Documentation Necessary for Electronic Private Placement Offerings

Quick Answer

Delivering private-placement offering documents electronically satisfies a delivery obligation when a firm provides three elements: direct notice that a document is available electronically, access comparable to paper delivery, and evidence that delivery actually occurred, most often the investor's informed consent to receive documents electronically.

What Three Elements Satisfy Electronic Delivery?

  • The SEC's interpretive guidance on electronic delivery sets out a three-part test for whether delivering documents such as the subscription agreement, offering memorandum, and investor questionnaire electronically satisfies a delivery obligation: notice, access, and evidence of delivery.
  • This is a 2000 interpretive release, not a rule on a periodic refresh cycle, but it remains the SEC's operative framework for electronic delivery of private-placement offering documents.

What Does Each Element Require?

  • Notice: direct notice to each investor that a document is available electronically. Posting a notice on a website, or publishing one in a newspaper, is not sufficient notice by itself; notice must reach the investor directly.
  • Access: electronic access comparable to paper delivery. A firm may deliver a document in Portable Document Format (PDF) if that format is not so burdensome that it effectively prevents access, for example by telling investors what is needed to open it and providing any necessary software or technical assistance at no cost.
  • Evidence of delivery: the firm must have a basis to conclude delivery actually occurred. Obtaining the investor's informed consent to electronic delivery is the primary way a firm satisfies this element.

Exam Tip: Gotchas

  • Notice, access, and evidence of delivery are the three elements of electronic delivery. Consent is not itself a fourth, separate element; it is the primary way a firm proves the evidence-of-delivery element.
  • Consent is informed when the investor is told the electronic medium or source that will be used, such as a particular website, any costs the investor may incur, such as online-connection charges, and the time and scope of the consent, including whether it is indefinite and covers more than one document type.
  • Consent may be given in writing, electronically, or telephonically, provided the firm retains a record of the consent sufficient to establish its authenticity.
  • The investor may revoke consent to electronic delivery at any time and receive documents in paper form afterward. Because a broad consent covers many documents, a firm may require revocation on an all-or-none basis, so long as it discloses that policy when it obtains the consent.
  • Implied consent, such as treating an investor's silence after notification as consent, does not satisfy the evidence-of-delivery element; consent must be affirmative.
  • Documents that are hyperlinked to each other, or listed together on the same website menu, are treated as delivered together, as if placed in the same paper envelope. A firm can satisfy a requirement to deliver multiple offering documents together, such as an offering memorandum and a subscription agreement, through linked electronic files.
  • An investor may give one global consent covering all documents of any issuer held through a particular intermediary, so long as that consent is informed.
  • A global consent must identify the types of electronic media that may be used. It need not name the medium any particular issuer will use, and it need not list the issuers it covers.
  • Issuers may be added to a global consent later without a further consent, if the consent says so. An investor can never be required to accept delivery through additional media later without giving a further informed consent.
  • A firm generally may not condition opening a brokerage account on the investor giving a global consent. If it does, the consent is not informed, and absent other evidence of delivery, the evidence-of-delivery element fails. The narrow exception is a firm that requires accounts to be opened and all transactions conducted online.
  • A firm may rely on a consent that a third-party document delivery service obtained. The issuer or broker-dealer keeps ultimate responsibility for confirming that consent is authentic and for delivering the documents.

Exam Tip: Gotchas

  • A global consent buried in an agreement the investor must sign to open the account is the classic wrong answer. Requiring the consent as the price of the account is what makes it uninformed, not the breadth of the consent itself.

  • An investor's silence after notice is not consent. Consent to electronic delivery must be affirmative, and the investor can revoke it at any time and switch back to paper.

What Should You Check on Exam Day?

  • Confirm all three elements are present: notice, access, and evidence of delivery, not just consent alone.
  • Check that notice reached the investor directly; a website posting or newspaper notice alone is not sufficient.
  • Verify consent specifies the medium, any costs, and the time and scope of delivery before treating it as informed.
  • Watch for implied consent, such as silence after notification, presented as satisfying the evidence-of-delivery element. It does not.
  • Check whether a global consent was a condition of opening the account. If it was, it is not informed.