Virtually all private securities offerings (offering) sold as unregistered exempt securities (units), are marketed on a “best efforts” basis. In a “best efforts” offering, the broker-dealer acts as the agent of the issuer (generally, the limited partnership or limited liability company) in attempting to sell the units directly from the issuer to the investors. In a “firm commitment” offering, the broker-dealer acquires the units from the issuer as a principal, marking up the price and then reselling the units to the investors. The spread between the cost of the units from the issuer and the resale price to the investors is the profit (or loss) to the broker-dealer in a “firm commitment” offering. In a “best efforts” offering, the broker-dealer is paid commissions from the issuer for sales made. Best efforts offerings frequently are made on an “all or none” or “part or none” (minimum-maximum) basis. In an “all or none” offering, all of the units must be sold during the specified offering period or the subscriptions must be promptly returned to the investors. In a “part or none” offering, the designated minimum amount must be sold within the specified time or subscriptions returned to investors.
The Oct. 11, 2016 and Dec. 19, 2016 columns discussed SEC Rule 15c2-4 and SEC Rule 10b-9, respectively, which establish procedures for best efforts offerings and prohibit improper practices. This column will discuss SEC and FINRA interpretive advice on transmitting subscription proceeds.
