purchaser claims to be, information about the purchaser, and the nature and terms of the offering.

Nature of the Purchaser and Type of Accredited Investor the Purchaser Claims to Be

Not surprisingly, the SEC noted that, for entities such as registered broker-dealers, very little effort would be required to verify accredited investor status; in the case of a broker-dealer, merely checking the broker-dealer’s status on FINRA’s Broker Check website would be sufficient. Of course, such a cut-and-dried approach is not always available, and the SEC noted that the nature of the reasonable steps an issuer would take to verify accredited investor status “would likely vary depending on the type of accredited investor that the purchaser claims to be.” Verification is more challenging with regard to natural persons, and the SEC acknowledged that taking reasonable steps to verify such persons’ accredited investor status “poses greater practical difficulties as compared to other categories of accredited investors, and these practical difficulties likely would be exacerbated by natural persons’ privacy concerns about the disclosure of personal financial information.”

Under Regulation D’s definition of “accredited investor,” a natural person is an accredited investor if his or her net worth, exclusive of the person’s primary residence, exceeds $1 million (subject to limited exclusions in calculating liabilities with respect to certain indebtedness secured by the person’s primary residence). In addition, a person is an accredited investor if he or she had an individual income in excess of $200,000 in each of the two most recent years or joint income with his or her spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year. As described below, while verification that a potential purchaser satisfies the income test could be achieved through the purchaser’s presentation of a Form W-2, providing verification of net worth will present more of a challenge.

Information About the Purchaser

Despite its acknowledgment of the difficulties in verifying the status of natural persons as accredited investors, the SEC indicated its unwillingness to countenance a process where the verification would be based solely on at least some forms of purchaser representations. The SEC stated, “[W]e do not believe that an issuer would have taken reasonable steps to verify accredited investor status if it required only that a person check a box in a questionnaire or sign a form, absent other information about the purchaser indicating accredited investor status.” As the examples provided by the SEC regarding acceptable forms of verification involve publicly available information or information obtained from third-party sources, there may be some question as to whether more comprehensive information provided by the purchaser, such as a detailed balance sheet, would satisfy the “other information” requirement.

An issuer’s inability to rely on such information could present a particular challenge in the context of verifying a natural person’s net worth. The income test applicable to natural persons and the assets test applicable to corporations, partnerships, Massachusetts or similar business trusts, or 501(c)(3) organizations could be verified through, for example, a Form W-2 (for purposes of the income test) or a bank statement or brokerage account statement (for purposes of the assets test). However, these types of verification will not be sufficient for the net worth test because that test requires not only assets but also liabilities to be taken into account. How does an issuer knows that it has verified all of a natural person’s outstanding liabilities if it cannot rely exclusively on the representations of the prospective purchaser? As described below, the SEC has suggested that verification by a third party, such as a broker-dealer, attorney, or accountant, may suffice if the issuer has a reasonable basis to rely on the verification. But the “reasonable basis” element of this alternative raises other concerns for an issuer. Therefore, we are hopeful that the SEC will provide additional guidance clarifying that, in this context, an issuer’s procurement of comprehensive information provided by the purchaser would constitute a “reasonable step.”

The SEC’s list of possible sources of verification of accredited investor status range from the obvious to the curious and include the following:

  • Publicly available information, for example:
    • For a Section 501(c)(3) organization, the organization’s Form 990 series return disclosing the organization’s total assets.
    • If the purchaser is a named executive officer of a company having a class of securities registered under the Securities Exchange Act of 1934, proxy statement disclosure of the person’s compensation.
  • Third-party information providing “reasonably reliable evidence,” such as the following:
    • For a natural person, copies of the person’s Form W-2.
    • “[T]he purchaser works in a field where industry and trade publications disclose average annual compensation for certain levels of employees or purchasers, and specific information about the average compensation earned at the purchaser’s workplace by persons at the level of the purchaser’s seniority is publically available.”
    • Verification by a third party, such as a broker-dealer, attorney, or accountant, “provided that the issuer has a reasonable basis to rely on such third-party verification.” The SEC did not provide any guidance on what constitutes a “reasonable basis” for such reliance. (In a footnote, the SEC speculated that perhaps verification services may develop, particularly for Web-based Rule 506 offering portals that include offerings for multiple issuers. The SEC noted that such services “as opposed to the issuer itself, could obtain appropriate documentation or otherwise verify accredited investor status.”)

Nature and Terms of the Offering

The SEC began its analysis here with the unsurprising observation that an issuer soliciting investors through a website generally available to the public “would likely be” obligated to take greater verification measures than an issuer who solicits new investors from a database of prescreened accredited investors “created and maintained by a reasonably reliable third party,” such as a registered broker-dealer. The SEC then proceeded to focus its analysis on the view expressed by some commentators that a purchaser’s ability to meet a high minimum investment amount “could be relevant to the issuer’s evaluation of steps that would be reasonable” to verify a purchaser’s status as an accredited investor. The SEC stated its belief that “there is merit to this view.” (A large minimum investment was at one time sufficient to confer accredited investor status on a purchaser. As initially adopted, Regulation D included among the categories of persons who were accredited investors a natural person who purchases at least $150,000 of the securities being offered, where the total purchase price did not exceed 20% of the person’s net worth at the time of sale, or joint net worth with the person’s spouse, and where the consideration paid was within specified categories. This category was rescinded in 1988.) The SEC stated:

[I]f an issuer knows little about [a natural person who is a] potential purchaser[,] . . . but the terms of the offering require a high minimum investment amount, then it may be reasonable for the issuer to take no steps . . . other than to confirm that the purchaser’s cash investment is not being financed by the issuer or by a third party, absent any facts that indicate that the purchaser is not an accredited investor.

This statement certainly does not constitute an endorsement of a minimum investment, by itself, as being sufficient to reasonably verify accredited investor status. By requiring that an issuer confirm a negative, namely that the purchaser’s cash investment is not being financed by the issuer or a third party, an issuer would appear to be facing a significant challenge absent the SEC’s willingness to countenance a purchaser’s own representation that it did not obtain such financing from a third party (obviously, the issuer will know if it financed such a purpose). The SEC provided no guidance on this issue.

In summing up its analysis of the factors addressed above, the SEC articulated a two-step test:

  1. Based on the information gained by looking at these factors, is it likely that a person qualifies as an accredited investor?
  2. If so, the issuer would have to take fewer steps to verify accredited investor status, and vice versa.

In our view, this two-step test is illusory and can be collapsed into a single test: Is the totality of information obtained by an issuer sufficient to support a reasonable conclusion that the person is an accredited investor? If so, the issuer has taken reasonable steps to verify that the purchaser is an accredited investor. If not, the issuer has not taken such steps. In other words, we believe that the SEC ultimately may determine the reasonableness of the steps taken based on its view of the reasonableness of the conclusion reached by the issuer regarding a purchaser’s accredited investor status. Such an analysis could be an invitation to the application of 20/20 hindsight.

“Reasonable Belief”

The SEC then engaged in a discussion of whether the “reasonable belief” standard continues to apply to the determination of accredited investors. Although the concept of “reasonable belief” is included in JOBS Act Section 201(a)(2) dealing with general solicitation in Rule 144A offerings, the concept is not included in Section 201(a)(1)’s requirement that all purchasers in a Rule 506 offering involving general solicitation must be accredited investors. Nevertheless, the SEC noted that the definition of “accredited investor” remains unchanged; that definition continues to include not only persons who come within the specified categories of accredited investors, but also persons the issuer reasonably believes come within the specified categories. As a result, the SEC concluded that the reasonable belief standard continues to apply to the determination of a person’s accredited investor status. In reaching this conclusion, the SEC noted its belief that the difference in the JOBS Act’s statutory language reflects the different manner in which the reasonable belief standard was included in Regulation D and Rule 144A as initially adopted, and not a congressional intent to eliminate the reasonable belief standard from Regulation D’s definition of “accredited investor.”

We believe the SEC’s analysis is sound, as far as it goes. But what constitutes a “reasonable belief” in the context of a traditional Rule 506 offering, which has not been subject to a verification requirement, and what constitutes a “reasonable belief” in the context of an offering under the new Rule 506(c) exemption from registration, which contains the verification requirement, likely are meaningfully different.

New Form D Check Box

Form D is a notice required to be filed with the SEC by issuers offering securities in reliance on an exemption from registration provided by Regulation D or by Section 4(a)(5) under the Securities Act. In conjunction with its amendment to Rule 506, the SEC proposed adding a separate check box for offerings relying on the new Rule 506(c) exemption (the current reference to “Rule 506” would be changed to “Rule 506(b)”). The SEC stated it proposed the change to assist its efforts to monitor general solicitation in Rule 506(c) offerings and to help it “look into the practices that would develop to satisfy the verification requirement.”

Privately Offered Funds

Section 3(c)(1) of the Investment Company Act of 1940 excludes from the definition of an “investment company” any issuer whose outstanding securities (other than short-term paper) are beneficially owned by no more than 100 beneficial holders. Section 3(c)(7) excludes from the “investment company” definition any issuer whose outstanding securities are owned exclusively by persons who, at the time of acquisition, are “qualified purchasers,” as defined in that act. In either case, the exemption applies only to issuers that are not making and do not “presently” (in the case of Section 3(c)(1)) or “at that time” (in the case of Section 3(c)(7)) propose to make a public offering of their securities.

For privately offered funds that may wish to rely on the proposed Rule 506(c) exemption, a question arises as to whether use of general solicitation would constitute a public offering that would make unavailable the Sections 3(c)(1) and 3(c)(7) exemptions. The SEC answered the question in the negative, noting that Section 201(b) of the JOBS Act states that offers and sales exempt under Rule 506, as revised under JOBS Act Section 201(a), will not be deemed to be public offerings under the federal securities laws as a result of general solicitation.

Integration of Rule 506 and Rule 144A Offerings with Regulation S Offerings

Regulation S is a “safe harbor” rule that articulates conditions that, if satisfied, would result in offers and sales of securities being deemed to take place outside of the United States and, therefore, not subject to the registration requirements under the Securities Act. It has been common for issuers to conduct offerings in reliance on Regulation S concurrently with a private offering in the United States conducted in accordance with Rule 506 or Rule 144A. This practice developed as a result of language in Regulation S itself, as well as specific SEC guidance in the release adopting Regulation S,[2] which stated that “[o]ffshore transactions made in compliance with Regulation S will not be integrated with registered domestic offerings or domestic offerings that satisfy the requirements for an exemption from registration under the Securities Act,” even if undertaken contemporaneously.

The use of general solicitation in Rule 506 or Rule 144A offerings raises a question regarding the continued ability to conduct those offerings concurrently with Regulation S offerings. Specifically, the question focuses on whether it remains possible to satisfy the Regulation S requirements that (1) securities sold without Securities Act registration must be sold in an offshore transaction and (2) there can be no directed selling efforts in the United States. In particular, commentators raised concerns regarding the impact of general solicitation on the “no directed selling efforts” requirement. Rather than specifically analyzing the interplay between general solicitation in Rule 506(c) and Rule 144A offerings and the “no directed selling efforts” requirement in Regulation S, the SEC simply reiterated that offshore offerings that are conducted in compliance with Regulation S would not be integrated with concurrent domestic unregistered offerings conducted in compliance with Rule 506 or Rule 144A, as proposed to be amended.

The application of this guidance is not entirely clear. We believe that, absent further guidance from the SEC, general solicitation in a Regulation S offering must be segregated from general solicitation in a U.S. offering such that the Regulation S solicitation will satisfy the “no directed selling efforts” requirement. With regard to Internet postings, taking steps such as providing separate uniform resource locators (URLs) containing information directed to specifically disparate audiences should be helpful. In the case of Internet postings in the context of a Regulation S offering, compliance with guidance provided by the SEC in Use of Internet Web Sites to Offer Securities, Solicit Securities Transactions or Advertise Investment Services, Release No. 33-7516 (March 23, 1998), would be prudent.

The comment period for the proposed rule amendments is relatively short, expiring on October 5, 2012. This may be a response to some political pressure on the SEC to dispense with proposed amendments and proceed directly to adopting final rules, particularly because the July 4, 2012, deadline set forth in the JOBS Act for adopting such rules has already passed.

[1]. Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-9354 (Aug. 29, 2012), available here.

[2]. Offshore Offers and Sales, Release No. 33-6863 (Apr. 24, 1990).

Copyright © 2012 by Morgan, Lewis & Bockius LLP

Indictments of Megaupload Are a Greater Threat to Web Users Than Piracy

Recently featured in The National Law Review was an article by Rachel Hirsch of  Ifrah Law regarding Megaupload Indictments:

 

 

 

In last week’s Megaupload indictment, the U.S. government has raised the debate over copyright infringement on the Web to a whole new level – treating the operators of one of the most popular sites on the Internet as if they were part of organized crime.

On January 19, 2012, a federal grand jury in the Eastern District of Virginia charged executives, founders and employees of Megaupload.com, one of the leading file-hosting services on the Web, with copyright infringement, conspiracy to commit racketeering and money laundering. The U.S. Department of Justice is charging that Megaupload.com caused over $500 million in lost revenue from “pirated” content such as music and movies. In addition, the government seized Megaupload’s domain names and shut down all of its sites, contending that Megaupload is an organization dedicated to copyright infringement.

These actions, more suitable to the type of steps that the government takes against an organized-crime enterprise dedicated to murder, theft and racketeering, are astonishing. The government seems to have ignored the fact that other popular content-sharing sites have successfully defended themselves in civil cases by using the safe harbor provisions of the Digital Millennium Copyright Act, which provide immunity to a site that promptly takes down infringing content.

Among those charged in the indictment were Megaupload founders Kim Dotcom and Mathias Ortmann, chief marketing and sales officer Fin Batato, and lead programmer Bram Van der Kolk. All four were arrested in Auckland, New Zealand. On Monday, the Auckland district court denied bail, making way for extradition proceedings that will likely be contested. In addition to the arrests, approximately 20 search warrants have also been executed within the United States and in eight additional countries. The Eastern District of Virginia has called for the seizure of 18 domain names associated with the site, and about $50 million in assets and targeted sites have been seized thus far.

The indictment is riddled with inconsistencies. On the one hand, the government asserts that Megaupload is not entitled to use the safe harbor provisions. According to the government, everything on the site was doctored to create a veneer of legitimacy, while its employees knew full well that the site’s main use was to distribute infringing content. Yet the government readily admits that it has Megaupload emails talking about using U.S. courts and lawyers to file actions against other “pirate” sites and that the site did take down illegal content and build an abuse tool. To top it all off, many big-name artists support the site, as evidenced by an entirely legal video posted on YouTube, which Megaupload tried to save in U.S. courts from takedown requests.

The 72-page indictment is not some knee-jerk reaction to the ongoing protests of proposed misguided legislation that would strengthen protections against piracy at severe costs to the Internet. This action was clearly in the works for some time. But the filing of a criminal case against one of the most popular sites in the world is remarkable to say the least, given that other popular content-sharing sites have never faced criminal charges for allegedly facilitating piracy. Indeed, when these other sites have been targeted in well-financed civil cases, they have successfully asserted defenses.

When Viacom filed its lawsuit against YouTube in 2007 based on charges that YouTube and its parent, Google were engaging in “massive intentional copyright infringement,” the government did not arrest YouTube or Google executives. In fact, the U.S. District Court for the Southern District of New York held that YouTube was shielded from liability in that case by the safe harbor provisions.

Similarly, when IO Group, Inc. filed a complaint against Veoh Networks for copyright infringement, the U.S. District Court for the Northern District of California held that Veoh’s video-sharing website was entitled to the protection of the safe harbor provision. In both cases, U.S. courts recognized that simply providing access to content did not equate to engaging in infringing activities.

Megaupload, an online storage and web hosting service site, counts itself in the same category as YouTube and Veoh — merely acting as a hosting company that provides access to content. By invoking the full wrath of U.S. criminal laws, the government is using tools that were never meant for this situation – and is potentially doing incalculable harm to thousands of Internet users and to the integrity of the Web itself.

© 2012 Ifrah PLLC