Under an initiative approved last week by the membership of the North American Securities Administrators Association (NASAA), sponsors, issuers, broker-dealers and others involved in the offer and sale of shares of non-traded real estate investment trusts (REITs), business development companies and other direct participation programs (DPPs) will soon have a clear field to use electronic versions of their offering documents. Investors that wish to subscribe for shares, moreover, will be able to sign documents electronically.
While not effective until and as adopted by the various states, NASAA's e-delivery/e-signature initiative is a welcome development for issuers and financial services firms that have been generally forced until now to mail expensive printed documents that required a "wet" signature.
Why NASAA is acting
Despite general acceptance of electronic means for delivering documents relating to the offer and sale of securities, and despite the many ways in which investors can sign and adopt documents electronically, DPP offerings such as non-traded REITs have not been able to fully utilize available means for electronic delivery of their offering documents. Moreover, pursuant to NASAA guidance, issuers and their agents have been required to accept only those subscription documents that have been manually signed by the investor (ie, those with a "wet" signature).
This has added additional printing and mailing costs, of course, but it has also forced broker-dealers and other financial services firms to introduce a costly and complicated process to deliver or provide hard copy offering and subscription documents for DPP offerings recommended to their clients and to ensure that they are fully executed in manual fashion before being submitted for acceptance.
Accurate statistics are hard to come by, but it is generally believed that the current "wet signature" requirement is responsible for a large number of rejected or "not in good order" subscriptions received by DPP sponsors and their distribution arms.
NASAA's e-initiative: key elements
NASAA's newly adopted Statement of Policy (SOP) is aimed at streamlining the document delivery process by allowing for offering materials to be delivered "over the Internet or by other electronic means" to prospective investors and their financial advisers. And the SOP embraces the federal "E-Sign" protocol and will allow investors to sign subscription and related documents electronically, thereby increasing the likelihood that investor paperwork will be filled out and executed correctly and the investor's subscription processed quickly and efficiently by the programs that are in the market raising capital.
As is to be expected, there are elements of the new SOP that warrant focus and that will require sponsors, issuers, financial advisers and others to take steps to ensure that their e-delivery and e-signature programs are consistent with the SOP's requirements. Among the main elements that deserve attention are the following:
Electronic delivery requirements - general
- The offering document (which includes among other things the prospectus, sales literature and subscription document) must be delivered as a single integrated document (or file), or if in multiple parts must be delivered together as a single package or list.
- The format must permit the recipient to store, retrieve and print the document.
Electronic signature requirements - general
- The process for obtaining e-signatures must follow the Federal E-Sign Act and the Uniform Electronic Transactions Act, which impose requirements relating to accuracy, security and disclosures and
- The process must employ a user authentication element as well as include safeguards against alternation as well as retention requirements.
- To carry out e-delivery, issuers and their agents (including selling brokers), must obtain "informed consent" from the investor or prospect, must ensure that delivery occurs at or before the time required by law, and must retain and make available evidence of delivery. Consent may be obtained either individually in connection with each offering, or on a global basis, subject to revocation at any time.
- For e-signature, investors are required to expressly opt in and can terminate their participation at any time. An issuer can get an investor's consent for each offering, or provided by the issuer's agent.
Subscription agreement terms
Under the SOP, an issuer or its agent may deliver a subscription agreement for a single offering (multiple offerings if permitted by a state securities administrator), and allow that document to be reviewed and completed electronically, but only if:
- the issuer or financial adviser (or other agent) reviews "all appropriate documentation related to the prospective investment…" and
- "mechanisms" are established to ensure that the prospective investor "reviews all required disclosures"and "scrolls through the document in its entirety prior to initialing or signing."
Conditionality and cost
The SOP does not permit:
- an issuer or its agent to condition participation in an offering on the investor's willingness to agree to e-delivery and/or to implement the electronic signature capability
- an investor to be charged more to invest if he or she eschews e-delivery (other than higher costs associated with such factors as printing or mailing)or
- discounts in exchange for participation in an e-delivery program.
Policies and procedures
Issuers must have and must require their principal underwriters, dealer-managers, placement agents, broker-dealers and/or other selling agents to maintain, written policies and procedures covering the use of electronic offering documents and subscriptions as well as electronic signatures elements.
In the event that a security breach occurs and is discovered anywhere in the world, the issuer and, as appropriate, its agents are required to take the following actions, as relevant:
- identify and locate the breach
- secure the affected information
- suspend the use of the compromised device or technology and
- provide notice to each investor whose confidential personal information has been improperly accessed and to the securities administrator in each state where an affected investor resides.
Please direct any questions regarding the SOP to the author or another member of the DLA Piper Financial Services group.