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October 10, 2018 |
Artificial Intelligence and Autonomous Systems Legal Update (3Q18)

Click for PDF We are pleased to provide the following update on recent legal developments in the areas of artificial intelligence, machine learning, and autonomous systems (or “AI” for short), and their implications for companies developing or using products based on these technologies.  As the spread of AI rapidly increases, legal scrutiny in the U.S. of the potential uses and effects of these technologies (both beneficial and harmful) has also been increasing.  While we have chosen to highlight below several governmental and legislative actions from the past quarter, the area is rapidly evolving and we will continue to monitor further actions in these and related areas to provide future updates of potential interest on a regular basis. I.       Increasing Federal Government Interest in AI Technologies The Trump Administration and Congress have recently taken a number of steps aimed at pushing AI forward on the U.S. agenda, while also treating with caution foreign involvement in U.S.-based AI technologies.  Some of these actions may mean additional hurdles for cross-border transactions involving AI technology.  On the other hand, there may also be opportunities for companies engaged in the pursuit of AI technologies to influence the direction of future legislation at an early stage. A.       White House Studies AI In May, the Trump Administration kicked off what is becoming an active year in AI for the federal government by hosting an “Artificial Intelligence for American Industry” summit as part of its designation of AI as an “Administration R&D priority.”[1] During the summit, the White House also announced the establishment of a “Select Committee on Artificial Intelligence” to advise the President on research and development priorities and explore partnerships within the government and with industry.[2]  This Select Committee is housed within the National Science and Technology Council, and is chaired by Office of Science and Technology Policy leadership. Administration officials have said that a focus of the Select Committee will be to look at opportunities for increasing federal funds into AI research in the private sector, to ensure that the U.S. has (or maintains) a technological advantage in AI over other countries.  In addition, the Committee is to look at possible uses of the government’s vast store of taxpayer-funded data to promote the development of advanced AI technologies, without compromising security or individual privacy.  While it is believed that there will be opportunities for private stakeholders to have input into the Select Committee’s deliberations, the inaugural meeting of the Committee, which occurred in late June, was not open to the public for input. B.       AI in the NDAA for 2019 More recently, on August 13th, President Trump signed into law the John S. McCain National Defense Authorization Act (NDAA) for 2019,[3] which specifically authorizes the Department of Defense to appoint a senior official to coordinate activities relating to the development of AI technologies for the military, as well as to create a strategic plan for incorporating a number of AI technologies into its defense arsenal.  In addition, the NDAA includes the Foreign Investment Risk Review Modernization Act (FIRRMA)[4] and the Export Control Reform Act (ECRA),[5] both of which require the government to scrutinize cross-border transactions involving certain new technologies, likely including AI-related technologies. FIRRMA modifies the review process currently used by the Committee on Foreign Investment in the United States (CFIUS), an interagency committee that reviews the national security implications of investments by foreign entities in the United States.  With FIRRMA’s enactment, the scope of the transactions that CFIUS can review is expanded to include those involving “emerging and foundational technologies,” defined as those that are critical for maintaining the national security technological advantage of the United States.  While the changes to the CFIUS process are still fresh and untested, increased scrutiny under FIRRMA will likely have an impact on available foreign investment in the development and use of AI, at least where the AI technology involved is deemed such a critical technology and is sought to be purchased or licensed by foreign investors. Similarly, ECRA requires the President to establish an interagency review process with various agencies including the Departments of Defense, Energy, State and the head of other agencies “as appropriate,” to identify emerging and foundational technologies essential to national security in order to impose appropriate export controls.  Export licenses are to be denied if the proposed export would have a “significant negative impact” on the U.S. defense industrial base.  The terms “emerging and foundational technologies” are not expressly defined, but it is likely that AI technologies, which are of course “emerging,” would receive a close look under ECRA and that ECRA might also curtail whether certain AI technologies can be sold or licensed to foreign entities. The NDAA also established a National Security Commission on Artificial Intelligence “to review advances in artificial intelligence, related machine learning developments, and associated technologies.”  The Commission, made up of certain senior members of Congress as well as the Secretaries of Defense and Commerce, will function independently from other such panels established by the Trump Administration and will review developments in AI along with assessing risks related to AI and related technologies to consider how those methods relate to the national security and defense needs of the United States.  The Commission will focus on technologies that provide the U.S. with a competitive AI advantage, and will look at the need for AI research and investment as well as consider the legal and ethical risks associated with the use of AI.  Members are to be appointed within 90 days of the Commission being established and an initial report to the President and Congress is to be submitted by early February 2019. C.       Additional Congressional Interest in AI/Automation While a number of existing bills with potential impacts on the development of AI technologies remain stalled in Congress,[6] two more recently-introduced pieces of legislation are also worth monitoring as they progress through the legislative process. In late June, Senator Feinstein (D-CA) sponsored the “Bot Disclosure and Accountability Act of 2018,” which is intended to address  some of the concerns over the use of automated systems for distributing content through social media.[7] As introduced, the bill seeks to prohibit certain types of bot or other automated activity directed to political advertising, at least where such automated activity appears to impersonate human activity.  The bill would also require the Federal Trade Commission to establish and enforce regulations to require public disclosure of the use of bots, defined as any “automated software program or process intended to impersonate or replicate human activity online.”  The bill provides that any such regulations are to be aimed at the “social media provider,” and would place the burden of compliance on such providers of social media websites and other outlets.  Specifically, the FTC is to promulgate regulations requiring the provider to take steps to ensure that any users of a social media website owned or operated by the provider would receive “clear and conspicuous notice” of the use of bots and similar automated systems.  FTC regulations would also require social media providers to police their systems, removing non-compliant postings and/or taking other actions (including suspension or removal) against users that violate such regulations.  While there are significant differences, the Feinstein bill is nevertheless similar in many ways to California’s recently-enacted Bot disclosure law (S.B. 1001), discussed more fully in our previous client alert located here.[8] Also of note, on September 26th, a bipartisan group of Senators introduced the “Artificial Intelligence in Government Act,” which seeks to provide the federal government with additional resources to incorporate AI technologies in the government’s operations.[9] As written, this new bill would require the General Services Administration to bring on technical experts to advise other government agencies, conduct research into future federal AI policy, and promote inter-agency cooperation with regard to AI technologies.  The bill would also create yet another federal advisory board to advise government agencies on AI policy opportunities and concerns.  In addition, the newly-introduced legislation seeks to require the Office of Management and Budget to identify ways for the federal government to invest in and utilize AI technologies and tasks the Office of Personal Management with anticipating and providing training for the skills and competencies the government requires going-forward for incorporating AI into its overall data strategy. II.       Potential Impact on AI Technology of Recent California Privacy Legislation Interestingly, in the related area of data privacy regulation, the federal government has been slower to respond, and it is the state legislatures that are leading the charge.[10] Most machine learning algorithms depend on the availability of large data sets for purpose of training, testing, and refinement.  Typically, the larger and more complete the datasets available, the better.  However, these datasets often include highly personal information about consumers, patients, or others of interest—data that can sometimes be used to predict information specific to a particular person even if attempts are made to keep the source of such data anonymous. The European Union’s General Data Protection Regulation, or GDPR, which went into force on May 25, 2018, has deservedly garnered a great deal of press as one of the first, most comprehensive collections of data privacy protections. While we’re only months into its effective period, the full impact and enforcement of the GDPR’s provisions have yet to be felt.  Still, many U.S. companies, forced to take steps to comply with the provisions of GDPR at least with regard to EU citizens, have opted to take many of those same steps here in the U.S., despite the fact that no direct U.S. federal analogue to the GDPR yet exists.[11] Rather than wait for the federal government to act, several states have opted to follow the lead of the GDPR and enact their own versions of comprehensive data privacy laws.  Perhaps the most significant of these state-legislated omnibus privacy laws is the California Consumer Privacy Act (“CCPA”), signed into law on June 28, 2108, and slated to take effect on January 1, 2020.[12]  The CCPA is not identical to the GDPR, differing in a number of key respects.  However there are many similarities, in that the CCPA also has broadly defined definitions of personal information/data, and seeks to provide a right to notice of data collection, a right of access to and correction of collected data, a right to be forgotten, and a right to data portability.  But how do the CCPA’s requirements differ from the GDPR for companies engaged in the development and use of AI technologies?  While there are many issues to consider, below we examine several of the key differences of the CCPA and their impact on machine learning and other AI-based processing of collected data. A.       Inferences Drawn from Personal Information The GDPR defines personal data as “any information relating to an identified or identifiable natural person,” such as “a name, an identification number, location data, an online identifier or to one or more factors specific to the physical, physiological, genetic, mental, economic, cultural or social identify of that nature person.”[13]  Under the GDPR, personal data has implications in the AI space beyond just the data that is actually collected from an individual.  AI technology can be and often is used to generate additional information about a person from collected data, e.g., spending habits, facial features, risk of disease, or other inferences that can be made from the collected data.  Such inferences, or derivative data, may well constitute “personal data” under a broad view of the GDPR, although there is no specific mention of derivative data in the definition. By contrast, the CCPA goes farther and specifically includes “inferences drawn from any of the information identified in this subdivision to create a profile about a consumer reflecting the consumer’s preferences, characteristics, psychological trends, preferences, predispositions, behavior, attitudes, intelligence, abilities and aptitudes.”[14]  An “inference” is defined as “the derivation of information, data, assumptions, or conclusions from evidence, or another source of information or data.”[15] Arguably the primary purpose of many AI systems is to draw inferences from a user’s information, by mining data, looking for patterns, and generating analysis.  Although the CCPA does limit inferences to those drawn “to create a profile about a consumer,” the term “profile” is not defined in the CCPA.  However, the use of consumer information that is “deidentified” or “aggregated” is permitted by the CCPA.  Thus, one possible solution may be to take steps to “anonymize” any personal data used to derive any inferences.  As a result, when looking to CCPA compliance, companies may want to carefully consider the derivative/processed data that they are storing about a user, and consider additional steps that may be required for CCPA compliance. B.       Identifying Categories of Personal Information The CCPA also requires disclosures of the categories of personal information being collected, the categories of sources from which personal information is collected, the purpose for collecting and selling personal information, and the categories of third parties with whom the business shares personal information. [16]  Although these categories are likely known and definable for static data collection, it may be more difficult to specifically disclose the purpose and categories for certain information when dynamic machine learning algorithms are used.  This is particularly true when, as discussed above, inferences about a user are included as personal information.  In order to meet these disclosure requirements, companies may need to carefully consider how they will define all of the categories of personal information collected or the purposes of use of that information, particularly when machine learning algorithms are used to generate additional inferences from, or derivatives of, personal data. C.       Personal Data Includes Households The CCPA’s definition of “personal data” also includes information pertaining to non-individuals, such as “households” – a term that the CCPA does not further define.[17]  In the absence of an explicit definition, the term “household” would seem to target information collected about a home and its inhabits through smart home devices, such as thermostats, cameras, lights, TVs, and so on.  When looking to the types of personal data being collected, the CCPA may also encompass information about each of these smart home devices, such as name, location, usage, and special instructions (e.g., temperature controls, light timers, and motion sensing).  Furthermore, any inferences or derivative information generated by AI algorithms from the information collected from these smart home devices may also be covered as personal information.  Arguably, this could include information such as conversations with voice assistants or even information about when people are likely to be home determined via cameras or motion sensors.  Companies developing smart home, or other Internet of Things, devices thus should carefully consider whether the scope and use they make of any information collected from “households” falls under the CCPA requirements for disclosure or other restrictions. III.       Continuing Efforts to Regulate Autonomous Vehicles Much like the potential for a comprehensive U.S. data privacy law, and despite a flurry of legislative activity in Congress in 2017 and early 2018 towards such a national regulatory framework, autonomous vehicles continue to operate under a complex patchwork of state and local rules with limited federal oversight.  We previously provided an update (located here)[18] discussing the Safely Ensuring Lives Future Deployment and Research In Vehicle Evolution (SELF DRIVE) Act[19], which passed the U.S. House of Representatives by voice vote in September 2017 and its companion bill (the American Vision for Safer Transportation through Advancement of Revolutionary Technologies (AV START) Act).[20]  Both bills have since stalled in the Senate, and with them the anticipated implementation of a uniform regulatory framework for the development, testing and deployment of autonomous vehicles. As the two bills languish in Congress, ‘chaperoned’ autonomous vehicles have already begun coexisting on roads alongside human drivers.  The accelerating pace of policy proposals—and debate surrounding them—looks set to continue in late 2018 as virtually every major automaker is placing more autonomous vehicles on the road for testing and some manufacturers prepare to launch commercial services such as self-driving taxi ride-shares[21] into a national regulatory vacuum. A.       “Light-touch” Regulation The delineation of federal and state regulatory authority has emerged as a key issue because autonomous vehicles do not fit neatly into the existing regulatory structure.  One of the key aspects of the proposed federal legislation is that it empowers the National Highway Traffic Safety Administration (NHTSA) with the oversight of manufacturers of self-driving cars through enactment of future rules and regulations that will set the standards for safety and govern areas of privacy and cybersecurity relating to such vehicles.  The intention is to have a single body (the NHTSA) develop a consistent set of rules and regulations for manufacturers, rather than continuing to allow the states to adopt a web of potentially widely differing rules and regulations that may ultimately inhibit development and deployment of autonomous vehicles.  This approach was echoed by safety guidelines released by the Department of Transportation (DoT) for autonomous vehicles.  Through the guidelines (“a nonregulatory approach to automated vehicle technology safety”),[22] the DoT avoids any compliance requirement or enforcement mechanism, at least for the time being, as the scope of the guidance is expressly to support the industry as it develops best practices in the design, development, testing, and deployment of automated vehicle technologies. Under the proposed federal legislation, the states can still regulate autonomous vehicles, but the guidance encourages states not to pass laws that would “place unnecessary burdens on competition and innovation by limiting [autonomous vehicle] testing or deployment to motor vehicle manufacturers only.”[23]  The third iteration of the DoT’s federal guidance, published on October 4, 2018, builds upon—but does not replace—the existing guidance, and reiterates that the federal government is placing the onus for safety on companies developing the technologies rather than on government regulation. [24]  The guidelines, which now include buses, transit and trucks in addition to cars, remain voluntary. B.       Safety Much of the delay in enacting a regulatory framework is a result of policymakers’ struggle to balance the industry’s desire to speed both the development and deployment of autonomous vehicle technologies with the safety and security concerns of consumer advocates. The AV START bill requires that NHTSA must construct comprehensive safety regulations for AVs with a mandated, accelerated timeline for rulemaking, and the bill puts in place an interim regulatory framework that requires manufacturers to submit a Safety Evaluation Report addressing a range of key areas at least 90 days before testing, selling, or commercialization of an driverless cars.  But some lawmakers and consumer advocates remain skeptical in the wake of highly publicized setbacks in autonomous vehicle testing.[25]  Although the National Safety Transportation Board (NSTB) has authority to investigate auto accidents, there is still no federal regulatory framework governing liability for individuals and states.[26]  There are also ongoing concerns over cybersecurity risks[27], the use of forced arbitration clauses by autonomous vehicle manufacturers,[28] and miscellaneous engineering problems that revolve around the way in which autonomous vehicles interact with obstacles commonly faced by human drivers, such as emergency vehicles,[29] graffiti on road signs or even raindrops and tree shadows.[30] In August 2018, the Governors Highway Safety Association (GHSA) published a report outlining the key questions that manufacturers should urgently address.[31]  The report suggested that states seek to encourage “responsible” autonomous car testing and deployment while protecting public safety and that lawmakers “review all traffic laws.”  The report also notes that public debate often blurs the boundaries between the different levels of automation the NHTSA has defined (ranging from level 0 (no automation) to level 5 (fully self-driving without the need for human occupants)), remarking that “most AVs for the foreseeable future will be Levels 2 through 4.  Perhaps they should be called ‘occasionally self-driving.'”[32] C.       State Laws Currently, 21 states and the District of Columbia have passed laws regulating the deployment and testing of self-driving cars, and governors in 10 states have issued executive orders related to them.[33]  For example, California expanded its testing rules in April 2018 to allow for remote monitoring instead of a safety driver inside the vehicle.[34]  However, state laws differ on basic terminology, such as the definition of “vehicle operator.” Tennessee SB 151[35] points to the autonomous driving system (ADS) while Texas SB 2205[36] designates a “natural person” riding in the vehicle.  Meanwhile, Georgia SB 219[37] identifies the operator as the person who causes the ADS to engage, which might happen remotely in a vehicle fleet. These distinctions will affect how states license both human drivers and autonomous vehicles going forward.  Companies operating in this space accordingly need to stay abreast of legal developments in states in which they are developing or testing autonomous vehicles, while understanding that any new federal regulations may ultimately preempt those states’ authorities to determine, for example, crash protocols or how they handle their passengers’ data. D.       ‘Rest of the World’ While the U.S. was the first country to legislate for the testing of automated vehicles on public roads, the absence of a national regulatory framework risks impeding innovation and development.  In the meantime, other countries are vying for pole position among manufacturers looking to test vehicles on roads.[38]  KPMG’s 2018 Autonomous Vehicles Readiness Index ranks 20 countries’ preparedness for an autonomous vehicle future. The Netherlands took the top spot, outperforming the U.S. (3rd) and China (16th).[39]  Japan and Australia plan to have self-driving cars on public roads by 2020.[40]  The U.K. government has announced that it expects to see fully autonomous vehicles on U.K. roads by 2021, and is introducing legislation—the Automated and Electric Vehicles Act 2018—which installs an insurance framework addressing product liability issues arising out of accidents involving autonomous cars, including those wholly caused by an autonomous vehicle “when driving itself.”[41] E.       Looking Ahead While autonomous vehicles operating on public roads are likely to remain subject to both federal and state regulation, the federal government is facing increasing pressure to adopt a federal regulatory scheme for autonomous vehicles in 2018.[42]  Almost exactly one year after the House passed the SELF DRIVE Act, House Energy and Commerce Committee leaders called on the Senate to advance automated vehicle legislation, stating that “[a]fter a year of delays, forcing automakers and innovators to develop in a state-by-state patchwork of rules, the Senate must act to support this critical safety innovation and secure America’s place as a global leader in technology.”[43]  The continued absence of federal regulation renders the DoT’s informal guidance increasingly important.  The DoT has indicated that it will enact “flexible and technology-neutral” policies—rather than prescriptive performance-based standards—to encourage regulatory harmony and consistency as well as competition and innovation.[44]  Companies searching for more tangible guidance on safety standards at federal level may find it useful to review the recent guidance issued alongside the DoT’s announcement that it is developing (and seeking public input into) a pilot program for ‘highly or fully’ autonomous vehicles on U.S. roads.[45]  The safety standards being considered include technology disabling the vehicle if a sensor fails or barring vehicles from traveling above safe speeds, as well as a requirement that NHTSA be notified of any accident within 24 hours. [1] See https://www.whitehouse.gov/wp-content/uploads/2018/05/Summary-Report-of-White-House-AI-Summit.pdf; note also that the Trump Administration’s efforts in studying AI technologies follow, but appear largely separate from, several workshops on AI held by the Obama Administration in 2016, which resulted in two reports issued in late 2016 (see Preparing for the Future of Artificial Intelligence, and Artificial Intelligence, Automation, and the Economy). [2] Id. at Appendix A. [3] See https://www.mccain.senate.gov/public/index.cfm/2018/8/senate-passes-the-john-s-mccain-national-defense-authorization-act-for-fiscal-year-2019.  The full text of the NDAA is available at https://www.congress.gov/bill/115th-congress/house-bill/5515/text.  For additional information on CFIUS reform implemented by the NDAA, please see Gibson Dunn’s previous client update at https://www.gibsondunn.com/cfius-reform-our-analysis/. [4] See id.; see also https://www.treasury.gov/resource-center/international/Documents/FIRRMA-FAQs.pdf. [5] See https://foreignaffairs.house.gov/wp-content/uploads/2018/02/HR-5040-Section-by-Section.pdf.   [6] See, e.g. infra., Section III discussion of SELF DRIVE and AV START Acts, among others. [7] S.3127, 115th Congress (2018). [8] https://www.gibsondunn.com/new-california-security-of-connected-devices-law-and-ccpa-amendments/. [9] S.3502, 115th Congress (2018). [10] See also, infra., Section III for more discussion of specific regulatory efforts for autonomous vehicles. [11] However, as 2018 has already seen a fair number of hearings before Congress relating to digital data privacy issues, including appearances by key executives from many major tech companies, it seems likely that it may not be long before we see the introduction of a “GDPR-like” comprehensive data privacy bill.  Whether any resulting federal legislation would actually pre-empt state-enacted privacy laws to establish a unified federal framework is itself a hotly-contested issue, and remains to be seen. [12] AB 375 (2018); Cal. Civ. Code §1798.100, et seq. [13] Regulation (EU) 2016/679 (General Data Protection Regulation), Article 4 (1). [14] Cal. Civ. Code §1798.140(o)(1)(K). [15] Id.. at §1798.140(m). [16] Id. at §1798.110(c). [17] Id. at §1798.140(o)(1). [18] https://www.gibsondunn.com/accelerating-progress-toward-a-long-awaited-federal-regulatory-framework-for-autonomous-vehicles-in-the-united-states/. [19]   H.R. 3388, 115th Cong. (2017). [20]   U.S. Senate Committee on Commerce, Science and Transportation, Press Release, Oct. 24, 2017, available at https://www.commerce.senate.gov/public/index.cfm/pressreleases?ID=BA5E2D29-2BF3-4FC7-A79D-58B9E186412C. [21]   Sean O’Kane, Mercedes-Benz Self-Driving Taxi Pilot Coming to Silicon Valley in 2019, The Verge, Jul. 11, 2018, available at https://www.theverge.com/2018/7/11/17555274/mercedes-benz-self-driving-taxi-pilot-silicon-valley-2019. [22]   U.S. Dept. of Transp., Automated Driving Systems 2.0: A Vision for Safety 2.0, Sept. 2017, https://www.nhtsa.gov/sites/nhtsa.dot.gov/files/documents/13069a-ads2.0_090617_v9a_tag.pdf. [23]   Id., at para 2. [24]   U.S. DEPT. OF TRANSP., Preparing for the Future of Transportation: Automated Vehicles 3.0, Oct. 4, 2018, https://www.transportation.gov/sites/dot.gov/files/docs/policy-initiatives/automated-vehicles/320711/preparing-future-transportation-automated-vehicle-30.pdf. [25]   Sasha Lekach, Waymo’s Self-Driving Taxi Service Could Have Some Major Issues, Mashable, Aug. 28, 2018, available at https://mashable.com/2018/08/28/waymo-self-driving-taxi-problems/#dWzwp.UAEsqM. [26]   Robert L. Rabin, Uber Self-Driving Cars, Liability, and Regulation, Stanford Law School Blog, Mar. 20, 2018, available at https://law.stanford.edu/2018/03/20/uber-self-driving-cars-liability-regulation/. [27]   David Shephardson, U.S. Regulators Grappling with Self-Driving Vehicle Security, Reuters. Jul. 10, 2018, available at https://www.reuters.com/article/us-autos-selfdriving/us-regulators-grappling-with-self-driving-vehicle-security-idUSKBN1K02OD. [28]   Richard Blumenthal, Press Release, Ten Senators Seek Information from Autonomous Vehicle Manufacturers on Their Use of Forced Arbitration Clauses, Mar. 23, 2018, available at https://www.blumenthal.senate.gov/newsroom/press/release/ten-senators-seek-information-from-autonomous-vehicle-manufacturers-on-their-use-of-forced-arbitration-clauses. [29]   Kevin Krewell, How Will Autonomous Cars Respond to Emergency Vehicles, Forbes, Jul. 31, 2018, available at https://www.forbes.com/sites/tiriasresearch/2018/07/31/how-will-autonomous-cars-respond-to-emergency-vehicles/#3eed571627ef. [30]   Michael J. Coren, All The Things That Still Baffle Self-Driving Cars, Starting With Seagulls, Quartz, Sept. 23, 2018, available at https://qz.com/1397504/all-the-things-that-still-baffle-self-driving-cars-starting-with-seagulls/. [31]   ghsa, Preparing For Automated Vehicles: Traffic Safety Issues For States, Aug. 2018, available at https://www.ghsa.org/sites/default/files/2018-08/Final_AVs2018.pdf. [32]   Id., at 7. [33]   Brookings, The State of Self-Driving Car Laws Across the U.S., May 1, 2018, available at https://www.brookings.edu/blog/techtank/2018/05/01/the-state-of-self-driving-car-laws-across-the-u-s/. [34]   Aarian Marshall, Fully Self-Driving Cars Are Really Truly Coming to California, Wired, Feb. 26, 2018, available at, https://www.wired.com/story/california-self-driving-car-laws/; State of California, Department of Motor Vehicles, Autonomous Vehicles in California, available at https://www.dmv.ca.gov/portal/dmv/detail/vr/autonomous/bkgd. [35]   SB 151, available at http://www.capitol.tn.gov/Bills/110/Bill/SB0151.pdf. [36]   SB 2205, available at https://legiscan.com/TX/text/SB2205/2017. [37]   SB 219, available at http://www.legis.ga.gov/Legislation/en-US/display/20172018/SB/219. [38]   Tony Peng & Michael Sarazen, Global Survey of Autonomous Vehicle Regulations, Medium, Mar. 15, 2018, available at https://medium.com/syncedreview/global-survey-of-autonomous-vehicle-regulations-6b8608f205f9. [39]   KPMG, Autonomous Vehicles Readiness Index: Assessing Countries’ Openness and Preparedness for Autonomous Vehicles, 2018, (“The US has a highly innovative but largely disparate environment with little predictability regarding the uniform adoption of national standards for AVs. Therefore the prospect of  widespread driverless vehicles is unlikely in the near future. However, federal policy and regulatory guidance could certainly accelerate early adoption . . .”), p. 17, available at https://assets.kpmg.com/content/dam/kpmg/nl/pdf/2018/sector/automotive/autonomous-vehicles-readiness-index.pdf. [40]   Stanley White, Japan Looks to Launch Autonomous Car System in Tokyo by 2020, Automotive News, Jun. 4, 2018, available at http://www.autonews.com/article/20180604/MOBILITY/180609906/japan-self-driving-car; National Transport Commission Australia, Automated vehicles in Australia, available at https://www.ntc.gov.au/roads/technology/automated-vehicles-in-australia/. [41]   The Automated and Electric Vehicles Act 2018, available at http://www.legislation.gov.uk/ukpga/2018/18/contents/enacted; Lexology, Muddy Road Ahead Part II: Liability Legislation for Autonomous Vehicles in the United Kingdom, Sept. 21, 2018,  https://www.lexology.com/library/detail.aspx?g=89029292-ad7b-4c89-8ac9-eedec3d9113a; see further Anne Perkins, Government to Review Law Before Self-Driving Cars Arrive on UK Roads, The Guardian, Mar. 6, 2018, available at https://www.theguardian.com/technology/2018/mar/06/self-driving-cars-in-uk-riding-on-legal-review. [42]   Michaela Ross, Code & Conduit Podcast: Rep. Bob Latta Eyes Self-Driving Car Compromise This Year, Bloomberg Law, Jul. 26, 2018, available at https://www.bna.com/code-conduit-podcast-b73014481132/. [43]   Freight Waves, House Committee Urges Senate to Advance Self-Driving Vehicle Legislation, Sept. 10, 2018, available at https://www.freightwaves.com/news/house-committee-urges-senate-to-advance-self-driving-vehicle-legislation; House Energy and Commerce Committee, Press Release, Sept. 5, 2018, available at https://energycommerce.house.gov/news/press-release/media-advisory-walden-ec-leaders-to-call-on-senate-to-pass-self-driving-car-legislation/. [44]   See supra n. 24, U.S. DEPT. OF TRANSP., Preparing for the Future of Transportation: Automated Vehicles 3.0, Oct. 4, 2018, iv. [45]   David Shephardson, Self-driving cars may hit U.S. roads in pilot program, NHTSA says, Automotive News, Oct. 9, 2018, available at http://www.autonews.com/article/20181009/MOBILITY/181009630/self-driving-cars-may-hit-u.s.-roads-in-pilot-program-nhtsa-says. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or the authors: H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com) Claudia M. Barrett – Washington, D.C. (+1 202-887-3642, cbarrett@gibsondunn.com) Frances Annika Smithson – Los Angeles (+1 213-229-7914, fsmithson@gibsondunn.com) Ryan K. Iwahashi – Palo Alto (+1 650-849-5367, riwahashi@gibsondunn.com) Please also feel free to contact any of the following: Automotive/Transportation: Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com) Christopher Chorba – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Privacy, Cybersecurity and Consumer Protection: Alexander H. Southwell – New York (+1 212-351-3981, asouthwell@gibsondunn.com) Public Policy: Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Mylan L. Denerstein – New York (+1 212-351-3850, mdenerstein@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 28, 2018 |
India – Legal and Regulatory Update (June 2018)

Click for PDF The Indian Market The Indian economy continues to be an attractive investment destination and one of the fastest growing major economies. After a brief period of uncertainty, following the introduction of a uniform goods and services tax and the announcement that certain banknotes would cease to be legal tender, the growth rate of the economy has begun to rebound, increasing to 7.7 percent in the first quarter of 2018, up from 6.3 percent in the previous quarter. In the World Bank’s most recent Ease of Doing Business rankings, India climbed 30 spots to enter the top 100 countries. This update provides a brief overview of certain key legal and regulatory developments in India between May 1, 2017 and June 28, 2018. Key Legal and Regulatory Developments Foreign Investment Compulsory Reporting of Foreign Investment: The Reserve Bank of India (“RBI“) has notified a one-time reporting requirement[1] for Indian entities with foreign investment. Each such entity must report its total foreign investment in a specified format (asking for certain basic information such as the entity’s main business activity) no later than July 12, 2018. Indian entities can submit their reports through RBI’s website. Indian entities that do not comply with this requirement will be considered to be in violation of India’s foreign exchange laws and will not be permitted to receive any additional foreign investment. This one-time filing requirement is a precursor to the implementation of a single master form that aims to integrate current foreign investment reporting requirements by consolidating nine separate forms into one single form. Single Brand Retail: The Government of India (“Government“) has approved up to 100% foreign direct investment (“FDI“) in single brand product retail trading (“SBRT“) under the automatic route (i.e., without prior Government approval), subject to certain conditions.[2] Previously, FDI in SBRT entities exceeding 49% required the approval of the Government. The Government has also relaxed local sourcing conditions attached to such foreign investment. SBRT entities with more than 51% FDI continue to be subject to local sourcing requirements in India, unless the entity is engaged in retail trading of products that have ‘cutting-edge’ technology. All such SBRT entities are required to source 30% of the value of goods purchased from Indian sources. The Government has now relaxed this sourcing requirement by allowing such SBRT entities to count any purchases made for its global operations towards the 30% local sourcing requirement for a period of five years from the year of opening its first store. The Government has clarified that this relaxation is limited to any increment in sourcing from India from the preceding financial year to the current one, measured in Indian Rupees. After this five year period, the threshold must be met directly by the FDI-receiving SBRT entity through its India operations, on an annual basis. Real Estate Broking Service: The Government has clarified that real estate broking service does not qualify as real estate business and is therefore eligible to receive up to 100% FDI under the automatic route.[3] Introduction of the Standard Operating Procedure: In mid-2017 the Government abolished the Foreign Investment Promotion Board – the Government body responsible for rendering decisions on FDI investments requiring Government approval. Instead, in order to streamline regulatory approvals, it has introduced the Standard Operating Procedure for Processing FDI Proposals (“SOP“).[4] The Government has designated certain competent authorities who are to process an application for FDI in the sector assigned to them. For example, the Ministry of Civil Aviation is responsible for considering and approving FDI proposals in the civil aviation sector. Under the SOP, the competent authorities must adhere to time limits within which a decision must be given. Significantly, the SOP mandates a relevant competent authority to obtain the DIPP’s concurrence before it rejects an application or imposes conditions on a proposed investment. Mergers and Acquisitions Relaxation of Merger Notification Timelines: Previously, parties to a transaction, regarded as a combination within the meaning of the [Indian] Competition Act, 2002 were required to notify the Competition Commission of India (“CCI“) within 30 days of a triggering event, such as execution of transaction documents or approval of a merger or amalgamation by the board of directors of the combining parties. Now, the CCI has exempted parties to combinations from the 30 day notice requirement until June 2022.[5] This move will provide parties involved in a combination sufficient time to compile a comprehensive notification and will possibly lead to faster approvals by easing the burden on CCI’s case teams. Rules for Listed Companies Involved in a Scheme: The Securities and Exchange Board of India (“SEBI“)’s listing rules requires listed companies involved in schemes of arrangement under the [Indian] Companies Act, 2013 (“Companies Act“), to file a draft version of the scheme with a stock exchange. This is in order to obtain a no objection/observation letter before the scheme can be filed with the National Company Law Tribunal. In March 2017, SEBI issued a revised framework for schemes proposed by listed companies in India. In January 2018, SEBI issued a circular[6] amending the 2017 framework. As a part of the 2018 amendments, SEBI clarified that a no objection/observation letter is not required to be obtained from a recognized stock exchange for a demerger/hive off of a division of a listed company into a wholly owned subsidiary, or a merger of a wholly owned subsidiary into its parent company. However, draft scheme documents will still need to be filed with the stock exchange for the purpose of information. The stock exchange will then disseminate the information on their website. Companies Act Action Against Non-Compliant Companies: Registrars of companies (“RoC“) in various Indian states, acting on powers granted under the Companies Act, have initiated action against companies which have either not commenced operations or have not been carrying on business in the past two years. In September 2017, the Government announced that over 200,000 companies had been struck-off from the register of companies based on the powers described above.[7] Further, the director identification numbers for individuals serving as directors on the board of such companies were cancelled, resulting in their disqualification to serve on the board of any company for a period of five years. The striking-off was targeted at Indian companies that failed to fulfill regulatory and compliance requirements (such as filing annual returns) for three years.[8] Notification of Layering Rules: The Government has notified a proviso to subsection 87[9] of Section 2 of the Companies Act along with the Companies (Restriction on Number of Layers) Rules, 2017 (the “Layering Rules“).[10] The effect of these notifications is that an Indian company which is not a banking company, non-banking financial company, insurance company or a government company, is not allowed to have more than two layers of subsidiaries. For the purposes of computing the number of layers, Indian companies are not required to take into account one layer consisting of one or more wholly owned subsidiaries. Further, the Layering Rules do not prohibit Indian companies from acquiring companies incorporated outside India which have subsidiaries beyond two layers (as long as such a structure is permitted in accordance with the laws of the relevant country). Provisions of Companies Act Extended to all Foreign Companies: India has enacted the Companies (Amendment) Act, 2017 in order to amend various sections of the Companies Act. The provisions of the amendment act are being brought into effect in a phased manner. Recently, the Government has notified a provision in the Companies (Amendment) Act, 2017[11] which extends the applicability of sections 380 to 386 and sections 392 and 393 of the Companies Act to all foreign companies which have a place of business in India or conduct any business activity in the country. Prior to this amendment, these provisions were only applicable to foreign companies where a minimum of fifty percent of the shares were held by Indian individuals or companies. These provisions of the Companies Act include a requirement to (a) furnish information and documents to the RoC, such as certified copies of constitutional documents, the company’s balance sheet and profit and loss account; and (b) comply with the provisions governing issuance of debentures, preparation of annual returns and maintaining books of account. Notification of Cross Border Merger Rules: The Government had notified Section 234 of the Companies Act and Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules 2016. Please refer to our regulatory update dated May 1, 2017 for further details. In this update, we had referred to the requirement of the RBI’s prior permission in order to commence cross border merger procedures under the Companies Act. On March 20, 2018, the RBI issued the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (the “Cross Border Merger Rules“).[12] The Cross Border Merger Rules provide for the RBI’s deemed approval where the proposed cross-border merger is in accordance with the parameters specified by it. These parameters include, where the resultant company is an Indian company, a requirement that any borrowings or guarantees transferred to the resultant entity comply with RBI regulations on external commercial borrowings within a period of two years from the effectiveness of the merger. End-use restrictions under the existing RBI regulations do not have to be complied with. However, where the resultant company is an offshore company, the transfer of any borrowings in rupees to the resultant company requires the consent of the Indian lender and must be in compliance with Foreign Exchange Management Act, 1999 and regulations issued thereunder. In addition, repayment of onshore loans will need to be in accordance with the scheme approved by the National Company Law Tribunal. Currently, these provisions apply only to mergers and amalgamations, and not to demergers. Labour Laws States Begin Implementing Model Labour Law: In mid-2016, the Government introduced the Model Shops and Establishments (Regulation of Employment and Conditions of Service) Bill (“S&E Bill“). The S&E Bill, as is the case with other shops and establishments legislation in India, mandates working hours, public holidays and regulates the condition of workers employed in non-industrial establishments such as shops, restaurants and movie theatres. States in India can either adopt the S&E Bill in its entirety, superseding existing regulations, or choose to amend their existing enactments based on the S&E Bill. The S&E Bill seeks to update Indian laws, adapting them to current business requirement for non-industrial establishments. For example, the S&E Bill (a) enables establishments to remain open 365 days in a year, and (b) allows women to work night shifts, while containing provisions for employers to ensure safety of women workers. Registration provisions under the new legislation have also been eased. In late 2017, the State of Maharashtra notified a new shops and establishments statute based on the S&E Bill.  Other states in India are expected to follow suit. Start–ups Issue of Convertible Notes by Start-ups: The Government had eased funding for start-ups in India in January 2016. Please refer to our regulatory update dated May 18, 2016, for an overview of this initiative. In January 2017, the RBI had permitted start-ups to receive foreign investment through the issue of convertible notes.[13] The revised FDI Policy issued in 2017 now incorporates these provisions. The provisions allow for an investment of INR 2,500,000 (approx. USD 36,700) or more to be made in a single tranche. These notes are repayable at the option of the holder, and convertible within a five year period. The issuance of the notes is subject to entry route, sectoral caps, conditions, pricing guidelines and other requirements that are prescribed for the sector by the RBI.[14] Capital Gains Tax Charging of Long Term Capital Gains Tax: An important amendment to Indian tax laws introduced by the Finance Act, 2018[15] is the levy of tax at the rate of 10% on capital gains made on the sale of certain securities (including listed equity shares) held at least for a year. The tax is levied if the total amount of capital gains exceeds INR 100,000 (approx. USD 1,448). This amendment came into effect on April 1, 2018. However, all gains made on existing holdings until January 31, 2018 are exempt from the tax.  In all such ‘grandfathering’ cases, the cost of acquisition of a security is deemed to be the higher of the actual cost of acquisition and the fair market value of the security as on January 31, 2018. Where the consideration received on transfer of the security is lower than the fair market value as on January 31, 2018, the cost of acquisition is deemed to be the higher of the actual cost of acquisition and the consideration received for the transfer.[16] [1] RBI Notification on Reporting in Single Master Form dated June 7, 2018. Available at https://rbidocs.rbi.org.in/rdocs/Notification/PDFs/NT194481067EB1B554402821A8C2AB7A52009.PDF [2] Press Note No. 1 (2018 Series) dated January 23, 2018, Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India. [3] Id.  [4] Standard Operating Procedure dated June 29, 2017. Available at http://www.fifp.gov.in/Forms/SOP.pdf  [5] MCA Notification dated June 29, 2017. Available at http://www.cci.gov.in/sites/default/files/notification/S.O.%202039%20%28E%29%20-%2029th%20June%202017.pdf  [6] SEBI Circular dated January 3, 2018. Available at https://www.sebi.gov.in/legal/circulars/jan-2018/circular-on-schemes-of-arrangement-by-listed-entities-and-ii-relaxation-under-sub-rule-7-of-rule-19-of-the-securities-contracts-regulation-rules-1957-_37265.html. [7] Press Information Bureau, Government of India, Ministry of Finance, “Department of Financial Services advises all Banks to take immediate steps to put restrictions on bank accounts of over two lakh ‘struck off’ companies”, http://pib.nic.in/newsite/PrintRelease.aspx?relid=170546 (September 5, 2017). [8] Live Mint, “Govt blocks bank accounts of 200,000 dormant firms”, http://www.livemint.com/Companies/oTcu9b66rZQnvFw6mgSCGK/Black-money-Bank-accounts-of-209-lakh-companies-frozen.html (September 6, 2017).  [9] MCA Notification vide S.O. No. 3086(E) dated September 20, 2017.  [10] Notification No. G.S.R. 1176(E) dated September 20, 2017. Available at http://www.mca.gov.in/Ministry/pdf/CompaniesRestrictionOnNumberofLayersRule_22092017.pdf[11] MCA Notification dated February 9, 2018. Available at http://www.mca.gov.in/Ministry/pdf/Commencementnotification_12022018.pdf [12] FEMA Notification dated March 20, 2018. Available at https://rbidocs.rbi.org.in/rdocs/notification/PDFs/CBM28031838E18A1D866A47F8A20201D6518E468E.pdf  [13] RBI Notification of changes to RBI regulations dated January 10, 2017. Available at https://rbi.org.in/scripts/NotificationUser.aspx?Id=10825&Mode=0 [14] Consolidated FDI Policy Circular of 2017. Available at http://dipp.nic.in/sites/default/files/CFPC_2017_FINAL_RELEASED_28.8.17.pdf [15] Section 33 of the Finance Act, 2018. Available at http://egazette.nic.in/writereaddata/2018/184302.pdf [16] CBDT Notification No. F. No. 370149/20/2018-TPL. Available at https://www.incometaxindia.gov.in/news/faq-on-ltcg.pdf Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the following authors in the firm’s Singapore office: India Team: Jai S. Pathak (+65 6507 3683, jpathak@gibsondunn.com) Karthik Ashwin Thiagarajan (+65 6507 3636, kthiagarajan@gibsondunn.com) Prachi Jhunjhunwala (+65.6507.3645, pjhunjhunwala@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 14, 2017 |
Accelerating Progress Toward a Long-Awaited Federal Regulatory Framework for Autonomous Vehicles in the United States

House Passes the SELF DRIVE Act, Consideration in Senate Committee Hearing on Including Large Commercial Autonomous Vehicles, and New Department of Transportation Guidelines Autonomous vehicles have operated for some time under a patchwork of state and local rules with limited federal oversight, but the last two weeks have seen a number of interesting legal developments towards a national regulatory framework.  The accelerated pace of policy proposals—and debate surrounding them—is set to continue as automakers’ request more autonomous vehicles be put on the road for testing.  While it seems likely that the federal government will step into a leading role by passing initial legislation later this year or early next, autonomous vehicles operating on public roads are likely to remain subject to both federal and state regulation. SELF DRIVE Act On September 6, 2017, lawmakers in the House took a major step toward advancing the development of autonomous vehicles, approving legislation that would put vehicles onto public roads more quickly and curb states from slowing their spread.  Amid strong bipartisan support the House voted to pass H.R. 3388,[1] a bill which is intended to accelerate the development of self-driving cars.  The “Safely Ensuring Lives Future Deployment and Research In Vehicle Evolution” or “SELF DRIVE” Act empowers the National Highway Traffic Safety Administration (NHTSA) with the oversight of manufacturers of self-driving cars through enactment of future rules and regulations that will set the standards for safety and govern areas of privacy and cybersecurity relating to such vehicles.  One key aspect of the Act is broad preemption of the states from enacting legislation that would conflict with the Act’s provisions or the rules and regulations promulgated under the authority of the Act by the NHTSA.   While state authorities will likely retain their ability to oversee areas involving human driver and autonomous vehicle operation, the Act contemplates that the NHTSA would continue to retain its authority to oversee manufacturers of autonomous vehicles, just as it has with non-autonomous vehicles, to ensure overall safety.  In addition, the NHTSA is required to create a Highly Automated Vehicle Advisory Council to study and report on the performance and progress of autonomous vehicles.  This new council is to include members from a wide range of constituencies, including members of the industry, consumer advocates, researchers, and state and local authorities.  The intention is to have a single body (the NHTSA) develop a consistent set of rules and regulations for manufacturers, rather than continuing to allow the states to adopt a web of potentially widely differing rules and regulations that may ultimately inhibit development and deployment of autonomous vehicles. While a uniform, concrete set of standards for the entire country has been welcomed by automakers and business lobbyists alike,[2] whether the NHTSA has the resources to fulfil its supervisory role as envisaged by the bill remains a real question—echoed by the concerns of a number of consumer advocate groups.[3]  The requirements that manufacturers develop specific privacy and cybersecurity plans before being allowed to sell vehicles, along with specific requirements for disclosures to vehicle purchasers, are likely to please many consumer advocates.  However, while the Act does provide for a phase-in period, it would ultimately increase the possible number of autonomous vehicles on the road dramatically.  Currently, automakers and companies interested in testing self-driving technology must apply to the NHTSA for exemptions in relation to certain safety requirements that non-autonomous vehicles must meet; and the agency only grants 2,500 exemptions per year.  This bill increases that cap to 25,000 per year initially, and expands it up to 100,000 annually in three years’ time.  Although the number of exemptions represents a slight decrease from the original draft bill, the bill passed by the House could still amount to potentially millions of such cars each year: a tall order for an agency which does not yet have an administrator.[4] Senate Committee Hearing on Large Commercial Autonomous Vehicles The SELF DRIVE Act now moves to the Senate, which has its own self-driving car legislation under review by the Commerce, Science and Transportation Committee.[5]  One key difference between the House and Senate versions of the legislation appears to be in the area of commercial vehicles, as the House version is focused on passenger cars and light trucks, not heavy commercial vehicles over 10,000 pounds (4,536 kg).  The Chair and some other members of the Senate Commerce Committee appear inclined to include large commercial vehicles in any autonomous vehicle legislation that makes its way to the President, and, as a result, scheduled a public hearing on September 13, 2017, to consider the impact of large autonomous vehicles on road safety.[6] Various witnesses at the September 13 hearing—including a trucking trade group, truck maker Navistar International Corp. and a representative from the National Safety Council—urged the Senate panel to develop a clear, uniform federal regulatory framework for autonomous vehicles by including large commercial vehicles in the Senate bill.  Labor union Teamsters opposed such a move,[7] citing concerns that self-driving trucks are subject to a very different set of safety and operational issues—warranting their own regulation and bill—and also raised particular concerns over cybersecurity and the loss of driving jobs.  Senator Gary Peters (D-Mich), who has been working with Republicans to draft self-driving legislation, said at the hearing he did not support including commercial trucks and that safety and job impacts must be addressed further.  Senator John Thune (R-S.D.), the Committee Chair, supports the inclusion of commercial trucks in the legislation, but said no final decision had been made. Thune indicated that he hoped to introduce a bill and get committee approval by early October 2017.[8] Revised Department of Transport Guidelines In addition to the flurry of activity in Congress, on September 12, 2017, the Department of Transportation (DoT) released new safety guidelines[9] for autonomous vehicles to replace those issued by the Obama administration last year.  Transportation Secretary Elaine Chao announced that these purely voluntary guidelines (“a nonregulatory approach to automated vehicle technology safety”)[10] are designed to clarify the federal government’s view of best practices for vehicle developers and state legislators and officials as more test cars reach public roads, and offer the lighter regulatory touch for which automakers previously advocated.[11]  Through the guidelines, the DoT avoids any compliance requirement or enforcement mechanism, at least for the time being, as the scope of the guidance is expressly to “support the industry as it develops best practices in the design, development, testing, and deployment of automated vehicle technologies.” Under the Obama administration, automakers were asked to follow a 15-point safety assessment before putting test vehicles on the road.[12]  The new, pared-down guidelines reduce the suggested safety assessment to a 12-point voluntary assessment, asking automakers to consider cybersecurity, crash protection, how the vehicle interacts with occupants and backup plans in the event that the vehicle encounters a problem.  Significantly, the DoT is no longer specifically asking automakers to address in a safety assessment any ethical or privacy issues (although a footnote to the guidelines does suggest the DoT recognizes the continued relevance of such issues).  Nor is it requesting that manufacturers share information beyond crash data, apparently reflecting concerns expressed by automakers in response to the previous guidelines, which suggested that automakers collect, store, analyze and share with NHTSA, and potentially with competitors, event reconstruction data from “near misses”, i.e. positive outcomes in which the system correctly detects a safety-relevant situation, and successfully avoids an incident.[13]  The federal guidelines are purposely crafted in a way that they can be adapted, and will be updated again next year.  NHTSA has invited public comment on the voluntary guidance and best practices.[14] As may be evident from the goals of the SELF DRIVE Act noted above, the delineation of federal and state regulatory authority has emerged as a key issue, chiefly because autonomous vehicles do not fit neatly into the existing regulatory structure.  Historically, the DoT has regulated and enforced how vehicles are built, particularly with regard to overall safety concerns, but states are typically responsible for the operation of vehicles.  The DoT’s new best practices for state legislatures explicitly seek to continue this basic schema and allocate overarching regulatory authority for autonomous vehicles to the federal level.  (“[A]llowing NHTSA alone to regulate the safety design and performance aspects of ADS technology will help avoid conflicting federal and state laws and regulations that could impede deployment.”)[15]  States can still regulate autonomous vehicles, but the guidance encourages states not to pass laws that would “place unnecessary burdens on competition and innovation by limiting [autonomous vehicle] testing or deployment to motor vehicle manufacturers only.”  It remains to be seen how the DoT’s proposed strict delineation will cope with issues surrounding liability for auto accidents.[16] California, as a state that has previously enacted legislation and regulations requiring automakers to publicly report crashes of autonomous test vehicles and which requires and issues approvals prior to testing of autonomous vehicles on California public roads,[17] said it was reviewing the new guidelines.[18] Looking Ahead In addition to putting some limits on roll-out and affording some assurances on security and privacy safeguards, the new legislation and guidelines indicate strong federal intent to provide more uniformity of requirements imposed on manufacturers across the country, and to keep the general oversight of the design and manufacture of autonomous vehicles with the federal government (as it has been) rather than cede such power to the individual states.  As a result, the intent seems to be to speed both development and deployment of autonomous vehicle technologies. If the Senate passes legislation that would amend the SELF DRIVE Act in any significant way, the resulting bills will need to go to Conference to reconcile any differences between the versions passed by the two chambers.  In addition, given the very busy nature of the legislative calendar this year, particularly that of the Senate, it is hard to say whether Congress will be able to send some version of the SELF DRIVE Act to the President for ratification into law before the end of the year, or whether additional time will be required.  However, what does seem to be clearly emerging from recent events is the near-universal, bipartisan support in Congress and the Executive branch for the need to take back the reins from the states and amend federal safety requirements to account for the introduction of autonomous vehicles on U.S. roads in the form of new federal legislation and regulations. Debate surrounding the regulation of large commercial vehicles is proving more contentious, in large part because the specter of potential job losses resonates strongly with labour groups.  Whether or not large commercial vehicles are ultimately included in the bills currently being considered by Congress, a national regulatory framework for all autonomous vehicles has moved well within reach.  We will continue to carefully monitor these developments and the bevy of unresolved policy issues—safety, ethics, data privacy, cybersecurity, insurance—that will inevitably accompany them. [1] H.R. 3388, 115th Cong. (2017), available at https://www.congress.gov/bill/115th-congress/house-bill/3388/text [2] Cecilia Kang, Self-Driving Cars’ Prospects Rise With Vote by House, N.Y. Times, Sept. 6, 2017, https://www.nytimes.com/2017/09/06/technology/self-driving-cars-prospects-rise-with-vote-by-congress.html. [3] Id. [4] NHTSA Administrator, NHTSA: National Highway Traffic Safety Administrator, https://one.nhtsa.gov/About-NHTSA/About-the-Administrator, (last visited Sept. 12, 2017) (“The position of NHTSA Administrator  is currently unfilled.”). [5] U.S. Chamber of Commerce, Senate Self Driving Car Legislation Staff Draft, Sept. 8, 2017, available at https://www.uschamber.com/report/senate-self-driving-car-legislation-staff-draft) [6] U.S. Senate Committee on Commerce, Science and Transportation, Press Release, Sept. 6, 2017, available at https://www.commerce.senate.gov/public/index.cfm/pressreleases?ID=BAC7FBCE-424B-4C61-8082-71B3E3D9333B [7] Gina Chon, Teamsters Union Tries to Slow Self-Driving Truck Push, N.Y. TIMES, Aug. 11, 2017,  https://www.nytimes.com/2017/08/11/business/dealbook/teamsters-union-tries-to-slow-self-driving-truck-push.html?_r=0 [8] Reuters, Trucking Industry, Navistar back U.S. Self-Driving Legislation, N.Y. TIMES, Sept. 13, 2017,  https://www.nytimes.com/reuters/2017/09/13/business/13reuters-autos-selfdriving.html?_r=0 [9] Automated Vehicles for Safety, NHTSA: National Highway Traffic Safety Administrator, https://www.nhtsa.gov/technology-innovation/automated-vehicles. [10] U.S. Dept. of Transp., Automated Driving Systems 2.0: A Vision for Safety ii (September 2017), https://www.nhtsa.gov/sites/nhtsa.dot.gov/files/documents/13069a-ads2.0_090617_v9a_tag.pdf. [11] Patti Waldmeir & Leslie Hook, Trump administration promises light touch on driverless cars, Financial Times, Sept. 12, 2017, https://www.ft.com/content/ff3a02fc-97e6-11e7-a652-cde3f882dd7b. [12] U.S. Dept. of Transp., Federal Automated Vehicles Policy, Sept. 2016, https://www.transportation.gov/AV/federal-automated-vehicles-policy-september-2016 [13] Id., at pp. 17-18. [14] Notice of Public Availability and Request for Comments, Docket No. NHTSA-2017-0082, (signed on Sept. 12, 2017), https://www.nhtsa.gov/sites/nhtsa.dot.gov/files/documents/ads2.0_frn_08312017.pdf [15] U.S. Dept. of Transp., Automated Driving Systems 2.0: A Vision for Safety ii (September 2017), at § 2, https://www.nhtsa.gov/sites/nhtsa.dot.gov/files/documents/automated-driving-systems-2.0-best-practices-for-state-legislatures.pdf [16]  Kang, supra note 2. [17] Testing of Autonomous Vehicles, State of California: Department of Motor Vehicles, https://www.dmv.ca.gov/portal/dmv/detail/vr/autonomous/testing. [18] Russ Mitchell, Driverless cars on public highways? Go for it, Trump administration says, L.A. Times, Sept. 12, 2017, http://www.latimes.com/business/autos/la-fi-hy-driverless-regs-chao-20170912-story.html. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or the authors: H. Mark Lyon – Palo Alto (+1 650-849-5307, mlyon@gibsondunn.com) Frances Annika Smithson – Los Angeles (+1 213-229-7914, fsmithson@gibsondunn.com) Please also feel free to contact any of the following: Automotive/Transportation: Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com) Christopher Chorba – Los Angeles (+1 213-229-7396, cchorba@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Public Policy: Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Mylan L. Denerstein – New York (+1 212-351-3850, mdenerstein@gibsondunn.com)   © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 5, 2017 |
Trump Administration Rescinds Deferred Action for Childhood Arrivals (DACA) Program

On September 5, 2017, the Trump Administration announced the termination of the Deferred Action for Childhood Arrivals program ("DACA").  Attorney General Jeff Sessions announced the Administration’s decision in remarks delivered on Tuesday morning.[1]  Acting Secretary of Homeland Security Elaine Duke subsequently issued a memorandum formally rescinding the program,[2] after which the White House issued a separate statement explaining President Trump’s decision.[3] Under DACA, certain individuals brought to the United States as children who met specific criteria could apply for a two-year, renewable period of deferred action from immigration enforcement.  Those granted deferred action were considered by the Department of Homeland Security ("DHS") to be "lawfully present" in the United States, and eligible for work authorization.  Since 2012, nearly 800,000 young people have been granted DACA status, with the majority of these individuals located in California, Texas, Illinois, New York, and Florida.[4] This alert addresses the implications of the implementation of the rescission memorandum by DHS.  Most notably for our clients, DHS will continue to accept renewal applications from individuals who have DACA status that will expire between now and March 5, 2018, so long as the renewal applications are filed and accepted by October 5, 2017. I.  Background On June 15, 2012, then-Secretary of Homeland Security Janet Napolitano issued a memorandum establishing the DACA program.[5]  Individuals qualified for DACA if they: (1) came to the United States under the age of sixteen; (2) had five years of continuous residence in the United States; (3) met certain education or military service requirements; (4) had not been convicted of a felony or certain other crimes, and weren’t otherwise a threat to national security; and (5) were not above the age of 30.[6] On November 20, 2014, DHS issued a new memorandum expanding the eligibility for DACA and also creating a new program called Deferred Action for Parents of Americans and Lawful Permanent Residents ("DAPA").[7]  However, shortly thereafter, a group of 26 states successfully challenged DAPA in federal court, obtaining a nationwide injunction against its implementation that was affirmed by the Fifth Circuit on the basis that the DAPA program was not authorized by the Immigration and Nationality Act and was therefore unlawful executive action.[8]  The Fifth Circuit’s decision was subsequently affirmed by an equally divided Supreme Court. On June 29, 2017, officials from ten of the states that had challenged the DAPA program sent a letter to Attorney General Sessions, asserting that the DACA program was unconstitutional for the same reasons that the court found the DAPA program to be unconstitutional.  The states wrote that they would amend their DAPA lawsuit to include a challenge to DACA unless the federal government rescinded the DACA program by September 5, 2017.[9] On July 21, 2017, attorneys general from twenty other states sent a letter to the President urging him to maintain DACA and defend the program in court.[10]  On August 31, 2017, hundreds of America’s leading business executives sent a letter to President Trump urging him to preserve the DACA program.[11] On September 4, 2017, Attorney General Sessions wrote to Acting Secretary of Homeland Security Duke, describing his assessment that "DACA was effectuated by the previous administration through executive action, without proper statutory authority;" that DACA "was an unconstitutional exercise of authority by the Executive Branch;" and that "it is likely that potentially imminent litigation would yield similar results [as the DAPA litigation] with respect to DACA."[12] On September 5, 2017, Attorney General Sessions announced the Administration’s decision to end DACA, and Acting Secretary of Homeland Security Duke issued the memorandum formally rescinding the DACA program. II.  Effect of Today’s Rescission Memorandum The DHS memorandum does not immediately terminate the lawful presence or work authorizations of current DACA recipients, nor does it immediately terminate the DACA program itself.  Rather, DHS has chosen to wind down the program over the coming years.  The details of this phase-out are as follows: DHS will continue to process and approve initial DACA applications that it received as of September 5, 2017, although it will not accept any new applications. DHS will continue to process and approve DACA renewal applications from current beneficiaries, including: (a) applications that DHS received as of September 5, 2017; and (b) applications that DHS receives between now and October 5, 2017, for individuals whose benefits will expire between now and March 5, 2018. DHS will not terminate any individual’s DACA status or work authorization solely on the basis of the rescission memorandum.  Rather, these benefits will be allowed to continue until their previously-established expiration dates, subject to the limited renewal period discussed above. DHS will "generally honor" the validity period for previously-granted foreign-travel requests submitted by DACA beneficiaries, called applications for "advance parole."  However, DHS will not approve any currently-pending requests for advance parole relying on DACA; these requests will be administratively closed, and DHS will refund the associated fees. DHS will reject all initial and renewal DACA applications and requests for advance parole, with the exceptions of those already outlined above that fall within the prescribed time periods. DHS will not "proactively" provide the information submitted in DACA requests to other law enforcement entities for the purpose of immigration enforcement proceedings, except in limited circumstances, such as those involving risks to national security or public safety.[13] DHS will continue to terminate or deny deferred action under DACA on an individual basis when immigration officials consider it appropriate to do so.[14] Although the extended nature of the rescission will delay the effect of terminating DACA somewhat, the end of the program is nonetheless expected to be disruptive to American businesses.  Researchers have estimated that terminating DACA would cause 30,000 people per month to lose their jobs, and will impose costs of approximately $3.4 billion on employers nationwide.[15] III.  Related Developments In a statement issued on September 5, 2017, President Trump called on Congress to pass comprehensive immigration reform, including a program similar to DACA.  President Trump wrote, "Congress now has the opportunity to advance responsible immigration reform that puts American jobs and American security first. . . . I look forward to working with Republicans and Democrats in Congress to finally address all of these issues in a manner that puts the hardworking citizens of our country first. . . . It is now time for Congress to act!"[16] At least one court challenge has already been initiated in reaction to today’s rescission memorandum.  The National Immigration Law Center, joined by the Jerome N. Frank Legal Services Organization at Yale Law School and Make The Road – New York, are requesting leave to amend a complaint in the Eastern District of New York, to allege that the rescission of DACA violates the Administrative Procedure Act and the constitutional rights of DACA beneficiaries.[17]  And at least three Democratic state attorneys general have threatened to challenge the Administration’s decision in court.[18] Additionally, following the Administration’s announcement, the states that successfully challenged the DAPA program voluntarily dismissed their lawsuit.[19] IV.  Guidance For Clients Employers may consider actions to address the developments described above, and minimize the effect on employees.  In particular, employers may want to consider: Identifying employees who are DACA recipients, in order to aid those employees with renewing their status if appropriate; Broadly distributing an informational email to employees regarding these developments and the limited opportunity for renewal (keeping in mind that some employees may not want to self-identify as DACA recipients); and Reviewing the potential impact on travel and work authorization of employees, being careful to comply with I-9 and non-discrimination requirements. Finally, employers may consider the impact that these developments are likely to cause for DACA beneficiaries and their families.  Employers may consider providing counseling or other support for employees affected by this change in policy. * * * Gibson Dunn will continue to closely monitor these rapidly developing issues.    [1]   See Attorney General Sessions Delivers Remarks on DACA (Sept. 5, 2017), https://www.justice.gov/opa/speech/attorney-general-sessions-delivers-remarks-daca.    [2]   See Memorandum from Acting Secretary Elaine C. Duke, Rescission of the June 15, 2012 Memorandum Entitled "Exercising Prosecutorial Discretion with Respect to Individuals Who Came to the United States as Children" (Sept. 5, 2017), https://www.dhs.gov/news/2017/09/05/memorandum-rescission-daca (hereinafter "Rescission Memorandum").    [3]   See Statement from President Donald J. Trump (Sept. 5, 2017), https://www.whitehouse.gov/the-press-office/2017/09/05/statement-president-donald-j-trump.    [4]   See United States Citizenship and Immigration Services, Number of Form 1-821D, Consideration of Deferred Action for Childhood Arrivals, by Fiscal Year, Quarter, Intake, Biometrics and Case Status Fiscal Year 2012-2017 (June 8, 2017).    [5]   Memorandum from Secretary Janet Napolitano, Exercising Prosecutorial Discretion with Respect to Individuals Who Came to the United States as Children (June 15, 2012), https://www.dhs.gov/xlibrary/assets/s1-exercising-prosecutorial-discretion-individuals-who-came-to-us-as-children.pdf.    [6]   Id.    [7]   Memorandum from Secretary Jeh Charles Johnson, Exercising Prosecutorial Discretion with Respect to Individuals Who Came to the United States as Children and with Respect to Certain Individuals Who Are the Parents of U.S. Citizens or Permanent Residents (Nov. 20, 2014), https://www.dhs.gov/sites/default/files/publications/14_1120_memo_deferred_action.pdf.    [8]   Texas v. United States, 86 F. Supp. 3d 591 (S.D. Tex. 2015); see also Texas v. United States, 809 F.3d 134 (5th Cir. 2015), aff’d by an equally divided Court, 136 S. Ct. 2271 (2016). [9]   Letter from Texas Attorney General Ken Paxton, et al., to U.S. Attorney General Jeff Sessions (June 29, 2017),  https://www.texasattorneygeneral.gov/files/epress/DACA_letter_6_29_2017.pdf. [10]   Letter from California Attorney General Xavier Becerra, et al., to President Donald J. Trump (July 21, 2017), https://oag.ca.gov/system/files/attachments/press_releases/7-21-17%20%20Letter%20from%20State%20AGs%20to%20President%20Trump%20re%20DACA.final_.pdf. [11]   Letter to Donald J. Trump, Paul Ryan, Nancy Pelosi, Mitch McConnell, and Charles Schumer (Aug. 31, 2017), https://dreamers.fwd.us/business-leaders. [12]   See Mahita Gajanan, Read Jeff Sessions’ Letter Calling for the End of DACA, TIME (Sept. 5, 2017), http://time.com/4927250/jeff-sessions-daca-rescind-letter; see also Rescission Memorandum, supra note 2. [13]   Department of Homeland Security, Frequently Asked Questions: Rescission Of Deferred Action For Childhood Arrivals (DACA) (Sept. 5, 2017), https://www.dhs.gov/news/2017/09/05/frequently-asked-questions-rescission-deferred-action-childhood-arrivals-daca. [14]   See Rescission Memorandum, supra note 2. [15]   See Immigration Legal Resource Center, Money on the Table: The Economic Cost of Ending DACA, at 4 (Dec. 2016), https://www.ilrc.org/sites/default/files/resources/2016-12-13_ilrc_report_-_money_on_the_table_economic_costs_of_ending_daca.pdf. [16]   Statement from President Donald J. Trump, supra note 3. [17]   See Batalla Vidal, et al. v. Baran, et al., No. 1:16-cv-04756-NGG-JO, Dkt. #46 (E.D.N.Y. Sept. 5, 2017). [18]   Reid Wilson, Dems Threaten to Sue Trump Over DACA, The Hill (Sept. 5, 2017), http://thehill.com/homenews/state-watch/349302-dems-threaten-to-sue-trump-over-daca. [19]   Texas v. United States, No. 1:14-cv-00254, Dkt. #469 (S.D. Tex. Sept. 5, 2017). Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or the following: Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com)Ethan Dettmer – San Francisco (+1 415-393-8292, edettmer@gibsondunn.com) Stuart F. Delery – Washington, D.C. (+1 202-887-3650, sdelery@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 29, 2017 |
Update on Immigration Executive Order

Gibson Dunn previously issued several client alerts regarding President Trump’s January 27, 2017 and March 6, 2017 Executive Orders restricting entry into the United States for individuals from certain nations and making other immigration-related policy changes.[1] This alert addresses implementation of the Supreme Court’s June 26, 2017 ruling allowing the travel ban to go partially into effect.  The executive branch has indicated it will begin enforcing the order as of 8 pm ET, June 29, 2017.  The most current information indicates this will primarily impact those applying for visas, not those travelling on existing visas. Experience suggests that individuals attempting to board U.S.-bound aircraft, or arriving in the United States, may nonetheless encounter some difficulties. I.    Background On January 27, 2017, President Trump issued the first Executive Order restricting entry into the country for individuals from seven specified nations, as well as related changes to visa and refugee programs.  Multiple courts enjoined implementation of most major aspects of that order, including the entry ban.  On March 6, 2017, the President issued a new Executive Order, rescinding in full the January Order, but providing for a ban on entry of individuals from six specified nations, and suspension of the refugee program, among other changes.  The revised order was narrower in certain respects, notably in removing Iraq from the list of impacted countries, and more clearly defining certain exceptions to the Order, such as the exception of dual citizens from the ban. Courts again blocked implementation of the major provisions, this time before it went into effect.  Ultimately both the Fourth Circuit (sitting en banc) and the Ninth Circuit upheld injunctions issued by the District of Maryland and the District of Hawaii, respectively.[2] The government asked the Supreme Court to reverse the lower courts’ order blocking implementation, as well as to grant certiorari to hear the merits of the case.  II.    Supreme Court Action On June 26, 2017, the Supreme Court issued an order allowing certain aspects of the the March Executive Order to be implemented.[3]  Separately, the Court granted certiorari and added the case to its calendar for the term beginning in October.[4] The Court’s order stayed implementation of the lower court injunctions in part, allowing the government to enforce the ban "with respect to foreign nationals who lack any bona fide relationship with a person or entity in the United States," but continued to block enforcement against individuals who do have such ties.  The Court provided some guidance on what it means to have a "bona fide relationship with a person or entity in the United States": For individuals, a close familial relationship is required. A foreign national who wishes to enter the United States to live with or visit a family member, like Doe’s wife or Dr. Elshikh’s mother-in-law, clearly has such a relationship. As for entities, the relationship must be formal, documented, and formed in the ordinary course, rather than for the purpose of evading [the Executive Order.] The students from the designated countries who have been admitted to the University of Hawaii have such a relationship with an American entity. So too would a worker who accepted an offer of employment from an American company or a lecturer invited to address an American audience.  Not so someone who enters into a relationship simply to avoid § 2(c): For example, a nonprofit group devoted to immigration issues may not contact foreign nationals from the designated countries, add them to client lists, and then secure their entry by claiming injury from their exclusion.[5] III.    Practical Implications It appears that the most immediate impact will be in connection with the issuance of new visas, rather than the use of a visa that was issued prior to 8 pm ET on June 29, 2017.  Certain categories of individuals are exempt from the ban based either on the terms of the March Executive Order itself or the State Department guidance implementing the Supreme Court’s decision.  Those are outlined below. Notwithstanding the clear language of the Executive Order, it is difficult to predict whether those travelling on existing visas will run into difficulties in trying to board U.S.-bound flights or upon attempting to enter upon arrival. A.    Who Is Covered By The Ban And Who Is Not? As a reminder, the March Executive Order barred entry to the United States by nationals of Iran, Libya, Somalia, Sudan, Syria, and Yemen.  (Iraq was not included in the second Executive Order.)  On its face, the March Executive Order already excluded from the ban: Nationals from those countries who are travelling on a passport from a country not included on the list; U.S. Legal Permanent Residents, regardless of nationality; Those travelling on already issued and currently valid visas; and Those travelling on certain diplomatic and related visas.[6] Now the Court has created another exception for those with a "bona fide relationship with a person or entity in the United States."  The primary question at this point is what qualifies as, and what is needed to prove, such a relationship. The State Department issued a cable on June 28, providing guidance about handling visa applications, and has also posted a similar FAQ.[7]  This cable gives some indications of how the government will interpret the March Executive Order, as narrowed by the recent Supreme Court order. The following additional categories of people are now exempt from the ban: Anyone who qualifies for a non-immigrant visa in a "classification other than B, C-1, D, I or K" because that eligibility inherently establishes the required relationship. "Derivative" applicants are also exempt (i.e., certain immediate family members of the main applicant). Individuals who have been granted asylum, refugees already admitted to the United States, and individuals already granted withholding of removal, advance parole, or protection under the Convention Against Torture. Otherwise, eligibility has to be established according to the following criteria: For family-based eligibility, the only relationships that qualify are "close family," which the State Department is defining as parents, parents-in-law, spouses, children (including adults), sons- and daughters-in law, and siblings (including half-siblings).  No other relationships qualify. UPDATE (6/30/17): As the ban was going into effect, the Departments of State and Homeland Security added fiancés to the list of qualifying categories. For entity-based eligibility, the standards are less clear, and largely parrot those in the Supreme Court’s order.  The following are specifically exempt from the Executive Order: Media ("I") visa applicants employed by an organization with a U.S. news office; Students admitted to a U.S. educational institution; Workers who have "accepted an offer of employment from a company in the United States;" and "Lecturer[s] invited to address an audience in the United States." The State Department specifically noted that "a hotel reservation, whether or not paid, would not constitute a bona fide relationship with an entity in the United States." In the event an applicant is not exempt, he or she may still be eligible for a waiver.  The State Department indicated that travelers in the following categories may be eligible for a waiver: Individuals who "previously established significant contacts with the United States but [are] outside the United States on the effective date of the" Order;  Travel for "significant business or professional obligations," which would be "impair[ed]" by the denial of entry; Small children, adoptees, and those needing medical care; and Those travelling for certain international organizations. B.    Practical Tips Without further clear guidance about how travelers (as opposed to visa applicants) will be treated under this system, those who may be affected and are travelling in the near future should collect and carry clear documentation of the purpose of the trip if that documentation might help to show a "bona fide relationship" with people or entities in the United States.  For example, for work-related travel, employment offer letters, conference agendas listening the traveler as a speaker, invitations to a business meeting, and the like may be helpful in the event of questions from immigration officials.  However, the Court made clear that the supporting documentation must show "ordinary course" relationships, and not relationships that appear to have been created for the purposes of fitting within the narrowed scope of the injunction.  As suggested in Gibson Dunn’s earlier alerts on these topics, companies will want to consider effective planning and communication with employees and partners who may be affected by implementation of the Executive Order.   *      *      * Gibson Dunn will continue to monitor these rapidly developing issues closely.    [1]    See, Court Orders Block Implementation of New Immigration Executive Order (March 16, 2017), http://gibsondunn.com/publications/Pages/Court-Orders-Block-Implementation-of-New-Immigration-Executive-Order.aspx; Analysis of March 6, 2017 Executive Order on Immigration (Mar. 7, 2017), http://www.gibsondunn.com/publications/Pages/Analysis-of-March-6-2017-Executive-Order-on-Immigration.aspx;  Ninth Circuit Court of Appeals Issues Opinion Upholding Nationwide TRO of January 27 Immigration-Related Executive Order (Feb. 10, 2017), http://www.gibsondunn.com/publications/Pages/Ninth-Circuit-Issues-Opinion-Upholding-Nationwide-TRO-of-Jan27-Immigration-Executive-Order.aspx; Recent Developments Regarding Executive Order on Immigration (Feb. 1, 2017), http://gibsondunn.com/publications/Pages/Recent-Developments-Regarding-Executive-Order-on-Immigration.aspx; President Trump Issues Executive Order on Immigration (Jan. 30, 2017), http://gibsondunn.com/publications/Pages/President-Trump-Issues-Executive-Order-on-Immigration.aspx     [2]   See Hawaii v. Trump, 2017 WL 2529640 (9th Cir. June 12, 2017) https://cdn.ca9.uscourts.gov/datastore/opinions/2017/06/12/17-15589.pdf; Int’l Refugee Assistance Project v. Trump, 857 F.3d 554 (4th Cir. 2017).    [3]   https://www.supremecourt.gov/opinions/16pdf/16-1436_l6hc.pdf.     [4]   Slip op at 12, https://www.supremecourt.gov/orders/courtorders/062717zr_6537.pdf.    [5]   https://www.supremecourt.gov/opinions/16pdf/16-1436_l6hc.pdf.     [6]   See Analysis of March 6, 2017 Executive Order on Immigration (Mar. 7, 2017), http://www.gibsondunn.com/publications/Pages/Analysis-of-March-6-2017-Executive-Order-on-Immigration.aspx.    [7]   See Dep’t of State, Implementing Executive Order 13780 Following Supreme Court Ruling – Guidance to Visa-Adjudicating Posts (June 28, 2017), http://live.reuters.com/Event/Live_US_Politics/989297085; Dep’t of State, Executive Order on Visas (June 29, 2017), https://travel.state.gov/content/travel/en/news/important-announcement.html.   Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following: Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com)Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)Anne M. Champion – New York (+1 212-351-5361, achampion@gibsondunn.com)Ethan Dettmer – San Francisco (+1 415-393-8292, edettmer@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Kirsten Galler – Los Angeles (+1 213-229-7681, kgaller@gibsondunn.com) Ronald Kirk – Dallas (+1 214-698-3295, rkirk@gibsondunn.com)Joshua S. Lipshutz – Washington D.C. (+1 202-955-8217, jlipshutz@gibsondunn.com) Katie Marquart, Pro Bono Counsel & Director – New York (+1 212-351-5261, kmarquart@gibsondunn.com) Samuel A. Newman – Los Angeles (+1 213-229-7644, snewman@gibsondunn.com) Jason C. Schwartz – Washington D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Kahn A. Scolnick – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com)   © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 7, 2017 |
Analysis of March 6, 2017 Executive Order on Immigration

Gibson Dunn previously issued several client alerts regarding President Trump’s January 27, 2017, Executive Order restricting entry into the United States for individuals from certain nations and making other immigration-related policy changes. This client alert addresses the replacement Executive Order entitled "Protecting the Nation from Foreign Terrorist Entry into the United States," signed on March 6, 2017.[1]  It also addresses a recent announcement suspending expedited processing of H-1B visas. I.          Overview of March 6, 2017 Replacement Executive Order The new order is in some regards narrower than the prior order, and its scope appears to be more clearly defined.  However, there is still some ambiguity as to the process for obtaining waivers, and the order continues to provide for the possible extension or expansion of the travel ban.  The order and the accompanying official statements also include considerably more material seeking to justify the provisions than contained in the prior order.[2] The Department of Homeland Security has released detailed Q&As[3] and a fact sheet regarding the new order;[4] additional guidance from the Department of State is expected.[5]  Key features of the new order include: Effective Date.  The effective date of the order is deferred for 10 days; the order goes into effect at 12:01 am ET on March 16, 2017.  Sec. 14. Status of Prior Order.  The new order fully rescinds and replaces the January 27 order.  Sec. 13. Travel Ban For 6 Countries.  Like the prior order, the new order suspends for 90 days entry for nationals of a number of Muslim-majority countries: Iran, Libya, Somalia, Sudan, Syria, and Yemen.  Sec. 1(e). Exclusions and Exceptions to Travel Ban.  The travel ban and related provisions have been narrowed and clarified in various respects: Iraq.  Iraq is no longer identified among the affected countries.  The other six nations designated in the original order are still covered.  However, the order specifically calls for additional review when an Iraqi national who holds a visa applies for "admission," meaning upon arrival to the U.S.  Secs. 1(g), 4.   Lawful Permanent Residents.  Lawful permanent residents (green-card holders) are explicitly excluded from the order.  Sec. 3(b)(i). Current Visa Holders.  Existing visas are not revoked by the order, and they can be used during the 90-day period otherwise covered by the order by the visa-holders under their existing terms, regardless of whether the visa-holder has previously been to the United States or is arriving for the first time.  Those who had a visa physically marked as cancelled as result of the January order are also entitled to admission.  Secs. 3(a), 12(c)-(d); Q&As 3, 5, 7. Dual-Citizens.  Dual citizens of one of the designated nations are also explicitly excluded from the order provided that they are travelling on a passport of a country other than the six designated.  For example, a dual-citizen of Somalia and the United Kingdom would still be eligible for admission to the United States if travelling on his U.K. passport.  Sec. 3(b)(iv). Refugees, Asylees, and Convention Against Torture.  Foreign nationals who are granted asylum status prior to the March 16 effective date, refugees already admitted, and those granted withholding of removal, advance parole, or protection under the Convention Against Torture are not barred from entry into the U.S. Sec. 3(b)(vi).  Note, however, that under existing law, individuals with those statuses may need certain advance permission or authorization if they wish to leave and return to the United States without jeopardizing that status. Certain Diplomatic and Related Visas.  As in the January order, diplomatic and diplomatic-type visas, NATO visas, C-2 (United Nations) visas, and G-1 through G-4 visas are excluded from the order.  Sec. 3(b)(v) Travel Ban Waivers.  The new order provides authority to certain Department of State and Homeland Security officials to grant waivers to the travel ban’s limitations on a case-by-case basis.  The new order identifies nine scenarios in which such treatment "could be appropriate."  These include a variety of hardship scenarios which arose under the January order, such as those needing urgent medical care or those who can document that they have "provided faithful and valuable service" to the United States government (e.g. foreign translators).  Sec. 3(c).  Importantly, these are still case-by-case waivers, not automatic exemptions.  It is also not yet clear if individuals seeking waivers will be allowed to board flights to the U.S. Suspension of Visa Interview Waiver Program.  As before, the Visa Interview Waiver program (often used by repeat business travelers from certain nations) is suspended.  Sec. 9. Suspension of Refugee Admission Program.  As in the January order, the Refugee Admission Program is suspended for 120 days, with a cap of 50,000 entrants for the current fiscal year upon resumption.  Sec. 6.  Unlike the January order, the new order does not indefinitely halt refugee admissions from Syria or prioritize religious minorities upon resumption.  The treatment of those already granted refugee status but not yet in the United States is somewhat unclear.  The DHS Q&A says such individuals "whose travel was already formally scheduled by the Department of State … are permitted to travel to the United States and seek admission," and they are covered by the text of the carve-out in Section 3(b)(vi). See Q&A 10.  But the Q&A also says those individuals "are exempt from the Executive Order."  Q&A 27.  Admission thus may require a case-by-case waiver. Possible Expansion and Extension.  Like the prior order, this order requires a global review to identify categories of individuals appropriate for further limitations.  Secs. 2(e)-(f).  Another provision requires re-alignment of any visa reciprocity programs, under which the United States offers visas of similar validity period and type (e.g. multiple-entry) on the basis of those offered to U.S. citizens.  Sec. 10. II.        Impact on Current Litigation There are approximately 20 active lawsuits challenging aspects of the January order.  Additional, key parts of that Order are currently subject to a preliminary injunction issued by the United States District Court for the Western District of Washington.  The Ninth Circuit declined to temporarily stay that injunction pending a fuller appeal.[6]  The Eastern District of Virginia has also issued a preliminary injunction against certain parts of the January order as it applies to Virginia residents and institutions. There are hearings and briefing deadlines scheduled in both the Washington and Ninth Circuit proceedings, as well as in many of the other cases.  Because the new order rescinds the old order, effective March 16, those challenges may become moot, and the Department of Justice has said it will be seeking dismissal.[7]  However, it is highly likely that some of the existing complaints and requests for relief will be amended to challenge the new ban.  New challenges to the newly announced Executive Order are also anticipated.  It is difficult to predict how the courts will approach litigation, either substantively or procedurally.  Given that the new order does not go into effect until March 16, there will be opportunity for more substantive (although expedited) proceedings than was the case with the original order.  Gibson Dunn will continue to monitor challenges for possible impacts on the new order. III.       Issues for Companies to Consider As with the January order, there is no "one size fits all" approach for companies addressing employee and business issues related to the new Executive Order. Accordingly, companies should again evaluate whether they will need to develop strategies to deal with the impact of the replacement Executive Order, both internally and as it relates to potential shareholder and business relations. In the immediate term, companies should consider outreach to their employees, particularly those who are or may be affected by the Executive Order.  Companies should also consider whether plans or policies are needed for travel by executives, employees, or other stakeholders.  In many ways, the new order is clearer than the January order, but as we describe in more detail below it not clear how all aspects of the order will be implemented.  Accordingly, employers may want to consider the following: Outreach to employees who may be affected.  Companies should consider proactively identifying and reaching out to all employees who may be affected.  As noted above, the Executive Order, on its face, applies to both immigrants and non-immigrants from the six covered countries.  Thus, employees traveling for business or leisure may be equally affected.  Note that different employees’ immigration statuses may compel differing guidance on how to approach any issues that arise in the enforcement of the Order. Outreach to employees who may have family members affected.  It is important to remember that some of your employees, even if not directly impacted by the Executive Order, will have family and loved ones who are or may be impacted.  Companies may consider providing counseling and support for employees with these concerns. Communicating with employees.  Companies should consider identifying employees who frequently travel to and from the affected countries or who are visa holders from affected countries, to explain company plans with respect to the Executive Order.  Given issues that arose for travelers in connection with the implementation of the original Executive Order in January, employees from affected countries who are currently outside the United States, but have a legal right to enter, should be advised to stay in communication with individuals in the United States about their travel plans, in the event they have difficulty re-entering the country, and have a plan to obtain appropriate assistance in that event.  Identifying a point of contact.  Consider identifying a contact point for any employee questions or concerns regarding the Executive Order.  Furthermore, ensure that this contact is prepared to field questions from affected or potentially affected employees, to discuss visa renewal or travel to and from the affected countries, and to refer employees with specific issues to the appropriate resources. Communicating with shareholders, business partners and other stakeholders.  Companies should consider whether communications with shareholders, business partners or other stakeholders regarding potential impacts on business as a result of enforcement of the Executive Order are appropriate. Modifying travel and meeting obligations.  Companies should consider modifying (or allowing for employee choice regarding) employee travel obligations, as appropriate to the company’s business needs, to avoid potential difficulties with travel to and from the United States.  Likewise, if companies have board members or executives affected by the Executive Order, or business stakeholders who will not be able to enter the United States due to the Executive Order, consider whether meetings can be conducted remotely or outside the United States.  Companies involved in pending litigation that may require employee travel to the United States should consider seeking the advice of litigation counsel to determine what, if any, notice to the relevant court or parties may be advisable at this stage. Reviewing non-discrimination policies.  Companies may wish to send reminders of applicable equal employment policies.  Many employers included such statements in communications regarding the original Order.  Companies may also wish to consider how their policies apply to employment and hiring decisions in light of travel restrictions.  This list addresses just some of the issues that companies will face in light of the Executive Order.  Gibson, Dunn & Crutcher’s lawyers, including its employment, securities, administrative law, constitutional law, and sanctions teams, are available to assist clients with navigating these and other issues that arise with respect to enforcement of the March 6 Order. IV.       Suspension of Expedited Processing for H-1B Visas On March 3, U.S. Citizen and Immigration Services (USCIS) announced it will suspend "premium processing" of applications for H-1B visas.[8]  This change is effective April 3, 2017, the first date for filing FY18 applications.  The agency says that this is necessary to process back-logged petitions.  It also says that "expedited" processing is still available for applications meeting certain criteria, and subject to "the discretion of office leadership."  Applications that remain eligible for premium processing include those involving:  Severe financial loss to company or ​person​;​ Emergency situation;​ Humanitarian reasons;​ Nonprofit organization whose request is in furtherance of the cultural and social interests of the United States​;​ Department of Defense or ​national ​interest ​​situation; USCIS error; or​ compelling interest of USCIS.​[9] *      *      * Gibson Dunn will continue to monitor these rapidly developing issues closely.    [1]   "Executive Order Protecting The Nation From Foreign Terrorist Entry Into The United States," Mar. 6, 2017, https://www.whitehouse.gov/the-press-office/2017/03/06/executive-order-protecting-nation-foreign-terrorist-entry-united-states.    [2]   See, e.g., Letter from Attorney General and Sec’y of Homeland Security, Mar. 6, 2017, https://www.dhs.gov/sites/default/files/publications/17_0306_S1_DHS-DOJ-POTUS-letter.pdf    [3]   U.S. Dep’t of Homeland Security, "Q&A: Protecting the Nation From Foreign Terrorist Entry To The United States," Mar. 6, 2017, https://www.dhs.gov/news/2017/03/06/qa-protecting-nation-foreign-terrorist-entry-united-states.    [4]   U.S. Dep’t of Homeland Security, "Fact Sheet: Protecting the Nation From Foreign Terrorist Entry To The United States," Mar. 6, 2017, https://www.dhs.gov/news/2017/03/06/fact-sheet-protecting-nation-foreign-terrorist-entry-united-states.    [5]   U.S. Dep’t of State, "Executive Order on Visas," Mar. 6, 2017, https://travel.state.gov/content/travel/en/news/important-announcement.html.    [6]   http://cdn.ca9.uscourts.gov/datastore/general/2017/02/27/17-35105%20-%20Motion%20Denied.pdf; https://cdn.ca9.uscourts.gov/datastore/opinions/2017/02/09/17-35105.pdf.    [7]   http://www.politico.com/story/2017/03/trump-releases-new-travel-ban-executive-order-235720.    [8]   U.S. Citizenship and Immigration Services, "USCIS Will Temporarily Suspend Premium Processing for All H-1B Petitions," Mar. 3, 2017 https://www.uscis.gov/news/alerts/uscis-will-temporarily-suspend-premium-processing-all-h-1b-petitions.    [9]   U.S. Citizenship and Immigration Services, "Expedite Criteria," https://www.uscis.gov/forms/expedite-criteria. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following: Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com)Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)Anne M. Champion – New York (+1 212-351-5361, achampion@gibsondunn.com)Ethan Dettmer – San Francisco (+1 415-393-8292, edettmer@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Kirsten Galler – Los Angeles (+1 213-229-7681, kgaller@gibsondunn.com) Ronald Kirk – Dallas (+1 214-698-3295, rkirk@gibsondunn.com)Joshua S. Lipshutz – Washington D.C. (+1 202-955-8217, jlipshutz@gibsondunn.com) Katie Marquart, Pro Bono Counsel & Director – New York (+1 212-351-5261, kmarquart@gibsondunn.com) Samuel A. Newman – Los Angeles (+1 213-229-7644, snewman@gibsondunn.com) Jason C. Schwartz – Washington D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Kahn A. Scolnick – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 10, 2017 |
Ninth Circuit Court of Appeals Issues Opinion Upholding Nationwide TRO of January 27 Immigration-Related Executive Order

On Monday, January 30, 2017, Gibson Dunn issued a client alert regarding President Trump’s January 27 Executive Order restricting entry into the United States for individuals from certain nations, and making other immigration-related policy changes.  On February 1, Gibson Dunn issued an updated client alert, covering subsequent developments relating to the Executive Order including: (1) coverage of dual citizens; (2) provisional revocation of certain visas; and (3) reciprocal policy changes abroad.  This update describes yesterday’s Ninth Circuit decision in State of Washington v. Trump, which denied the Government’s request to stay the nationwide temporary restraining order, as well as other recent developments relating to the various legal challenges to the Executive Order.  On February 10, the Ninth Circuit issued a sua sponte request that the parties brief whether en banc review by the Ninth Circuit is appropriate.  At the same time, news reports indicate that the Trump administration may issue a revised executive order, rather than appeal the decision.[1]  This update also provides considerations for companies and others as they continue to deal with the aftereffects of the Executive Order and the various court challenges to it.  This alert is informational only, and you should, of course, seek legal advice specific to any particular situation. I.      Ninth Circuit Decision in State of Washington v. Trump, No. 2:17-cv-141 On February 3, in an action brought by the State of Washington and the State of Minnesota, the United States District Court for the Western District of Washington (Hon. James L. Robart) issued a nationwide temporary restraining order against enforcement of the Executive Order.  The next day the federal defendants filed an emergency motion for an immediate administrative stay and for a stay pending appeal.  The Ninth Circuit denied an immediate stay and held telephonic oral argument on Tuesday, February 7.  On Thursday, February 9, the three-judge panel issued its unanimous opinion holding that, "the Government has not shown a likelihood of success on the merits of its appeal, nor has it shown that failure to enter a stay would cause irreparable injury, and we therefore deny its emergency motion for a stay."  Opinion at 3.[2]             A.      Jurisdiction and Standing  The Court determined it had appellate jurisdiction due to the extraordinary circumstances of the case, even though it generally does not review temporary restraining orders.  The Court rejected the Government’s argument that the plaintiff States lack Article III standing, finding that, for purposes of this stage of the proceedings, the States adequately alleged that the Executive Order caused concrete harm to their state universities, faculty and students.  Opinion at 12.             B.      Reviewability of the Executive Order While recognizing the deference owed to the executive branch on matters of immigration and national security, the Court rejected the Government’s argument that the Executive Order was not subject to judicial review, stating that such a claim "runs contrary to the fundamental structure of our constitutional democracy."  Opinion at 14.  The Court went on to cite a number of instances in which federal courts have reviewed and, in some instances invalidated, executive actions taken in the name of national security.  Opinion at 14-18.             C.      Legal Reasoning and Opinion In deciding whether to stay the temporary restraining order, the Court examined four factors:  (1) whether the federal government was likely to succeed on the merits; (2) whether the federal government would be irreparably harmed absent a stay; (3) whether the stay would irreparably injure the plaintiff States; and (4) what is in the public interest. As to success on the merits, the Court concluded that the federal government had not demonstrated that it was likely to succeed on the merits, at least with respect to the States’ due process claims.  With respect to the due process claims, the federal government failed to show that the Executive Order provided notice and a hearing prior to restricting an individual’s ability to travel.  The Court rejected the federal government’s assertion that the Executive Order no longer applies to lawful permanent residents, as that clarification came from the White House counsel, who is "not known to be in the chain of command for any of the Executive Departments."  Opinion at 22.  With respect to those without legal status, the court found potential claims of due process violations existed as well.  The Court also noted that the States’ religious discrimination claims raised "serious allegations and present significant constitutional questions," but reserved consideration of those claims until the merits are fully briefed.  Opinion at 26.  With respect to the likelihood of irreparable harm, the Court found that the federal government failed to show that a stay was necessary to avoid unnecessary injury stating, "the Government submitted no evidence to rebut the States’ argument that the district court’s order merely returned the nation temporarily to the position it has occupied for many previous years."  Opinion at 26.  The Court found that the States had offered ample evidence of irreparable harm, including separating families and stranding individuals traveling abroad.  Opinion at 28.  Finally, the court found that there were competing public interests at play here such that irreparable harm alone could not justify a stay.  Opinion at 28-29. The Court also declined the federal government’s proposed alternative relief, including modification or narrowing of the existing temporary restraining order either in geographic scope or as to what categories of covered individuals.  Opinion at 23-24.      On the day after the Ninth Circuit issued its ruling, it issued an order that the parties submit simultaneous briefs setting forth their positions on whether en banc review by an 11-judge panel of the Ninth Circuit is appropriate.  At the same time, as stated above, recent news reports indicate that the White House may not seek to appeal the decision and will instead draft and issue a revised executive order.[3] II.      Status of Other Legal Challenges Since the January 27 Executive Order was issued, dozens of legal challenges have been brought in an effort to stay or invalidate the Executive Order.  Many of these suits have resulted in orders staying or limiting the Executive Order itself, including by judges in Massachusetts, Brooklyn, and Virginia.  See, e.g., Louhghalam v. Trump, No. 1:17-cv-10154-NMG (D. Mass. Feb 3, 2017); Darweesh v. Trump, 17 Civ. 480 (AMD) (E.D.N.Y. Jan. 28, 2017); Aziz v. Trump, No. 1:17-cv-116 (E.D.Va. Jan. 28, 2017).   One decision refused to offer temporary injunctive relief against the effectiveness of the Executive Order.  Louhghalam, 2017 WL 479779 (D. Mass. Feb. 3, 2017).  At least one case seeking to enjoin enforcement of the Executive Order has been stayed pending today’s decision by the Ninth Circuit.  State of Hawaii v. Donald J. Trump et al., No. 1:17-cv-50 (D. Haw. February 3, 2017). Other lawsuits filed over the course of the last week have sought to challenge the Executive Order as whole, as well as its impact on specific populations.  See, e.g., Pars Equality Ctr. v. Trump, No. 1:17-cv-255 (D.D.C. Feb. 9, 2017) (suit by several Iranian-American groups seeking a broad permanent injunction and alleging that the Executive Order reflects "invidious discrimination"); Int’l Refugee Assistance Project v. Trump, No. 8:17-cv-00361 (D. Md. Feb. 7, 2017) (seeking declaration that "the entire Executive Order is unlawful and invalid"). III.      Issues for Consideration  Despite the temporary clarity provided by the Ninth Circuit’s ruling, there are, as described above, multiple legal challenges still outstanding and the likelihood of further appeals of the Ninth Circuit decision issued on Thursday, February 9.  As such, companies and others should still consider the guidance provided in our earlier client alerts on this topic, until the courts or the administration provide more certainty on this issue.  For example, companies should still consider modifying (or allowing for employee choice regarding) employee travel obligations, as appropriate to the company’s business needs, to avoid potential difficulties with travel to and from the United States.  Likewise, if companies have officers, employees, contractors, or others affected by the Executive Order, or business stakeholders who will not be able to enter the United States due to the Executive Order, consider whether meetings can be conducted remotely or outside the United States.      [1]   http://www.cnn.com/2017/02/10/politics/immigration-executive-order-white-house/index.html    [2]   In addition to the filings by the parties, 20 amicus briefs were filed by a variety of entities and individuals.  Sixteen of the briefs supported the States, and were submitted by various nonprofit organizations, several other states, labor organizations, a group of law professors, and a group of over 120 technology companies.  Three briefs filed by a variety of nonprofit organizations support the government.  These briefs are available on the Ninth Circuit’s website, at https://www.ca9.uscourts.gov/content/view.php?pk_id=0000000860.       [3]   http://www.cnn.com/2017/02/10/politics/immigration-executive-order-white-house/index.html Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following: Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com)Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)Anne M. Champion – New York (+1 212-351-5361, achampion@gibsondunn.com)Ethan Dettmer – San Francisco (+1 415-393-8292, edettmer@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Kirsten Galler – Los Angeles (+1 213-229-7681, kgaller@gibsondunn.com) Ronald Kirk – Dallas (+1 214-698-3295, rkirk@gibsondunn.com)Joshua S. Lipshutz – Washington D.C. (+1 202-955-8217, jlipshutz@gibsondunn.com) Katie Marquart, Pro Bono Counsel & Director – New York (+1 212-351-5261, kmarquart@gibsondunn.com) Samuel A. Newman – Los Angeles (+1 213-229-7644, snewman@gibsondunn.com) Jason C. Schwartz – Washington D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Kahn A. Scolnick – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 1, 2017 |
Recent Developments Regarding Executive Order on Immigration

On Monday, January 30, 2017, Gibson Dunn issued a client alert regarding President Trump’s January 27 Executive Order restricting entry into the United States for individuals from certain nations and making other immigration-related policy changes.  This update describes further developments relating to the Executive Order involving (1) coverage of dual citizens; (2) provisional revocation of certain visas; and (3) reciprocal policy changes abroad.  It also provides updates on the status of various legal challenges to the Executive Order.[1]  In particular, it describes a decision from earlier today that broadly prohibits enforcement of the Executive Order, on an interim basis. I.     Coverage of Dual Citizens, Certain Special Immigrants Clarified The Department of Homeland Security ("DHS") announced that dual citizens are not affected by the ban on entry of individuals from the seven countries covered by the Executive Order.  According to new guidance, "travelers are being treated according to the travel document they present," and will be admitted if they "apply for entry based on their citizenship from one of the countries NOT on the list" and are otherwise eligible.[2]  The Acting Commissioner of Customs & Border Protection stated that "[t]ravelers will be assessed … based on the passport they present, not any dual-national status.  So if you’re a citizen of the United Kingdom, you present your United Kingdom passport and the executive order does not apply to you upon arrival."[3] However, as a practical matter, travelers who are also nationals of one of the seven covered countries may be subject to additional screening both when applying for a visa (if applicable) under their non-affected passport, or upon arrival in the United States. Relatedly, DHS announced that holders of "special immigrant visas" (which could include translators for the U.S. armed forces in Iraq), will be treated similarly to lawful permanent residents from the covered countries.  Although covered by the ban, they will generally be allowed entry under the "case-by-case" waiver provision.[4] II.     Revocation of Existing Visas On Tuesday, January 31, in one of the cases challenging the Executive Order, the government publicly filed a January 27 Department of State order that "provisionally revoke[d] all valid nonimmigrant and immigrant visas of nationals of Iraq, Iran, Libya, Somalia, Sudan, Syria, and Yemen."[5]  It is not currently clear to what extent this order is being enforced. Like the Executive Order, this State Department order recognizes the possibility of exceptions made on a "case-by-case" basis, but does not provide information on the process for obtaining such an exception.  While application of this order remains unclear, revocation of a visa has potentially significant implications.  For example, once a nonimmigrant visa is revoked, the visa holder becomes deportable.[6]  The rule regarding immigrant visas is less clear, although there is some risk that an immigrant whose visa has been revoked could be subject to deportation.[7]  If the government seeks to deport an individual on the basis of a visa revocation, that individual has the right to judicial review prior to removal.[8]   While no guidance has been issued, the order may mean that individuals who entered on a valid multi-entry visa prior to the Executive Order will not be able to enter again under the same visa, even after the 90-day ban expires.  Instead, individuals in this category will likely need to obtain a new visa, or a waiver from the revocation.  In addition, individuals in the United States under a previously issued visa may be deported.  III.     Reciprocal Action in Other Nations At least two of the seven nations covered by the Executive Order are implementing or moving toward reciprocal bans on travel from the United States, although details of the scope of these bans, and possible exceptions, are unclear at this time.  Iran has announced a ban.[9]  Iraq’s parliament has passed a non-binding recommendation to take similar action if the U.S. ban remains in effect, in line with criticism of the Executive Order from the foreign ministry there.[10] IV.     Status of Legal Challenges              A.        Badr Dhaifallah Ahmed Mohammed et al v. United States of America et al, 2:17-cv-00786 (C.D. Cal. January 31, 2017) On January 31, the United States District Court for the Central District of California (Hon. André Birotte Jr.) entered an Order enjoining the President, DHS, CBP, and other defendants from enforcing the Executive Order "by removing, detaining, or blocking the entry of Plaintiffs, or any other person from" the seven countries named in the Executive Order "with a valid immigrant visa." The court further: (i) enjoined the defendants from cancelling the plaintiffs’ validly obtained and issued visas; (ii) ordered the defendants, and the State Department in particular, to return "to Plaintiffs their passports containing validly issued immigrant visas so that Plaintiffs may travel to the United States on said visas,"; and (iii) ordered defendants to immediately "inform all relevant airport, airline, and other authorities at Los Angeles International Airport and International Airport in Djibouti that Plaintiffs are permitted to travel to the United States on their valid immigrant visas." Although the court’s order prohibits the "blocking of entry" of anyone from the seven countries who possesses "a valid immigrant visa," regardless of whether the individual is a plaintiff in the case, it is unclear what impact this will have beyond the named plaintiffs in light of the Department of State’s order provisionally revoking all such visas as discussed above.               B.        State Government Actions Four state governments have also sued to enjoin the Executive Order or moved to intervene in cases challenging the Order, one new class action was filed challenging the Executive Order, and two potentially significant hearings are scheduled for this Friday.  Several States have gone to court to challenge the ban.  The State of Washington filed a challenge in the Western District of Washington.[11]  Similarly, Massachusetts,[12] Virginia,[13] and New York,[14] moved to join existing lawsuits pending in federal court in their states. The Northwest Immigrant Rights Project filed a class action in the Western District of Washington seeking invalidation of the Executive Order.  Abdiaziz v. Trump, No. 2:17-cv-135. Finally, two hearings are set for this Friday, February 3.  The District of Massachusetts hearing in Tootkaboni v. Trump, No. 17-cv-10154, will further consider the temporary restraining order that court entered last weekend.  The Western District of Washington will consider the state government’s request for a temporary restraining order in its recently filed case, State of Washington v. Trump, No. 2:14-cv-141. *      *      * Gibson Dunn will continue to closely monitor these rapidly developing issues.                 [1]     On January 30, shortly after the release of our earlier client alert, the Acting Attorney General announced guidance that the Justice Department would not defend the Executive Order, explaining that she is not "convinced that the Executive Order is lawful."  (http://documents.latimes.com/message-acting-attorney-general).  The White House relieved the Acting Attorney General of her duties, stating that the Acting Attorney General had "betrayed the Department of Justice by refusing to enforce a legal order designed to protect the citizens of the United States."  See White House, Statement on the Appointment of Dana Boente as Acting Attorney General, Jan. 30, 2017 (https://www.whitehouse.gov/the-press-office/2017/01/30/statement-appointment-dana-boente-acting-attorney-general).  The new Acting Attorney General promptly announced that he was rescinding his predecessor’s guidance regarding the Executive Order.  See U.S. Dept. of Justice, "Acting Attorney General Boente Issues Guidance to Department on Executive Order," Jan. 30, 2017 (https://www.justice.gov/opa/pr/acting-attorney-general-boente-issues-guidance-department-executive-order).                 [2]     U.S. Customs & Border Protection, "Protecting the Nation from Foreign Terrorist Entry into the United States," Jan. 31, 2017 (https://www.cbp.gov/border-security/protecting-nation-foreign-terrorist-entry-united-states).                 [3]     U.S. Dept. of Homeland Security, "Transcript of Media Availability on Executive Order with Secretary Kelly & DHS Leadership," Jan. 31, 2017 (https://www.dhs.gov/news/2017/01/31/transcript-media-availability-executive-order-secretry-kelly-and-dhs-leadership).                 [4]     U.S. Dept. of Homeland Security, "Transcript of Media Availability on Executive Order with Secretary Kelly & DHS Leadership," Jan. 31, 2017 (https://www.dhs.gov/news/2017/01/31/transcript-media-availability-executive-order-secretry-kelly-and-dhs-leadership).                 [5]     U.S. Dept. of State, Order, Jan. 27, 2017.  This document is not currently available on a government website, but can be found at http://www.politico.com/f/?id=00000159-f6bd-d173-a959-ffff671a0001 .                 [6]     See 8 U.S.C. § 1227(a)(1)(B) ("Any alien who is present in the United States in violation of this chapter or any other law of the United States, or whose nonimmigrant visa (or other documentation authorizing admission into the United States as a nonimmigrant) has been revoked under section 1201(i) of this title, is deportable.").                 [7]     See 8 U.S.C.  § 1201(i); 22 C.F.R. § 42.82(b); see also 8 U.S.C. § 1227(4)(c)(i) ("An alien whose presence or activities in the United States the Secretary of State has reasonable ground to believe would have potentially serious adverse foreign policy consequences for the United States is deportable.").                 [8]     8 U.S.C. § 1201(i) ("There shall be no means of judicial review … of a revocation … except in the context of a removal proceeding if such revocation provides the sole ground for removal…").                  [9]     Asas Fitch, et al., "Iran Halts Visas to Americans As Iraq Keeps Doors Open," Wall Street J., Jan. 31, 2017 (https://www.wsj.com/articles/iran-stops-issuing-visas-to-americans-1485870515).                 [10]     Qassim Abdul-Zahra, "Iraqi Lawmakers Urge Ban On Americans After Trump Order," Associated Press, Jan. 30, 2017 (http://www.kcbd.com/story/34378139/iraqi-lawmakers-urge-ban-on-americans-after-trump-order).                 [11]     Washington State Office of the Attorney General, "AG Ferguson Seeks Halt to Trump’s Immigration Executive Order," Jan. 30, 2017 (http://www.atg.wa.gov/news/news-releases/ag-ferguson-seeks-halt-trump-s-immigration-executive-order).                 [12]     Attorney General of Massachusetts, "AG Healey Announces Lawsuit Against President Trump’s Executive Order on Immigration," Jan. 31, 2017 (http://www.mass.gov/ago/news-and-updates/press-releases/2017/2017-01-31-ag-lawsuit-president-eo.html).                 [13]     Attorney General of Virginia, "Virginia Brings Action Against President Trump for Unlawful and Unconstitutional Executive Order on Immigration," Jan. 31, 2017 (http://www.oag.state.va.us/media-center/news-releases/879-january-31-2017-virginia-brings-action-against-president-trump-for-unlawful-and-unconstitutional-executive-order-on-immigration).                 [14]     Attorney General of New York State, "A.G. Schneiderman Joins Lawsuit Against President Trump’s Immigration Executive Order, Jan. 31, 2017 (https://ag.ny.gov/press-release/ag-schneiderman-joins-lawsuit-against-president-trumps-immigration-executive-order). Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following: Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com)Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com)Anne M. Champion – New York (+1 212-351-5361, achampion@gibsondunn.com)Ethan Dettmer – San Francisco (+1 415-393-8292, edettmer@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Kirsten Galler – Los Angeles (+1 213-229-7681, kgaller@gibsondunn.com) Ronald Kirk – Dallas (+1 214-698-3295, rkirk@gibsondunn.com)Joshua S. Lipshutz – Washington D.C. (+1 202-955-8217, jlipshutz@gibsondunn.com) Katie Marquart, Pro Bono Counsel & Director – New York (+1 212-351-5261,kmarquart@gibsondunn.com) Samuel A. Newman – Los Angeles (+1 213-229-7644, snewman@gibsondunn.com) Jason C. Schwartz – Washington D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Kahn A. Scolnick – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 30, 2017 |
President Trump Issues Executive Order on Immigration

Click for PDF On Friday January 27, 2017, President Trump issued an Executive Order entitled “Protecting the Nation from Foreign Terrorist Entry into the United States Executive Order.”  (Available here.) The Executive Order imposes, among other things, a 90-day ban on entry into the United States for any purpose by non-U.S. citizens from Iran, Iraq, Libya, Somalia, Sudan, Syria, and Yemen.  The State Department has advised individuals from the affected countries seeking visas to enter the United States not to schedule or attend interviews, or pay fees for such visas, until further notice.[i]  Over the weekend, three federal courts blocked implementation of various parts of the Executive Order.  Additionally, the Administration has announced that implementation of the Executive Order will be somewhat relaxed for U.S. lawful permanent residents.  However, confusion persists at airports both here and abroad.  For example, it has been reported that some individuals have not been permitted to board U.S.-bound flights, and that upon arrival in the United States, other individuals have been subjected to inconsistent treatment, including detention by Customs and Border Protection (“CBP”) officers or often lengthy screenings.  Additionally, in some cases, individuals are reportedly unable to communicate with their family members or legal counsel. Although the legal landscape is continuing to evolve, as we describe below, this Client Alert provides an overview of the Executive Order, the district court decisions enjoining portions of the Executive Order, and guidance that may assist companies and others impacted by the Executive Order.  As we understand that responding to inquiries involving the Order may be our clients’ most pressing concern, we start with a brief background of the Executive Order and provide guidance companies may want to consider.  We then provide an overview of the legal landscape that exists as of Monday, January 30, 2017.  This alert is informational only, and you should, of course, seek legal advice specific to any particular situation.  Please note that we have published a supplement to this Client Alert regarding later relevant events, which is available here. I.     Overview of the Executive Order The Executive Order has the stated purpose of “protect[ing] the American people from terrorist attacks by foreign nationals admitted to the United States.”  Among its provisions are the restriction of “immigrant and nonimmigrant” entry of non-citizens from seven countries for 90 days, suspension of all refugee admission for 120 days, and indefinite prohibition of refugees from Syria.      A.     Individuals Covered and Not Covered by the 90-day Ban Section 3(c) of the Executive Order “suspend[s] entry into the United States, as immigrants and nonimmigrants” for 90 days of “aliens” from Iran, Iraq, Libya, Somalia, Sudan, Syria, and Yemen.  Subject to certain exceptions, this suspension applies regardless of travel origin, type of visa, or U.S. immigration status. The Executive Order provides that the “the Secretaries of State and Homeland Security may, on a case-by-case basis, and when in the national interest, issue visas or other immigration benefits to nationals of countries for which visas and benefits are otherwise blocked.”  Sec. 3(g).  The Executive Order also explicitly exempts only certain categories of visas for diplomats, NATO business, United Nations business (C-2), and international organization staff (G-1, G-2, G-3, G-4)).  Sec. 3(c). The Executive Order is drafted broadly enough to cover lawful permanent residents (i.e., green-card holders), and there are reports that in the first 36 hours of implementation, the CBP officers denied re-entry to such individuals.  However, on Sunday, January 29, the Department of Homeland Security (“DHS”) announced that “absent significant derogatory information indicating a serious threat to public safety and welfare, lawful permanent resident status will be a dispositive factor in our case-by-case determinations” under Section 3(g) of the Order.[ii]  Since that announcement, reports from across the country suggest that such individuals are now being admitted under this discretionary authority, after extended screening upon arrival. The Executive Order also implicates dual citizens who are not U.S. citizens.  However, exactly how such individuals will be addressed by CBP is uncertain.  There are some indications that such individuals will be treated similarly to green-card holders–subject to increased scrutiny, but generally admitted.  However, admission appears to be discretionary, and, as of now, there is no clearly announced policy.  The United Kingdom Foreign Office announced on Sunday, January 29 that the United States is not applying the ban to individuals who are dual citizens of the United Kingdom and one of the banned countries, if such individuals are travelling from the United Kingdom.[iii]  On Monday, January 30, the U.S. Embassy & Consulates in the United Kingdom made a similar announcement, confirming that “[d]ual nationals of the United Kingdom and one of [the seven covered] countries are exempt from the Executive Order when travelling on a valid United Kingdom passport and U.S. visa.”[iv]  In addition, various news outlets have reported–quoting Canadian government officials–that the United States is not applying the ban to individuals who are dual citizens of Canada and one of the banned countries.[v]  U.S. officials, however, have yet to make a similar announcement. U.S. citizens are not covered by the language of the Executive Order.  As described below, however, non-U.S. citizens from countries other than the seven covered countries may still be affected by the Executive Order’s suspension of the Visa Interview Waiver Program.  Suspension of this program is likely to increase the time necessary for issuance of U.S. visas.      B.     Other Provisions A few other provisions of the Executive Order should also be noted, as they may hinder travel to the United States by those not directly affected by the country-specific ban. The Executive Order suspends the Visa Interview Waiver Program, which allows those renewing certain types of visas to skip a consular interview under certain circumstances.  See Sec. 8(a).  This program is commonly used by low-risk travelers, including many employment-based visa applicants, in order to expedite the time in which visas are obtained for travel to the United States.  Suspension of this program is likely to slow, perhaps significantly, the process of renewing a visa, as it appears to impose a requirement that all visa applicants be interviewed in person. The Executive Order requires the Secretary of State to review “all non-immigrant visa reciprocity agreements.”  Sec. 9.  This raises the prospect that certain visas will be scaled back in the future, such as by reducing the number of allowed visits in a period or the length of an allowed stay under a visa. The Executive Order suspends the U.S. Refugee Admissions Program for 120 days (Sec. 5), and indicates certain priority for religious minorities upon its limited resumption.  This is generally understood to apply to Christian refugees from Muslim-majority nations. Finally, it is possible that the list of affected countries will expand after the 90-day ban period.  The Executive Order directs the DHS to submit for inclusion a list of any other countries that “do not provide adequate information” regarding admission of their citizens.  Sec. 3(b).  At the end of the 90-day period, DHS or the State Department may also “submit to the President the names of any additional countries recommended for similar treatment.”  Sec. 3(f). II.     Issues for Companies to Consider There is no “one size fits all” approach for companies addressing employee and business issues related to the Executive Order.  In the immediate term, companies should consider preparing a uniform communications plan for their employees, particularly those who are or may be affected by the Executive Order.  Companies should also consider whether plans or policies are needed for travel by executives, employees, or other stakeholders.  Although this situation is fluid and continues to develop, as further described below, we believe companies should also be mindful of whether they will need to develop strategies to deal with the impact of the Executive Order, both internally and as it relates to potential shareholder and business relations. Specific questions that companies may want to consider with respect to the Executive Order include: Outreach to employees who may be affected.  Although the administrative and judicial interpretation of the Executive Order continues to evolve, meaning that the full scope of individuals who may be affected is in flux, companies should consider proactively identifying and reaching out to all employees who may be affected.  As noted above, the Executive Order, on its face, applies to both immigrants and non-immigrants from the seven covered countries.  Thus, employees traveling for business or leisure may be equally affected.  In addition, as discussed above, there have been indications that lawful permanent residents may be subject to additional questioning when entering the United States from one of the seven covered countries, even if those individuals are not subject to detention.  Note that different employees’ immigration statuses may compel differing guidance on how to approach any issues that arise in the enforcement of the Order. Outreach to employees who may have family members affected.  It is important to remember that for some of your employees, even if they are not directly impacted by the Executive Order, they will have family and loved ones who are directly impacted.  We have received reports of many family members detained and separated from other family members upon arrival at an airport.  We have heard reports about family members traveling abroad who are now fearful of not being able to return home to reunite with a family member.  Companies may consider providing counseling and support for your employees who are facing these concerns. Communicating with employees.  Companies should consider identifying employees who frequently travel to and from the affected countries or who are visa holders from affected countries, to explain company plans with respect to the Executive Order.  In particular, employees from affected countries who are currently outside the United States, but have a legal right to re-enter, should be advised to stay in communication with individuals in the United States about their travel plans, in the event they have difficulty re-entering the country, and have a plan to obtain appropriate assistance in that event.  For employees currently in the United States but who are from the affected countries or frequently travel to the affected countries, consider whether travel abroad is necessary before the full scope of enforcement of the Executive Order is known and understood. Identifying a point of contact.  Consider identifying a contact point for any employee questions or concerns regarding the Executive Order.  Furthermore, ensure that this contact is prepared to field questions from affected or potentially affected employees, to discuss visa renewal or travel to and from the affected countries, and to refer employees with specific issues to the appropriate resources. Communicating with shareholders, business partners and other stakeholders.  Companies should consider whether communications with shareholders, business partners or other stakeholders regarding potential impacts on business as a result of enforcement of the Executive Order are appropriate. Modifying travel and meeting obligations.  Companies should consider modifying (or allowing for employee choice regarding) employee travel obligations, as appropriate to the company’s business needs, to avoid potential difficulties with travel to and from the United States.  Likewise, if companies have board members or executives affected by the Executive Order, or business stakeholders who will not be able to enter the United States due to the Executive Order, consider whether meetings can be conducted remotely or outside the United States.  Companies involved in pending litigations that may require employee travel to the United States, should consider seeking the advice of litigation counsel to determine what, if any, notice to the relevant court or parties may be advisable at this stage. Reviewing non-discrimination policies.  Companies may wish to send reminders of applicable equal employment policies.  Many employers have included such statements in communications regarding the Order.  Companies may also wish to consider how their policies apply to employment and hiring decisions in light of travel restrictions. This list addresses just some of the issues that companies will face in light of the Executive Order.  Gibson, Dunn & Crutcher’s lawyers, including its employment, securities, administrative law, constitutional law, and sanctions teams, are available to assist clients with navigating these and other issues that arise with respect to enforcement of the Order. III.     District Court Orders Blocking Implementation of the Executive Order As of the morning of January 30, three district courts–in New York, Massachusetts, and Virginia–have issued orders of varying general applicability temporarily (a) halting deportations resulting from the Executive Order and (b) providing certain other relief.  Other federal courts, including those in the Central District of California and the Western District of Washington have issued relief specific to individual applicants.      A.     Nationwide Stay of Removal–Darweesh v. Trump, No. 17 Civ. 480 (AMD) (E.D.N.Y. Jan. 28, 2017). On Saturday, January 28, two visa holders of Iraqi origin detained at JFK Airport in New York filed suit relief on behalf of themselves and others similarly situated, along with a petition for writ of habeas corpus.  They also asked the court for an emergency stay of removal of similarly situated people nationwide. Judge Ann Donnelly of the Eastern District of New York granted relief that evening, enjoining the President, DHS, CBP, and other respondents from removing (i) refugees, (ii) visa-holders, and (iii) individuals from the nations affected by the Executive Order. The court found that the petitioners–two individuals who were detained at JFK, along with all others similarly situated–“have a strong likelihood of success” with respect to their Due Process and Equal Protection challenges to the Executive Order.  The court also found that, absent the stay, there was an “imminent danger that . . . there will be substantial and irreparable injury” to those subject to the Executive Order. On Sunday, January 29, petitioners filed a motion for clarification and enforcement of the order.  The motion cited reports that similarly situated people “have been placed on planes, possibly deported, and subject to intimidation to sign removal orders after the issuance of the Court’s Order.”  Among other things, petitioners seek confirmation that the court’s order applies to all similarly situated people nationwide. On Monday, January 30, the case was assigned to Judge Carol Bagley Amon.       B.     Nationwide Stay of Removal and Detention —Tootkaboni v. Trump, No. 17-cv-10154 (D. Mass. Jan. 29, 2017).  On Saturday, January 28, two lawful permanent residents of Iranian origin who were detained at Logan Airport in Boston filed a similar action for relief, and also applied for an emergency stay on a nationwide basis. Early Sunday, Judge Allison D. Burroughs and Magistrate Judge Judith Dein of the District of Massachusetts issued a temporary restraining order (“TRO”) prohibiting removal and detention of those subject to the Executive Order (i.e., refugees, visa-holders, and individuals from the affected nations).  The court made the same findings as the Darweesh Court, described above.  The TRO is in effect for seven days, with the court to set a further hearing date prior to its expiration. The court also directed respondents to limit secondary screening–an airport security measure that some critics have associated with profiling–to comply with the regulations and statutes in effect prior to the Executive Order, including 8 U.S.C. § 1101(a)(13)(C), the statute providing the standards by which a lawful permanent resident may be regarded as “seeking admission” into the United States.  The court also issued instructions to CBP, apparently intended to address the issue of airlines turning away passengers on international flights destined for Logan Airport, stating that CBP “shall notify airlines that have flights arriving at Logan Airport of this Order and the fact that individuals on these flights will not be detained or returned based solely on the basis of the Executive Order.”      C.     Stay of Removal of Lawful Permanent Residents at Dulles–Mohammed Aziz v. Trump, No. 1:17-cv-116 (E.D. Va. Jan. 28, 2017) On Saturday, January 28, two brothers of Yemeni origin detained at Dulles International Airport filed an emergency application seeking a stay of removal on behalf of themselves as lawful permanent residents and others similarly situated at that same airport, as well as seeking access to counsel. Judge Leonie M. Brinkema of the Eastern District of Virginia issued a TRO forbidding removal of any lawful permanent residents from Dulles for seven days.  The court also directed that respondents “shall permit lawyers access to all legal permanent residents being detained at Dulles International Airport.” On January 30, petitioners filed a First Amended Complaint, adding new allegations that they were coerced into surrendering their green cards and then flown to Addis Ababa airport in Ethiopia.[vi]      D.     Other Court Actions and Orders Individuals seeking relief on an individual basis only, and not on behalf of others similarly situated, have sought habeas corpus and/or other relief in a number of other district courts with jurisdiction over relevant international airports. For instance, on Saturday, January 28, a visa holder of Iranian origin detained at LAX in Los Angeles filed suit in the Central District of California, seeking habeas corpus, declaratory, and injunctive relief.  See Vayeghan v. Kelly, No. CV 17-0702 (C.D. Cal. Jan. 28, 2016).  Before the court could consider the emergency application for a TRO, however, “he was placed on a flight to Dubai to be removed to Iran.”  But Judge Dolly M. Gee issued a TRO on January 29, directing respondents to “transport Petitioner back to the United States and admit him under the terms of his previously approved visa.”  The court found, among other things, “a strong likelihood of success” on the petitioner’s claims under the Equal Protection Clause, Establishment Clause, and Immigration and Nationality Act, and also pointed to “the public interest in upholding constitutional rights.”  The court set a hearing to show cause regarding preliminary injunctive relief for Friday, February 10. On Saturday, January 28, Judge Thomas S. Zilly of the Western District of Washington granted an emergency stay of removal with respect to two petitioners being detained at Seattle-Tacoma International Airport.  A full hearing on the stay is set for Friday, February 3.  The matter is Doe v. Trump, No. C17-126 (W.D. Wash. Jan. 28, 2017). In addition, there are at least two broad-based suits being filed today.  First the Council on American-Islamic Relations (“CAIR”) has filed suit in the Eastern District of Virginia, focusing on the Executive Order’s “apparent purpose and underlying motive . . . to ban people of the Islamic faith from Muslim-majority countries from entering the United States.”[vii]  The case  raises challenges under the Establishment, Free Exercise, and Due Process Clauses, and seeks broad injunctive relief against most aspects of the Executive Order restricting travel to the United States.  See Sarsour v. Trump, No. 1:17-cv-00120 (E.D. Va. Jan. 30, 2017).  Second, the attorney general of Washington State has announced he will file a suit in the Western District of Washington, also seeking to have key provisions declared unconstitutional and requesting injunctive relief.[viii] Finally, we are aware of other actions being filed in the Northern District of Illinois (Chicago O’Hare International Airport); the Northern District of California (San Francisco International Airport); the Central District of California (LAX); and the Northern District of Texas (Dallas-Fort Worth International Airport).  Additionally, there are at least fifteen actions pending in the Eastern District of New York, including the Darweesh matter discussed above. IV.     On-the-Ground Observations at Airports Nationwide Although deportations appear to have stopped and DHS has indicated it will comply with the court orders described above, reports from airport observers indicate that confusion continues regarding the implementation of the Executive Order and compliance with these court orders.  The Administration, however, has contradicted these reports, but has acknowledged that some individuals were affected and slowed down in their travel.[ix] Attorneys at various airports around the country have reported denial of access to detainees.  Despite court orders mandating attorney access to potential clients, CBP has reportedly refused to allow some detainees to speak in person with counsel.[x]  Other lawyers have reported that CBP has been averse to inquiries for information.  In Los Angeles, for example, CBP closed its airport office, making it difficult to determine the number, identity, and legal status of potential detainees. Detainees have reported extensive examinations and confiscations of luggage and personal belongings.[xi]  Multiple reports circulated detailing investigations into detainees’ social media accounts and corresponding questioning regarding personal religious beliefs and political views, particularly related to President Trump and his administration.  Some detainees stated that individuals wearing headscarves were targeted for additional vetting.  Wait times varied widely, from half a day or longer to an hour or less.  There have also been reports that some detainees have been pressured into renouncing their lawful status under threat of being banned from re-entry for up to five years.[xii] Finally, many individuals have reported undergoing more rigorous screening at the point of embarkment.  As part of that process, individuals may be denied permission to board if there is an expectation they will not be admitted to the United States upon arrival.[xiii] *          *          * The issues described in this Client Alert are rapidly changing.  Gibson Dunn is dedicated to staying at the forefront of these issues for the benefit of our friends and clients, and will update you with significant developments. [i] U.S. State Dept., “Urgent Notice: Executive Order on Protecting the Nation from Terrorist Attacks by Foreign Nationals,” Jan. 27, 2017 (https://travel.state.gov/content/visas/en/news/executive-order-on-protecting-the-nation-from-terrorist-attacks-by-foreign-nationals.html). [ii] U.S. Dept. of Homeland Security, “DHS Statement On Compliance With Court Orders And The President’s Executive Order,” Jan. 29, 2017 (https://www.dhs.gov/news/2017/01/29/dhs-statement-compliance-court-orders-and-president%E2%80%99s-executive-orders). [iii] U.K. Foreign & Commonwealth Office, “Press Release, Presidential Executive Order on Inbound Migration to United States,” Jan. 29, 2017 (https://www.gov.uk/government/news/presidential-executive-order-on-inbound-migration-to-us). [iv] U.S. Embassy & Consulates in the U.K., “Updated Guidance on Executive Order on Protecting the Nation from Terrorist Attacks by Foreign Nationals,” Jan. 30, 2017 (https://uk.usembassy.gov/updated-guidance-executive-order-protecting-nation-terrorist-attacks-foreign-nationals/). [v] See, e.g., Daniel Dale & Emily Mathieu, “Canadian dual citizens exempted from Trump’s travel ban,” Toronto Star, Jan. 28, 2017 (https://www.thestar.com/news/world/2017/01/28/passport-holders-of-7-muslim-majority-countries-cant-board-air-canada-flights-to-us.html). [vi] As of Sunday night, it is unclear how the matters in Massachusetts and Virginia, brought by lawful permanent residents, are affected by DHS’s statement on January 29 that “the entry of lawful permanent residents is in the national interest.” [vii] Council on American-Islamic Relations, “CAIR to Announce Constitutional Challenge to Trump’s ‘Muslim Ban’ Executive Order,” Jan. 27, 2017 (https://www.cair.com/press-center/press-releases/14062-cair-to-announce-constitutional-challenge-to-trump-s-muslim-ban-executive-order.html). [viii] KOMO Staff, “State attorney general to file lawsuit against Trump immigration order,” KOMO News, Jan. 30, 2017 (http://komonews.com/news/local/state-attorney-general-plans-major-announcement-on-trump-immigration-plan). [ix] E.g., Berkeley Lovelace Jr, “White House spokesman Sean Spicer says immigration ban ‘small price to pay’ for safety,” CNBC, Jan. 30, 2017 (http://www.cnbc.com/2017/01/30/white-house-spokesman-sean-spicer-immigration-ban.html). [x] See, e.g., Edward Helmore, et al., “Border agents defy courts on Trump travel ban, congressmen and lawyers say,” Guardian, Jan. 29, 2017 (https://www.theguardian.com/us-news/2017/jan/29/customs-border-protection-agents-trump-muslim-country-travel-ban). [xi] See, e.g., Nadel Issa, et al., “As hundreds protest, attorneys seek info on how many are detained,” Chicago Sun-Times, Jan. 29, 2017 (http://chicago.suntimes.com/politics/calm-before-the-storm-ohare-quiet-sunday-morning/). [xii] See, e.g., Joseph Goldstein, et al., “Lives Rewritten With the Stroke of a Pen,” New York Times, Jan. 29, 2017 (https://www.nytimes.com/interactive/2017/01/29/nyregion/detainees-trump-travel-ban.html?_r=0). [xiii] See, e.g., Evan Perez, et al., “Inside the confusion of the Trump executive order and travel ban,” CNN, Jan. 30, 2017 (http://www.cnn.com/2017/01/28/politics/donald-trump-travel-ban/).   Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following: Theodore J. Boutrous, Jr. – Los Angeles (+1 213-229-7000, tboutrous@gibsondunn.com) Rachel S. Brass – San Francisco (+1 415-393-8293, rbrass@gibsondunn.com) Anne M. Champion – New York (+1 212-351-5361, achampion@gibsondunn.com) Ethan Dettmer – San Francisco (+1 415-393-8292, edettmer@gibsondunn.com) Theane Evangelis – Los Angeles (+1 213-229-7726, tevangelis@gibsondunn.com) Kirsten Galler – Los Angeles (+1 213-229-7681, kgaller@gibsondunn.com) Ronald Kirk – Dallas (+1 214-698-3295, rkirk@gibsondunn.com) Joshua S. Lipshutz – Washington D.C. (+1 202-955-8217, jlipshutz@gibsondunn.com) Katie Marquart, Pro Bono Counsel & Director – New York (+1 212-351-5261,kmarquart@gibsondunn.com) Samuel A. Newman – Los Angeles (+1 213-229-7644, snewman@gibsondunn.com) Jason C. Schwartz – Washington D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Kahn A. Scolnick – Los Angeles (+1 213-229-7656, kscolnick@gibsondunn.com)   © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 19, 2017 |
India – Legal and Regulatory Update (January 2017)

The Indian Market The Indian economy continues to be an attractive investment destination due to its sustained stable growth and implementation of further liberalisation policies by the Government of India ("Government"). In November 2016, the Government announced that Indian Rupees 500 and 1000 would cease to be legal tender. These high-value currency notes comprised the majority of the currency in circulation in the market. While this move has created some uncertainty in the market, the Government expects that this will lead to an increase in tax collections and bank deposits, creating room for reductions in interest and tax rates in the first half of 2017. Following on from our previous update dated October 3, 2016 (which sets out an overview of key legal and regulatory developments in India from May 1, 2016 to August 31, 2016), this update will provide a brief overview of the key legal and regulatory developments in India between September 1, 2016 and December 31, 2016. Key Legal and Regulatory Developments Foreign Investment 100% Foreign Investment in Certain Financial Services: The Reserve Bank of India ("RBI") has permitted 100% foreign investment, without prior Government approval, in non-banking finance companies ("NBFCs") providing financial services regulated by financial services regulators such as the RBI, Securities and Exchange Board of India ("SEBI"), Insurance Regulation and Development Authority etc.[1] However, such investment will be subject to applicable conditions imposed by relevant financial services regulators or other applicable laws, including minimum capitalisation requirements. Further, 100% foreign investment in unregulated financial services has also been permitted under the Government approval route. Previously, foreign investment up to 100% was permitted under the automatic approval route only in NBFCs engaged in 18 specified financial services. India-Singapore Double Taxation Avoidance Agreement Amendment: India and Singapore have signed a protocol (the "Protocol") amending the agreement between India and Singapore for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income ("India-Singapore DTAA").[2] This radically changes the tax liability on capital gains earned by a Singapore tax resident from sale of shares of an Indian company. Under the erstwhile regime, such gains were taxable in the country of residence i.e. Singapore, where there is no tax on capital gains. Now, the Protocol imposes taxes on such gains at the source i.e. in India (where the company is registered) at the applicable domestic tax rate. This amendment effectively takes away the capital gains benefits that were available to investments by Singapore tax resident entities. The Protocol has been made effective on investments made on or after April 1, 2017. Therefore, investments made prior to March 31, 2017 and related exits/share transfers will remain unaffected by this change. This follows similar amendments to the convention for the avoidance of double taxation and the prevention of fiscal evasion between India and Mauritius ("India-Mauritius DTAA") (discussed in our previous update dated October 3, 2016). India-Cyprus Revised Double Taxation Avoidance Agreement: India and Cyprus have also revised their agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital ("India-Cyprus DTAA"), to incorporate source-based taxation in place of the residence-based taxation under the existing agreement.[3] This change will be effective from April 1, 2017. This is in line with recent amendments to the India-Mauritius DTAA and the India-Singapore DTAA (as discussed above). Previously, the Government had, by a notification, declared Cyprus to be a jurisdictional area with lack of effective exchange of information, which made Cypriot entities ineligible for any tax benefits. This notification has now been withdrawn to make the revised India-Cyprus DTAA fully operational. Subsequent to the recent amendments to India’s tax agreements with various countries, Mauritius has emerged as an attractive jurisdiction for banking transactions. The withholding tax rate for interest payments by Indian residents to Mauritius-resident banks under the recently amended India-Mauritius DTAA is 7.5%, while the withholding rates on such interest payments under the India-Singapore DTAA and the India-Cyprus DTAA remain at 10%. Corporate Law and Financing Notification of Companies Act Provisions: The new [Indian] Companies Act, 2013 ("2013 Act") has been brought into force in a phased manner since the Act received presidential assent three years ago. In December 2016, the Government notified several provisions of the 2013 Act which effect significant changes to corporate laws in India. Two key provisions that were notified are discussed below. Procedure for Court Approved Mergers: Schemes for mergers, de-mergers and compromises will now fall under the jurisdiction of the National Company Law Tribunal ("NCLT"). While state High Courts previously had jurisdiction over these matters, the NCLT is now the dedicated quasi-judicial body responsible for company law matters. The 2013 Act introduces some major changes from the framework previously provided for such schemes under the [Indian] Companies Act, 1956 ("1956 Act"). These changes include (a) recognition of cross-border mergers; (b) shorter procedure for mergers of small companies[4] and those involving holding companies and their wholly owned subsidiaries; (c) prescription of monetary thresholds for maintaining objections to the approval of schemes; and (d) clear description of mandatory filings such as valuation reports for effective compliance. Purchase of Minority Shareholding: Under the 1956 Act there was no effective procedure for the purchase of minority shareholding other than in the circumstances of a purchase of shares of dissenting shareholders under a court-approved scheme or a contract approved by a majority of the shareholders. The 2013 Act provides for the acquisition of minority shareholding without court intervention. An "acquirer" or "a person acting in concert" ("Acquirer") holding 90% or more of the issued equity share capital of a company must notify the company of his intention to acquire the minority shareholding of such company. The minority shareholding may be acquired at a price determined by a registered valuer pursuant to an offer issued by the Acquirer or, alternatively, by an offer made by the minority shareholders. Notably, there is some ambiguity in relation to this provision as it does not make such purchase of minority shareholding a mandatory obligation nor does it provide for a specified time period to accept or reject such offer. Indian Banks Permitted to Issue Rupee Denominated Offshore Bonds: The RBI has permitted Indian banks to raise capital by issuing rupee denominated offshore bonds to meet their capital requirements and for financing infrastructure and affordable housing.[5] Insolvency and Restructuring Changes in the Corporate Insolvency Framework: A substantial part of the [Indian] Insolvency and Bankruptcy Code, 2016 ("Insolvency Code") came into effect on December 1, 2016. Please refer to our update dated June 8, 2016, for an overview of the Insolvency Code. Petitions for winding-up of companies under the 1956 Act that are currently pending will now be dealt with by the NCLT. This change applies to winding up petitions that have been filed on the grounds of a company’s inability to pay its debts that are yet to be served on all respondents.   Debt Restructuring Procedures Streamlined: Since 2014 the RBI has introduced several measures to better equip lenders to deal with distressed assets. The RBI continues to review and fine tune these schemes from time to time. In 2014, the RBI had provided banks with greater flexibility in structuring and refinancing long term project loans extended to key sectors such as infrastructure, energy and resources. In November 2016 the RBI extended such flexibility to project loans across all sectors. In June 2016, the RBI had announced the scheme for sustainable structuring of stressed assets ("S4A"), which permitted banks to separate funded liabilities of a stressed borrower into sustainable and unsustainable debt. While the sustainable debt portion is required to be serviced by the borrower in accordance with existing loan terms, the S4A scheme allows for the conversion of the unsustainable debt portion into equity or quasi-equity instruments. In November 2016, the RBI increased the time period for the formulation and implementation of such S4A resolution plans from 90 to 180 days.[6] Start-ups Rules Relaxed for Angel Funding for Start-ups: SEBI has amended the SEBI (Alternative Investment Funds) Regulation, 2012 to permit angel funds (registered with SEBI) to invest in entities incorporated up to five years ago. Further, the lock-in period has been reduced from three years to one year and the minimum investment threshold has been reduced to Indian Rupees 2.5 million (approximately USD 37,000) from Indian Rupees 5 million (approximately USD 74,000). Angel funds are now also permitted to invest up to 25% of their investible corpus overseas, in order to manage risks through diversification.    [1]   A.P. (DIR Series) Circular No. 8 dated October 20, 2016 issued by RBI available at https://rbidocs.rbi.org.in/rdocs/notification/PDFs/APDR087150F21E462D4D24AEDE64BDB65893C1.PDF    [2]   Third Protocol amending the Agreement Between the Government of the Republic of Singapore and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, available at https://www.iras.gov.sg/irashome/uploadedFiles/IRASHome/ Quick_Links/Protocol%20amending%20Singapore-India%20DTA%20(Not%20in%20force)%20(31%20Dec% 202016).pdf    [3]   Press release issued by the Central Board of Direct Taxes, Government of India, dated December 16, 2016 available at http://www.incometaxindia.gov.in/Lists/Press%20Releases/Attachments/567/Notification-Completion-Internal-Procedures-Revised-Double-Taxation-Avoidance-Agreement-India-Cyprus-16-12-2016.pdf    [4]   Small Companies are companies with paid-up share capital less than Indian Rupees 5 million (approximately USD 74,000)    [5]   A.P. (DIR Series) Circular No. 14 dated November 3, 2016 issued by the RBI, available at: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT10715D00F793D6D44E88CB1666FB1A4E791.PDF    [6]   Circular issued by RBI dated November 10, 2016 (DBR.No.BP.BC.34/21.04.132/2016-17) available at: https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI12242DE6B307C1D4415934A9F672CC25571.PDF Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the following authors in the firm’s Singapore office: India Team:Jai S. Pathak (+65 6507 3683, jpathak@gibsondunn.com)Karthik Ashwin Thiagarajan (+65 6507 3636, kthiagarajan@gibsondunn.com)Sidhant Kumar (+65 6507 3661, skumar@gibsondunn.com)  © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 1, 2016 |
Indian Government Amends Foreign Direct Investment Policy (July 2016)

The Foreign Direct Investment Policy ("FDI Policy") is the primary regulation governing foreign investment in India. The Government of India ("Government") introduced several amendments to the FDI Policy through the annual Consolidated Foreign Direct Investment Policy Circular, 2016 issued on June 7, 2016 ("2016 FDI Policy") and a subsequent press note issued on June 24, 2016 ("Press Note")[1]. The 2016 FDI Policy supersedes the FDI Policy of 2015, which was issued by the Government in May 2015 ("2015 FDI Policy") and consolidates several amendments issued by the Government since May 2015. The Press Note effects changes to the 2016 FDI Policy. For the purposes of this alert, it is relevant to note that under the FDI Policy, there are two routes for foreign strategic investors to invest in an Indian company: Government Route: Where the prior approval of the Government is required for foreign investment in certain specific business sectors or beyond certain prescribed investment thresholds; and Automatic Route: Where foreign investment is freely permitted without the prior approval of the Government. This alert is a brief summary of the changes brought about by the 2016 FDI Policy and the Press Note: Sector Former FDI Policy Revised FDI Policy   Cap Route Cap Route Broadcasting Carriage Services 49% Automatic 100% Automatic Above 49% Government Brownfield Airports 74% Automatic 100% Automatic Above 74% Government Domestic Passenger Airlines 49% Automatic 49% Automatic Above 49% Government Private Security Agencies 49% Government 49% Automatic Above 49% up to 74% Government Brownfield Pharmaceutical Projects 100% Government 74% Automatic Above 74% Government   Single Brand Retail Trading: Under the Press Note, Indian entities with foreign investment of 51% or more that are engaged in single brand retail trading involving ‘state-of-art’ or ‘cutting- edge’ technologies are exempted from the local sourcing requirement (of 30% of the value of the goods purchased) for a period of 3 years. The exemption is available only in circumstances where local sourcing of products is not possible. This exemption period will commence from the date of the opening of the first store. Trading of Food Products: The Government has now permitted 100% foreign investment under the Government Route for entities engaged in retail trading of food products manufactured or produced in India (including through e-commerce). Private Security Agencies: In addition to the change in the sectoral limit for foreign investment in this sector (set out in the table above), the 2016 FDI Policy has clarified that private securities agencies are entities providing private security services, including training of private security guards and deployment of armoured cars. Prior to this clarification, there was some ambiguity on whether all these activities would be treated as activities of a private security agency for the purposes of foreign investment. The entity would be required to comply with the [Indian] Private Security Agencies (Regulation) Act, 2005.   Investment by Foreign Venture Capital Investors ("FVCIs"): The 2016 FDI Policy has clarified that FVCIs are permitted to invest in Venture Capital Funds or Category I Alternative Investment Funds registered with the Securities and Exchange Board of India ("SEBI") or Indian companies engaged in ten specified sectors[2] (e.g., biotechnology, nanotechnology, IT, infrastructure etc.).  FVCIs are now also permitted to invest in ‘start-up’ entities[3] engaged in any sector. This clarification has been made to make the 2016 FDI Policy consistent with the regulations issued by the Reserve Bank of India ("RBI") on foreign investment for FVCIs. Courier Services: The 2016 FDI Policy reiterates that foreign investment in courier services is permitted up to 100% under the Automatic Route and is not subject to any foreign investment restrictions or conditions. Defence: Under the 2016 FDI Policy, foreign investment of up to 49% is permitted under the Automatic Route. Foreign investment exceeding 49% was permitted in this sector only if such investment was likely to result in access by the Indian company to ‘modern’ and ‘state-of-art’ technology. Pursuant to the Press Note, the Government can now approve foreign investment exceeding 49% in this sector if it determines that such investment will result in access by the Indian company to ‘modern’ technology or for other reasons to be recorded by the Government. While this appears to be a relaxation of the 2016 FDI Policy requirements, the Government is yet to define the term ‘modern’. The revised FDI Policy also applies to entities involved in the manufacture of small arms and ammunition covered under the [Indian] Arms Act, 1959. The following is a brief summary of the various amendments/notifications issued by the Government in the last year (after the 2015 FDI Policy was issued). These have now been consolidated and set out in the 2016 FDI Policy. We have separately discussed each of these amendments/notifications (as and when these came into effect) in our client alerts circulated since May 2015.   Composite Caps: Under previous FDI Policies, there were investment caps or ceilings in specific industry sectors beyond which foreign investors were not permitted to invest. For example, there was a 74% cap on investment in private banks. Within these overall caps, there were further sub-ceilings for various categories of foreign investors (i.e., a regular foreign investor, a foreign portfolio investor, etc.). The sub-ceilings within the overall sectoral cap have been eliminated and the 2016 FDI Policy now only provides for composite caps for foreign investment across sectors. Foreign investment through Partly-Paid Shares and Warrants: Foreign investment by way of partly-paid shares and warrants can now be made under the Automatic Route in industry sectors that are eligible for foreign investment under the Automatic Route. Under the 2015 FDI Policy, the prior approval of the Government was required for subscribing to partly-paid shares or warrants. This enables foreign investors to acquire an interest in an Indian company with the ability to fund the company fully at a later stage. Some of the key conditions that investors must comply with at the time of subscribing to partly-paid shares or warrants are: (a) the total price for these instruments must be determined at the time of their subscription; (b) at least 25% of the total consideration must be received upfront; and (c) the balance consideration must be received within 12 months for partly-paid shares and within 18 months for warrants.  Share Transfers between Non-Residents: A non-resident is permitted to transfer shares of an Indian company to another non-resident without the need to comply with the pricing guidelines of the RBI. These pricing guidelines apply to transfer of shares of an Indian company between residents and non-residents and vice-versa. There are also no reporting requirements for a transfer of shares between non-residents. There was, however, some ambiguity on whether the prior approval of the Government was required for a transfer of shares of an Indian company between two non-residents if that company is engaged in a Government Route sector. The 2016 FDI Policy now expressly clarifies that prior approval of the FIPB will be required for a transfer of shares of an Indian company between two non-residents only if that company is engaged in a sector under the Government Route. Real Estate Investment Trusts & Infrastructure Investment Trusts: The 2016 FDI Policy now states that real estate investment trusts, infrastructure investment trusts and alternative investment funds are recognized as eligible entities for receiving foreign investment. The establishment and operation of these trusts and funds are regulated by the SEBI. These trusts provide a tax efficient means for investment in capital intensive sectors and incentivize greater foreign investment. Limited Liability Partnerships: The 2016 FDI Policy states that foreign investment is now permitted in limited liability partnerships ("LLPs") without Government approval in business sectors where 100% foreign investment is permitted under the Automatic Route. In addition, LLPs are permitted to make further downstream investments in any company or LLP in India engaged in a business sector where 100% foreign investment is permitted under the Automatic Route. While this has been done to bring LLPs at par with companies under the FDI Policy for the purpose of receiving foreign investment, LLPs continue to be subject to certain restrictions under the [Indian] Limited Liability Partnership Act, 2008. For example, debt investment in LLPs continues to be prohibited. Pre-Commencement of Business Foreign investment: The 2016 FDI Policy states that foreign investment in a company not engaged in any business activity and with no downstream investments (at the time that foreign investment is received by such company) is permitted under the Automatic Route if such company proposes to engage in activities that are otherwise permitted under the Automatic Route. Previously, foreign investment in any company without operations required prior approval of the Government. Changes in Sectoral Caps and Conditions: In addition to the changes discussed above, the Government has introduced several amendments over the last year to increase sectoral caps for foreign investment and to simplify investment conditions. For example, foreign investment caps applicable to insurance companies, pension funds, defence manufacturing and construction have been increased, conditions imposed on single brand retail trading entities with foreign investment have been simplified and the Government’s position on foreign investment in entities engaged in e-commerce activities has been clarified. The 2016 FDI Policy incorporates all these changes, amendments and clarifications[4].    [1]   Press Note 5 (2016 Series) dated June 24, 2016    [2]   As notified in the Annexure to Schedule 6, Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB dated 3rd May 2000).    [3]   A "start-up" has been defined under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 to mean (i) an entity incorporated/registered in India for a period of up to 5 years from the date of its incorporation/ registration; (ii) having a  turnover, in any financial year, of less than INR 250,000,000 (approx. USD 3.67 Million) and (iii) working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.    [4]   For further detailed analysis on these changes please refer to our client alerts dated May 18, 2016 http://www.gibsondunn.com/publications/Pages/India-Legal-and-Regulatory-Update.aspx  and October 21, 2015 http://www.gibsondunn.com/publications/Pages/Legal-Developments-in-India–2015-Nine-Month-Update.aspx Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the following authors in the firm’s Singapore office: India Team:Jai S. Pathak (+65 6507 3683, jpathak@gibsondunn.com)Priya Mehra (+65 6507 3671, pmehra@gibsondunn.com)Bharat Bahadur (+65 6507 3634, bbahadur@gibsondunn.com)Karthik Ashwin Thiagarajan (+65 6507 3636, kthiagarajan@gibsondunn.com)Sidhant Kumar (+65 6507 3661, skumar@gibsondunn.com)  © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

May 18, 2016 |
India – Legal and Regulatory Update

The Indian economy continues to be an attractive investment destination due to its sustained stable growth and implementation of further liberalization policies by the Government of India ("Government"). The Government’s focus remains on improving the ease of doing business in India and many effective steps have been taken in this direction. Following our nine-month update dated October 21, 2015 (which sets out an overview of key legal and regulatory developments in India from January 1, 2015 to September 30, 2015), this update provides a brief overview of the key legal and regulatory developments in India from October 1, 2015 to April 30, 2016. Key Legal and Regulatory Developments Foreign Direct Investment Policy 1.      November 2015 Amendments to the Foreign Direct Investment Policy: On November 24, 2015, the Government effected several important amendments[1] to India’s consolidated foreign direct investment policy ("FDI Policy"). These amendments enable increased levels of foreign direct investment in a number of business sectors and simplify various sector-specific conditions under the FDI Policy. For a detailed analysis, please refer to our client alert dated December 8, 2015 at http://www.gibsondunn.com/publications/pages/Indian-Government-Amends-Foreign-Direct-Investment-Policy-Dec2015.aspx. 2.      Foreign Direct Investment in Insurance[2]: Total foreign investment ownership through any means, including portfolio investment, in an Indian insurance company (which includes insurance brokers, insurance third party administrators, surveyors and loss assessors), directly or indirectly (through one or more holding companies), is now permitted up to 49% without the prior approval of the Government ("Automatic Route"). Previously, foreign investment not exceeding 26% was permitted under the Automatic Route and foreign investment beyond 26% and up to 49% required the prior approval of the Government (through the Foreign Investment Promotion Board ("FIPB"). Prior approval of the Insurance Regulatory and Development Authority is required in all circumstances where there is any change in shareholding of an Indian insurance company. The ownership and control of an Indian insurance company (including the appointment of the CEO) must remain in the hands of resident Indians at all times. "Control" is defined to mean the right to appoint a majority of the directors on the board of the company or the power to control the management or policy decisions of a company by virtue of shareholding, management rights, shareholders agreements or voting rights agreements. 3.             Foreign Direct Investment in Pension Funds[3]: In line with the policy on foreign investment in the insurance sector, the Government has permitted foreign investment in Indian pension funds up to 49% under the Automatic Route . Previously, 26% was permitted under the Automatic Route and foreign investment beyond 26% and up to 49% required the prior approval of the Government (through the FIPB). Foreign investment in the Indian pension sector continues to be subject to the conditions set out in the Pension Fund Regulatory and Development Authority Act, 2013.     4.             Foreign Investment in E-Commerce Activities[4]: The Government, on March 29, 2016, has clarified the position on foreign direct investment in e-commerce trading entities and e-commerce market place entities. There is no restriction on foreign investment in companies engaged in B2B e-commerce activities. In respect of companies engaged in B2C e-commerce activities, the key provisions are as follows: (a)          E-commerce has now been defined as the buying and selling of goods and services, including digital products, through a digital and electronic network. (b)          The term ‘digital and electronic network’ has been defined to include a ‘network of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles, etc.‘ (c)          The Government has drawn a distinction between an ‘inventory-based’ model of e-commerce ("Inventory Model") and a ‘marketplace based’ model of e-commerce ("Marketplace Model"). Inventory Model has been defined as an e-commerce business model where the inventory of goods and services is owned by an e-commerce entity and is sold to the consumers directly. Marketplace Model has been defined as the provision of an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between a buyer and a seller. (d)          The Government has clarified that foreign investment of up to 100% is permitted under the Automatic Route in companies that have a Marketplace Model. No foreign investment is permitted in companies that have an Inventory Model. (e)          Some of the key conditions that companies operating the Marketplace Model must comply with are: (i)                 Not more than 25% of the total sales of the company can be undertaken on its marketplace by a single vendor or such vendor’s group companies; (ii)               The company is permitted to provide support services to sellers in respect of warehousing, logistics, order fulfilment, call centres, payment collection and other similar services; and (iii)             The company cannot directly or indirectly influence the sale price of goods or services and are obligated to maintain a level playing field. While the above clarifications have removed ambiguities in relation to foreign investment in entities engaged in B2C ecommerce activities, there are certain grey areas that have arisen as a result of these clarifications. For example, (a) services have now been included within the definition of e-commerce – the presumption earlier was that this only includes goods, (b) there is also no guidance on what constitutes ‘influencing the sale price of goods directly or indirectly’ or how a ‘level playing field’ should be maintained by companies that have a Marketplace Model. Further clarity is required on these aspects. 5.             Foreign Investment in Asset Reconstruction Companies[5]: The Government has permitted foreign investment in asset reconstruction companies up to 100% under the Automatic Route. Previously, foreign investment of up to 49% was permitted under the Automatic Route and foreign investment beyond 49% and up to 100% required the prior approval of the Government (through the FIPB). Insurance On October 19, 2015, the Insurance Regulatory and Development Authority issued the "Guidelines on Indian Owned and Controlled" Insurance Companies (the "Guidelines") to further clarify the requirements with regard to Indian ownership and control of Indian insurance companies. The Guidelines apply to all Indian insurance companies that receive foreign investment. The Guidelines state that the ownership and control of an Indian insurance company (including the appointment of the CEO) must remain in the hands of resident Indians at all times. "Control" is defined to mean the right to appoint a majority of the directors on the board of the company or the power to control the management or policy decisions of a company by virtue of shareholding, management rights, shareholders agreements or voting rights agreements. For detailed analysis, please refer to our client alert dated October 22, 2015 at http://www.gibsondunn.com/publications/pages/Ownership-and-Control-of-Indian-Insurance-Companies-with-Foreign-Investment.aspx. Financing The Reserve Bank of India ("RBI") has promulgated the External Commercial Borrowings ("ECB") Policy-Revised Framework ("Revised Framework"). The Revised Framework lays down a more liberal approach for ECBs, whether they are long-term foreign currency denominated ECBs or Indian Rupee denominated ECBs. The Revised Framework expands the list of eligible borrowers, recognised lenders and reduces the restrictions on use of proceeds (i.e., end-use of the ECB). The Revised Framework became effective on December 2, 2015 with the publication of the relevant regulatory notifications in the Official Gazette of India. Borrowers were permitted to receive ECBs under the previous ECB regime until March 31, 2016 (if they had already executed the ECB agreement prior to the date of effectiveness of the Revised Framework). Additionally, borrowers that were in negotiations with lenders (at the time the Revised Framework became effective) were also permitted to execute ECB agreements under the previous ECB regime until March 31, 2016 for certain specific purposes such as working capital for airlines, loans for low cost affordable housing projects, etc. For detailed analysis, please refer to our client alert dated January 4, 2016 at http://www.gibsondunn.com/publications/Pages/Reserve-Bank-of-India-Introduces-Revised-ECB-Framework.aspx. Start-ups 1.             The Government launched a new initiative on January 17, 2016 aimed at providing various benefits to start-up companies in India. The following are key provisions in relation to start-up companies: (a)          A "start-up" has been defined to mean an entity incorporated/ registered in India  (i) for a period of up to 5 years from the date of its incorporation/ registration and (ii) its turnover in any financial year has not exceeded INR 250,000,000 (approx. USD 3.67 Million) and (iii) it is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property. (b)          The Government has clarified that a business would be considered a start-up only if it aims to develop and commercialize (i) a new product or service or (ii) significantly improves an existing product, service or process that will create and add value for customers. (c)          The RBI has made appropriate amendments to its foreign exchange regulations to state that  Foreign Venture Capital Investors ("FVCIs") are now permitted to invest in all start-ups, regardless of the sector that the start-up is engaged in. Prior to this amendment, FVCIs were permitted to only invest in a list of permissible sectors. Certain other benefits announced by the RBI for start-ups include (i) transfer of shares with deferred consideration, escrow or indemnity arrangements for a period of 18 months; (ii) simplification of the process for dealing with delayed reporting of FDI; (iii) easing access to rupee denominated loans under the ECB framework; and (iv) easing operational restrictions on overseas subsidiaries of start-ups. (d)          Start-ups are also exempted from certain statutory provisions relating to inspection under certain labour legislations in India by self-certifying compliance with such legislations. (e)          Eligible start-ups (established between April 2016 and March 2019) are entitled to a tax deduction of one hundred per cent of the profits and gains derived by them, for a period of three years, from a business involving innovation development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property. Real Estate The Real Estate (Regulation and Development) Act, 2013 ("RERA") was notified on March 27, 2016. RERA seeks to establish a regulatory framework to govern transactions between buyers and promoters/sellers of real estate projects. It establishes state level regulatory authorities with the objective of  (a) ensuring that residential projects are registered, and their details uploaded on the authorities’ website; (b) ensuring that buyers, sellers, and agents comply with obligations under the RERA; and (c) advising the government on matters related to the development of real estate. RERA also imposes a requirement that at least 70% of the funds collected for a particular real estate project from buyers will be invested solely in such project. It seeks to protect buyers by prohibiting advertisements promoting real estate projects which have not obtained all regulatory approvals along with an additional provision for penalties for delay in construction. Antitrust On March 4, 2016, the Government, through the Ministry of Corporate Affairs issued a number of notifications (the "Notifications") which have substantially (a) amended and increased the merger control thresholds and, (b) amended as well as extended the existing target based exemption under the merger control regulations in India for another five years. 1.       Target Based Exemption: On March 4, 2011, the Government had introduced a de minimis target based exemption (i.e., based on the valuation of assets or turnover of the target company) which excluded certain transactions from the provisions of Section 5 of the [Indian] Competition Act, 2002 (the "Competition Act") for a period of five years. Transactions that fell below the threshold did not have to be notified to the Competition Commission of India ("CCI"). The Government, through the Notifications has extended the exemption for another five-year period, i.e., until March 4, 2021. The values of asset/turnover thresholds under this exemption have also been raised. 2.       Merger Control Thresholds: Section 5 of the Competition Act sets out the asset and turnover thresholds that are required to be satisfied for a transaction to qualify as a "combination". A qualifying combination is required to be mandatorily notified to the CCI for prior approval, unless the target based-exemption discussed above is applicable. The Notifications have amended and increased these thresholds. Please refer to our client alert dated March 15, 2016 for more details, including these revised thresholds: http://www.gibsondunn.com/publications/Pages/Indian-Government-Amends-Merger-Control-Regulations.aspx. Arbitration The Arbitration & Conciliation (Amendment) Ordinance, 2015 ("Ordinance") was promulgated on October 23, 2015 to introduce substantial changes to the [Indian] Arbitration & Conciliation Act, 1996 (the "Arbitration Act"). The Ordinance was approved by both houses of the Indian Parliament and was published in the official gazette on January 1, 2016 after receiving Presidential assent as the Arbitration and Conciliation (Amendment) Act, 2015 ("Amendment Act"). The primary objective of the Amendment Act is to encourage expeditious resolution of disputes and transparency in arbitration proceedings. The Amendment Act has reformed domestic arbitrations, foreign seated international commercial arbitrations (in so far as the Arbitration Act applies to them) and international commercial arbitrations seated in India by reducing delays and limiting the scope of judicial intervention. For detailed analysis, please refer to our client alert dated November 10, 2015 at  http://www.gibsondunn.com/publications/pages/Government-of-India-Amends-Indian-Arbitration-and-Conciliation-Act–1996.aspx. [1]       http://dipp.nic.in/English/acts_rules/Press_Notes/pn12_2015.pdf [2]       http://dipp.nic.in/English/acts_rules/Press_Notes/pn1_2016.pdf [3]       http://dipp.nic.in/English/acts_rules/Press_Notes/pn2_2016.pdf [4]       http://dipp.nic.in/English/acts_rules/Press_Notes/pn3_2016.pdf [5]       http://dipp.nic.in/English/acts_rules/Press_Notes/pn4_2016.pdf Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the following authors in thefirm’s Singapore office: India Team:Jai S. Pathak (+65 6507 3683, jpathak@gibsondunn.com)Priya Mehra (+65 6507 3671, pmehra@gibsondunn.com)Bharat Bahadur (+65 6507 3634, bbahadur@gibsondunn.com)Karthik Ashwin Thiagarajan (+65 6507 3636, kthiagarajan@gibsondunn.com)Sidhant Kumar (+65 6507 3661, skumar@gibsondunn.com)  © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 22, 2015 |
U.S. SEC Adopts Final Rules Implementing “Regulation A+” Offering Exemption for Offerings of up to $50 Million

On March 25, 2015, in a unanimous vote, the U.S. Securities and Exchange Commission (the "SEC" or the "Commission") approved final rules to create a new avenue for certain issuers to raise capital in transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act").  The set of new rules, collectively referred to as "Regulation A+," amends the existing Regulation A offering exemption and is intended to create additional opportunities for companies to raise capital without having to comply with several of the more burdensome aspects of the traditional registration process.  The new rules are expected to be effective on or about June 19, 2015.  The adopting release and the Regulation A+ rules are available here: Final Rules. In addition to creating a two-tiered regime for offerings that may qualify for the registration exemption (Tier 1, for offerings of up to $20 million, and Tier 2, for offerings of up to $50 million), Regulation A+ adds or modifies provisions regarding issuer eligibility, offering circular contents, testing-the-waters, and "bad actor" disqualification.  Furthermore, the new rules modernize the Regulation A filing process to permit electronic filings, align certain Regulation A requirements with current practices for registered offerings and establish an ongoing reporting regime for certain Regulation A issuers. I.   Background The Regulation A+ rules respond to the Congressional mandate in Section 401 of the Jumpstart Our Business Startups Act (the "JOBS Act").  Section 401 added Section 3(b)(2) to the Securities Act and directed the Commission to adopt rules exempting from the registration requirements of the Securities Act offerings by an issuer of up to $50 million of securities annually.  Securities issued under Regulation A+ to non-affiliates will be freely tradable and will not be restricted securities under Rule 144 of the Securities Act.  With the exception of the holding period requirement, however, affiliates would be subject to the limitations of Rule 144. Regulation A+ builds upon the existing Regulation A framework, a longstanding but seldom-used offering exemption under the Securities Act, which could be used by an issuer for small public offerings of securities not exceeding $5 million in any 12-month period.[1]  Among other factors, required qualification under the state "blue sky" laws, as well as the small dollar limits, were cited as the principal reasons for the underutilization of existing Regulation A. Regulation A+, the rules and forms of which were first proposed on December 18, 2013, fulfills the SEC’s mandate pursuant to Section 401 of the JOBS Act and attempts to create a new avenue of capital raising that addresses the various aspects of Regulation A that resulted in its underutilization by issuers. II.   Exemption Requirements under Regulation A+ Regulation A+ creates two new tiers of exempt offering sizes. Tier 1 offerings are those in which the aggregate offering size does not exceed $20 million during a 12-month period.[2]  Tier 2 offerings are those in which the aggregate offering size does not exceed $50 million during a 12-month period.[3]             A.   Eligible Issuers  Regulation A+ is available generally to entities organized and with their principal place of business in the United States or Canada.  The final rules, however, establish certain categories of issuers which are specifically excluded from making offerings under Regulation A+, such as:  Issuers subject to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") immediately prior to the Regulation A+ offering; Blank check companies (for example, a special purpose acquisition company, or SPAC); Investment companies registered or required to be registered under the Investment Company Act of 1940 (the "Investment Company Act") or business development companies as defined in Section 2(a)(48) of the Investment Company Act; Issuers of fractional undivided interests in oil and gas rights or similar interests in other mineral rights; Issuers subject to any order denying, suspending or revoking the registration of a class of securities pursuant to Section 12(j) of the Exchange Act within five years before the filing of a relevant offering statement; Issuers who have failed to file with the SEC all reports required to be filed, if any, pursuant to Regulation A+ during the two years before the filing of the offering statement (or for such shorter period that the issuer was required to file reports pursuant to Regulation A+); and Issuers subject to "Bad Actor" disqualification under Rule 262 of Regulation A+ (the covered persons and triggering events for bad actor disqualification under Regulation A+ are substantially the same as those under Regulation D).             B.   Offering Limits Although selling stockholders are allowed to participate in offerings under Regulation A+, securities sold by them count toward the annual limits.  Because a primary goal of Regulation A+ is to provide another avenue for companies to raise capital, the portion of the aggregate offering price attributable to the securities of selling stockholders may not exceed 30% of the aggregate offering price of a particular offering in (i) the issuer’s first offering under Regulation A+ and (ii) any subsequent Regulation A+ offering that is qualified within one year after the qualification date of the issuer’s first Regulation A+ offering.  In addition, sales by selling stockholders that are affiliates of the issuer may not exceed $6 million (of the $20 million overall limit) in a 12-month period in Tier 1 offerings, or $15 million (of the $50 million overall limit) in a 12-month period in Tier 2 offerings.[4]  Thus, a company that conducts Regulation A+ offerings every year has an effective cap on selling stockholder participation.                        C.   Integration with Other Offerings  The final rules include a limited integration safe harbor.  Offerings or sales made in reliance on Regulation A+ will not be integrated with prior offers or sales of securities, or with subsequent offers or sales of securities that are: (i) registered under the Securities Act, except as provided in Rule 255(e) (abandoned offerings); (ii) made pursuant to compensatory benefit plans and compensation agreements exempt from registration under Rule 701; (iii) made pursuant to an employee benefit plan; (iv) made outside the United States and exempt from registration under Regulation S; (v) made more than six months after the completion of a Regulation A offering; or (vi) "crowd-funding" offerings exempt from registration under Section 4(a)(6) of the Securities Act.  In the absence of a safe harbor exemption, the integration of Regulation A+ offerings and other offers and sales of securities will depend on the "particular facts and circumstances."   With respect to concurrent exempt offerings, offerings or sales of securities made in reliance on Regulation A+ will not be integrated with another exempt offering (for example an offering made in reliance on Regulation D or Rule 144A), provided that each such offering complies with the relevant rules and regulations permitting exemption for that specific offering.               D.   Eligible Securities; Treatment of Convertible Securities  Equity securities, debt securities, and securities convertible or exchangeable to equity securities (including any guarantees of such securities) are eligible for exemption under Regulation A+.[5]  If convertible securities or warrants are being offered that are convertible, exercisable or exchangeable within one year of the offering statement’s qualification (or at the issuer’s discretion), the underlying securities must also be qualified and the aggregate offering price for the offering must account for the actual or maximum estimated conversion, exercise or exchange price, effectively reducing the quantity of securities that can be offered by that amount.[6]             E.   Continuous or Delayed Offerings Issuers may make continuous or delayed offerings under Regulation A+ under certain conditions.  Continuous or delayed offerings are generally available for offerings that: (i) commence within two days after the qualification date, (ii) will be made on a continuous basis, (iii) may continue for a period in excess of 30 calendar days from the qualification date and (iv) at the time of qualification, are reasonably expected to be completed within two years of the qualification date.[7]    Issuers may make continuous or delayed offerings for three years from the qualification date of the offering statement.  Before the expiration of the three-year period, issuers may also file a new offering statement for a continuous or delayed offering that includes any unsold securities covered by the earlier offering, effectively allowing such unsold securities to be carried forward.  The earlier offering statement will be deemed terminated as of the qualification date of the new offering statement.  Issuers may sell securities on a continuous or delayed basis only if they are current with the ongoing reporting requirements for Tier 2 issuers at the time of such sale.[8] In addition, continuous or delayed offerings are also available for securities: to be offered or sold solely by or on behalf of a person or persons other than the issuer (or a parent or subsidiary of the issuer); to be offered or sold pursuant to a dividend or interest reinvestment plan or an employee benefit plan of the issuer; to be issued upon the exercise of outstanding options, warrants or rights; to be issued upon the conversion of other outstanding securities; or pledged as collateral.             F.   Treatment under State Securities Laws The two tiers of Regulation A+ offerings differ greatly in their treatment under state securities laws. Tier 1 Consistent with the existing Regulation A exemption, Tier 1 offerings will remain subject to applicable state law requirements. Tier 2 Under the final rules, securities offered or sold to "qualified purchasers" are preempted from otherwise applicable state securities law registration and qualification requirements.  A qualified purchaser is broadly defined as any person to whom securities are offered or sold in a Tier 2 offering. Despite broad pre-emption, states retain important powers under Section 18(c) of the Securities Act with respect to Tier 2 offerings.  For example, states may: investigate and prosecute fraudulent securities transactions; require issuers to file offering materials filed with the SEC; and enforce filing and fee requirements. The requirement to file the offering statement publicly not less than 21 calendar days before qualification facilitates the ability of state regulators to require issuers to make notice filings of offering materials and assess any filing fees.  As a result, issuers conducting Tier 2 offerings must still remain vigilant with respect to state-law requirements. As described more fully below, Tier 2 issuers are also permitted to register securities on a national securities exchange.             G.   Offering Statements Issuers must file their offering statements and all other documents submitted in conjunction with Regulation A+ electronically on EDGAR.  There are no filing fees associated with the process.  Offering statements will be declared qualified by the SEC when a "notice of qualification" is issued, which is analogous to a notice of effectiveness in a registered offering.  SEC officials have noted that the review of Regulation A+ offering statements will be conducted by the industry group covering the specific issuer. Issuers may initially elect to file draft offering statements for non-public (i.e., confidential) review by the SEC. However, all non-public submissions, amendments, and correspondence with the SEC must be filed publicly not less than 21 calendar days before qualification of the offering statement. Unlike emerging growth companies conducting a registered public offering, the timing requirement does not depend on whether or not the issuer plans to conduct a road show–the relevant measurement date is the date of qualification.  In addition, correspondence related to the prior non-public filings must be made available before the qualification of the offering statement, which is earlier than when correspondence related to non-public filings is generally available in the context of a registered offering.  Importantly, the option of non-public review is only available to issuers who have not previously sold securities pursuant to a qualified offering statement under Regulation A or a Securities Act registration statement. In addition, a broker-dealer must deliver the preliminary offering circular to prospective purchasers at least 48 hours in advance of sale, assuming the issuer is not already subject to Tier 2 reporting obligations. Regulation A+ offering circulars will be filed on Form 1-A, which consists of three parts: Part I: Notification. Captures key information about the issuer and the offering. Part II: Information Required in Offering Circular. Disclosure narrative and financial statements are included here. Part III: Exhibits. Exhibit index and exhibits to the offering statement. Disclosure in Part II of Form 1-A (information required in offering circular) can either follow the Offering Circular disclosure format[9] or include the information required in Part I of Form S-1 or Form S-11, as appropriate.  Offering Circular disclosure for Tier 2 offerings will be similar in scope to disclosures made by a smaller reporting company for a registered offering. All issuers under Regulation A+ will be required to file balance sheets and other required financial statements as of the two most recently completed fiscal years (or for such shorter time they have been in existence); however, only Tier 2 issuers are required to present audited financial statements audited in accordance with U.S. Generally Accepted Auditing Standards (GAAS) or the standards of the Public Company Accounting Oversight Board (PCAOB).[10]  An offering statement cannot be qualified if the date of the most recent balance sheet is more than nine months before the date of qualification. Both Tier 1 and Tier 2 issuers must file summary information after the termination or completion of a Regulation A+ offering.  Tier 1 issuers must publicly file Part I of the Form 1-Z exit report with the SEC within 30 calendar days of termination or completion of an offering, including summary information about the offering and proceeds.  Tier 2 issuers’ obligations are described more fully in "Ongoing Reporting" below.             H.   Securities Act Liability Issuers will be subject to Securities Act liability for offerings made pursuant to Regulation A+.  The JOBS Act expressly provides for Section 12(a)(2) liability for any person offering or selling securities under Regulation A. Additionally, antifraud liability provisions under Section 17 of the Securities Act will also apply to Regulation A+ offerings.  These liabilities also extend to solicitation materials.             I.   Offering Communications Testing-the-waters communications will be permitted both before and after the filing of an offering statement relating to offerings under Regulation A+, as long as the issuer complies with specific rules on filing and disclaimers.  Unlike testing-the-waters materials that are generally not made public in connection with registered offerings by emerging growth companies, solicitation materials must be filed as an exhibit when the related offering statement is submitted for review.  Solicitation materials used before qualification will be required to bear a legend stating that no money or consideration is being solicited and will not be accepted, no offer to buy securities can be accepted and any such offer can be withdrawn before qualification, and a person’s indication of interest does not create a commitment.  Testing-the-waters materials used after the offering statement is publicly filed must be accompanied by a current preliminary offering circular or contain a notice of how to obtain it.  These solicitation materials and the preliminary offering circular are required to be updated and redistributed if they become inadequate or inaccurate in any material respect. In addition, the Commission confirmed that regularly released factual business communications do not constitute solicitation materials (consistent with the existing exemption under Rule 169 of the Securities Act).             J.   Listing on a National Stock Exchange Tier 2 issuers will be permitted to register securities for sale on an exchange using Exchange Act Form 8-A registration (instead of a Form 10, which would generally be more costly and take significantly more time to prepare), provided that issuers use the Part 1 of Form S-1 or, in the case of a real estate investment trust, Part 1 of Form S-11 disclosure model in the offering circular.  However, a Form 8-A may only be used if it is being filed in conjunction with the qualification or requalification of a related Form 1-A; if the Form 8-A is not being filed concurrently with Form 1-A, issuers must use the longer Form 10.  In addition, if a Tier 2 issuer is registering securities under the Exchange Act, the financial statements must be audited in accordance with the standards of the PCAOB by a PCAOB-registered firm.[11] Upon effectiveness of a Form 8-A, the issuer will become an Exchange Act reporting company, and the ongoing reporting obligations under Regulation A+ will be suspended for the duration of a company’s reporting obligations under Section 13 of the Exchange Act.  Additionally, the Commission stated that issuers using this pathway will be considered "emerging growth companies" if they otherwise qualify as such.             K.   Ongoing Reporting Tier 2 issuers are subject to ongoing reporting requirements.  Tier 2 issuers are required to file: Annual reports on Form 1-K: These annual reports must be filed within 120 calendar days after the end of the fiscal year and must include financial statements audited in accordance with GAAS or the standards of the PCAOB.[12] Semiannual reports on Form 1-SA: These reports must be filed within 90 calendar days after the end of the semiannual period.[13] Current event reports on Form 1-U: These reports generally must be filed within four business days after the occurrence of the event being reported.  Events required to be reported include fundamental changes, material modifications to the rights of securityholders, and changes in control of issuer. Part II of Form 1-Z: Issuers must provide notice to the SEC of the suspension of their ongoing reporting obligations. Any successor issuer must continue to file Regulation A+ ongoing reports, regardless of whether the successor was originally subject to Regulation A+ reporting requirements.[14] In addition to providing information to investors, a Tier 2 issuer’s ongoing reports will qualify as that type of information about an issuer that a broker-dealer must review before publishing a quotation for a security in a quotation medium, as required by Rule 15c2-11 under the Exchange Act. A Tier 2 issuer that might otherwise be subject to Section 12(g) reporting under the Exchange Act is conditionally exempt from the 12(g) reporting requirement if it had a public float of less than $75 million as of the last business day of its most recently completed semiannual period or, if it had no public float, had annual revenues of less than $50 million as of its most recently completed fiscal year. A Tier 2 issuer that exceeds the Section 12(g) threshold will have the benefit of a two-year transition period. Importantly, Tier 2 ongoing reports will not constitute "reasonably current information" on a year-round basis for purposes of resales under Rule 144 (which would be applicable for affiliates) or Rule 144A.  Issuers may need to file quarterly financial statements on Form 1-U to meet these requirements. A Tier 2 issuer may suspend its obligation to file ongoing reports at any time after completion of reporting for the fiscal year in which the offering statement was qualified, upon filing an exit report on Form 1-Z.  This suspension is only permitted if the issuer has filed all required ongoing reports for the shorter of (1) the period since the issuer became subject to such reporting obligation or (2) its three most recently completed fiscal years and the applicable portion of the current year.  Additionally, not more than 300 persons can hold of record the securities of each class to which the offering statement relates and there must be no ongoing offers and sales made in reliance on a qualified offering statement.  Tier 2 issuers must supply the information in Part I of Form 1-Z, unless this information was previously reported on Form 1-K. Tier 2 issuers will additionally be required to complete Part II of Form 1-Z in order to notify investors and the SEC that it will no longer file and provide annual reports. As discussed above, Regulation A+ reporting requirements for Tier 2 issuers are suspended automatically if the issuer becomes a reporting company under the Exchange Act by filing Form 8-A.             L.   Limitations with Respect to Investors Certain investors in Tier 2 offerings will be subject to investment limitations, and it is the obligation of the issuer to notify investors of these limitations. Non-accredited, natural persons may invest no more than 10% of the greater of the purchaser’s annual income or net worth.[15]  Non-accredited, non-natural persons may invest no more than 10% of the greater of the purchaser’s revenue or net assets, as of the most recent fiscal year end.  Issuers are not required to verify compliance and may rely on representations of the applicable investor. These investment limitations do not, however, apply to investors who qualify as accredited investors under Rule 501 of Regulation D, and there are no limitations with respect to investors for Regulation A+ securities that will be listed on a national securities exchange upon qualification. If the investor is purchasing securities that are convertible into, or exercisable or exchangeable for, other securities, the investment limitation must be calculated to include the aggregate conversion, exercise, or exchange price of such securities, in addition to the purchase price of the convertible security. III.   Further Thoughts While Regulation A+ provides issuers with an alternative for raising capital that addresses many of the perceived limitations of the existing Regulation A exemption, including the relatively low offering cap of $5 million and the need to comply with both state and federal securities laws, certain considerations may dictate its ultimate acceptance, and whether Tier 2 offerings in particular will truly constitute the "IPO-lite" alternative to full registration for which some commentators have long hoped.    First, for issuers seeking to list on a national securities exchange for potential liquidity purposes, careful consideration should be given as to what advantages a Tier 2 Regulation A+ offering presents when compared to a typical IPO.  For example, while Regulation A+ allows listing by means of a short-form Form 8-A, the issuer will then become subject to the full reporting requirements imposed by the Exchange Act once listed, including the Sarbanes-Oxley Act.[16]   While an issuer would be considered an emerging growth company for these purposes, it would still be required to prepare S-1 level disclosure (albeit under the "smaller reporting company" standard if it meets that definition) in connection with its initial offering and then prepare and file with the SEC annual reports, quarterly reports and current reports upon the occurrence of material events.  As a result, issuers and their advisors should consider whether the customary IPO route, with no limit on the types of investors or aggregate offering size imposed by Tier 2, may be preferable in these circumstances.[17] Second, required public disclosure of more written materials when compared with the rules that currently apply to emerging growth companies under the JOBS Act may also give certain issuers pause before using Regulation A+.  While an issuer will have the opportunity to submit an offering statement for review by the SEC on a non-public basis under Regulation A+, correspondence with the SEC relating to a non-public submission will need to be publicly filed at least 21 days before qualification along with the non-public filings, which will presumably include responses to the SEC’s comments.  Similarly, an issuer using Regulation A+ will be required to file publicly any solicitation or test-the-waters materials with the SEC during the same period.  These public disclosures prior to qualification are significant deviations from the emerging growth company IPO process otherwise provided under the JOBS Act under which the public is typically only able to review an issuer’s responses to the SEC’s comments well after the offering is completed and where testing-the-waters materials are not required to be publicly filed. Third, if liquidity is not the primary consideration for the issuer, conducting an offering under Regulation D, for example, should be considered as an alternative to Regulation A+ since it imposes no ongoing reporting requirements, requires no public disclosure of the business or affairs of the issuer and is not limited as to offering size.  Furthermore, as an added benefit to any investment bank or placement agent marketing such an offering, any issuance pursuant to Regulation D would not be required to comply with FINRA Rule 5110 regarding filing and disclosure of underwriting compensation, while such requirement would apply to an offering under Regulation A+. Fourth, the ultimate use of Regulation A+ may depend on the development of a viable secondary market for securities offered under the exemption.  If an issuer does not elect to list on a national exchange, reliance on OTC Pink Sheets, SecondMarket or other secondary exchanges will become necessary to ensure minimal liquidity, which may in turn depend on whether investment banks will attempt and succeed in creating a market for these securities, including initiating research coverage.[18]  Indeed, SEC Commissioner Gallagher has noted that the SEC should work to create venture exchanges in order to facilitate liquidity relating to small companies.[19] Fifth, the reporting regime imposed on an issuer conducting a Tier 2 offering without a national listing may also present some disadvantages that may argue in favor of either simply becoming an Exchange Act reporting company or conducting another type of exempt offering.  For example, as discussed by Commissioner Gallagher in his comments at the March 25 open Commission meeting, Regulation A+ periodic reports would not constitute "reasonably current information" that satisfy the reporting requirements of Rule 144 and Rule 144A, such that issuers might in effect be required to provide quarterly, in addition to semiannual, updates to their disclosures.[20]  Issuers should also remember that, despite ongoing reporting requirements, investors accumulating securities would not be required to file a Schedule 13D or Schedule 13G should they meet the relevant requirements.  As a result, issuers with outstanding securities issued pursuant to Regulation A+ would have very limited means available to them to detect large accumulations of securities by a single investor on a secondary exchange.  Following adoption, the SEC will conduct a biennial study of the offering thresholds under Regulation A+, along with an effectiveness review of the impact on capital formation and investor protection within five years, to determine if any further amendments to Regulation A+ are appropriate.  The initial review will likely look at whether Tier 1 is actually utilized, or if it remains too similar to the original Regulation A framework despite the increased offering limit.  An important factor will be whether the North American Securities Administrators Association’s multi-state coordinated review program sufficiently addresses issuers’ concerns about the burden of state review, or if preemption of state law needs to be revisited in the context of Tier 1 offerings to make it a viable option.  Finally, the SEC may look to other enhancements that would allow reporting issuers to use Regulation A+, developing a market for what Commissioner Gallagher has referred to as a "half-PIPE." In light of these considerations, it remains to be seen if Regulation A+ will become an effective and accessible path for small companies to raise capital.    [1]   A July 2012 report by the U.S. Government Accountability Office (the "GAO") found that there was only one qualified offering under Regulation A in 2011.  See http://www.gao.gov/assets/600/592113.pdf, at 2.    [2]   The permitted offering size is defined as "aggregate offering price" plus "aggregate sales," with "aggregate offering price" meaning the sum of all cash and other consideration to be received for the securities being offered, while "aggregate sales" means the gross proceeds for all securities sold pursuant to other Regulation A+ offering statements in the prior 12 months.    [3]   Any securities that could be sold pursuant to an underwriters’ overallotment option in an underwritten Regulation A+ offering presumably also count toward these limitations, meaning the maximum base deal size in a Tier 2 firm commitment underwritten offering with a customary 15% overallotment option can only be approximately $43.5 million.    [4]   According to the Adopting Release, the differing treatment of affiliated and non-affiliated selling securityholders under the rules is designed to strike a balance between facilitating exit opportunities and the insiders’ informational advantages.    [5]   The list of securities eligible for exemption under Regulation A+ is set forth in Section 3(b)(3) of the Securities Act.  Offerings of "asset-backed securities," as defined by Section 1101(c) of Regulation AB, may not be conducted under Regulation A+.    [6]   This treatment of convertible securities is consistent with Section 3(b)(3) of the Securities Act and the definition of "equity security" in Rule 405.    [7]   At-the-market offerings, by or on behalf of the issuer or otherwise, are not permitted under Regulation A+.    [8]   Aside from requiring adherence to the Tier 2 reporting requirements, the rules otherwise permit continuous or delayed Tier 1 offerings.    [9]   Such disclosure includes, but is not limited to, (i) basic information regarding the issuer; (ii) material risks and risk factors; (iii) use of proceeds from the issuance; (iv) information regarding the issuer’s business; (v) management’s discussion and analysis of operations; (vi) information regarding executive officer and director compensation; (vii) any related party transactions; and (viii) a description of the offered securities and plan of distribution.   [10]   For Tier 1 offerings, audited financial statements are only required to be disclosed if they are otherwise available.    [11]   For Tier 2 offerings that are not registered, the financial statements of the issuer are required to be audited in accordance with either U.S. GAAS or PCAOB standards.  The audit firm is not required to be PCAOB-registered.   [12]   Form 1-K requires disclosures relating to (i) the issuer’s business and operations for the preceding three fiscal years; (ii) related party transactions; (iii) executive officers and directors and their compensation; (iv)management’s discussion and analysis of operations; and (v) two years of audited financial statements.   [13]   Form 1-SA is similar to Form 10-Q and, as such, would require certain updates to financial and operational information and a less rigorous set of disclosures as compared to the Form 1-K requirements.    [14]   An issuer can succeed to that class of securities in connection with a merger or similar transaction.   [15]   See 17 CFR § 230.501(a)(5) (net worth).   [16]   Regulation A+ issuers are excluded from the definition of "issuer" under Sarbanes-Oxley to the extent they do not seek a listing and become Exchange Act reporting companies.   [17]   Irrespective of listing, the diligence process an issuer would have to undertake in connection with a Regulation A+ offering would likely be comparable to the diligence process of a traditional IPO, as the issuer would have Section 12(a)(2) and Section 17 liability in connection with offers or sales made by means of an offering circular or oral communications containing a material misstatement or omission.   [18]   While Regulation A+ does not set forth any rules related to the publication of research by investment banks participating in a Regulation A+ offering, banks should consider whether any additional restrictions are appropriate.   [19]   Commissioner Daniel M. Gallagher, "Grading the Commission’s Record on Capital Formation: A+, D, or Incomplete" March 27, 2015 (http://www.sec.gov/news/speech/032715-spch-cdmg.html#.VRxA2vnF98E).   [20]   Commissioner Daniel M. Gallagher, "Statement at Open Meeting on Reg A+," March 25, 2015 (http://www.sec.gov/news/statement/032515-ps-dmg-a.html#.VRXjSph0xJ0).           Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, any of the following, or any member of the firm’s Securities Regulation and Corporate Governance or Capital Markets practice groups: Securities Regulation and Corporate Governance Group:John F. Olson – Washington, D.C. (202-955-8522, jolson@gibsondunn.com)Brian J. Lane - Washington, D.C. (202-887-3646, blane@gibsondunn.comRonald O. Mueller – Washington, D.C. (202-955-8671, rmueller@gibsondunn.com)James J. Moloney - Orange County (949-451-4343, jmoloney@gibsondunn.com)Elizabeth Ising – Washington, D.C. (202-955-8287, eising@gibsondunn.com)Lori Zyskowski – New York (212-351-2309, lzyskowski@gibsondunn.com)Gillian McPhee – Washington, D.C. (202-955-8201, gmcphee@gibsondunn.com) Capital Markets Group:Stewart L. McDowell – San Francisco (415-393-8322, smcdowell@gibsondunn.com)Peter W. Wardle – Los Angeles (213-229-7242, pwardle@gibsondunn.com)Andrew L. Fabens – New York (212-351-4034, afabens@gibsondunn.com)Glenn R. Pollner – New York (212-351-2333, gpollner@gibsondunn.com)Sean Sullivan – San Francisco (415–393–8275, ssullivan@gibsondunn.com)Nicolas H.R. Dumont – New York (212-351-3837, ndumont@gibsondunn.com) © 2015 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 30, 2015 |
Bitcoin Basics: a Primer on Virtual Currencies

Washington, D.C. partner Judith Lee, New York partner Arthur S. Long, Los Angeles partner Marcellus McRae, Washington D.C. counsel Jeffrey L. Steiner and associate Stephenie Gosnell Handler are the authors of "Bitcoin Basics: a Primer on Virtual Currencies" [PDF] published in the January issue of the Business Law International.

March 12, 2014 |
Emerging from EGC Status: Transition Periods for Former EGC Issuers to Comply with Reporting and Corporate Governance Requirements

Nearly two years ago, on April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act ("JOBS Act") into law.  As part of the law’s effort to encourage U.S. initial public offerings, the JOBS Act loosened restrictions on a new category of issuer, the Emerging Growth Company ("EGC"), which generally is an issuer that had less than $1 billion in annual revenues in its most recently completed fiscal year and that conducted its initial public offering after December 8, 2011.  For as long as an issuer remains an EGC, it benefits from a number of exemptions from certain reporting and corporate governance requirements that apply to public companies that are not EGCs.[1] On January 1, 2014 some calendar fiscal year EGC issuers lost their EGC status, and additional EGC issuers will lose their EGC status going forward as their fiscal year-ends pass.[2]  These issuers will no longer qualify for certain exceptions and will be required to transition to more extensive disclosure obligations and expanded corporate governance requirements.  This Client Alert discusses the transition times for an issuer that ceases to be an EGC to comply with the reporting and corporate governance requirements that apply to non-EGCs. Under Section 2(a)(19) of the Securities Act of 1933 and Section 3(a)(80) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), an EGC will lose its EGC status upon the earliest of: the last day of the first fiscal year in which the company’s annual gross revenues exceed $1 billion; the date on which the company is deemed to be a large accelerated filer (as defined in Rule 12b-2 under the Exchange Act);[3] the date on which the company has, during the previous three-year period, issued more than $1 billion in non-convertible debt; and the last day of the fiscal year in which the fifth anniversary of the company’s first sale of equity securities pursuant to an effective registration statement occurs. In most instances, the JOBS Act does not directly address the transition periods for an issuer that was an EGC to comply with the reporting and corporate governance requirements that apply to non-EGCs, and the transition periods described below may be subject to differing interpretations. REQUIREMENT TRANSITION PERIOD Auditor’s Opinion on Effectiveness of Internal Controls  (pursuant to Item 404(b) of the Sarbanes-Oxley Act of 2002) ("Attestation Report") If the issuer is an accelerated filer or a large accelerated filer (as defined in Rule 12b-2 under the Exchange Act), then it must include an Attestation Report in the next Form 10-K it files after ceasing to be an EGC.  If the issuer is neither an accelerated filer nor a large accelerated filer, then it will continue to be exempt from including an Attestation Report. CD&A and Other Executive Compensation Disclosure Required of Non-EGC Public Companies If the issuer is not a "smaller reporting company" as defined in Item 10(f) of Regulation S-K, full executive compensation disclosure may be required in public filings as early as the first filing that requires executive compensation disclosure after the issuer ceases to be an EGC.[4]   If the issuer is a "smaller reporting company," then it will continue to be entitled to provide "scaled" executive compensation disclosures. Say-on-Pay Vote If the issuer is an EGC for less than two years following the first registered sale of equity securities, the first say-on-pay vote must be held prior to the third anniversary of such registered sale of equity securities. If the issuer is an EGC for at least two years, the first say-on-pay vote must be held prior to the first anniversary of the date the issuer ceases to be an EGC. Say-on-Frequency Vote This say-on-frequency vote may be required as early as the first annual meeting that takes place after the issuer ceases to be an EGC.[5] Golden Parachute Advisory Vote At any stockholders’ meeting that takes place after the issuer ceases to be an EGC at which stockholders are asked to approve an acquisition, merger, consolidation, or a proposed sale or other disposition of all or substantially all the issuer’s assets.  However, in lieu of holding this vote at a stockholders’ meeting in connection with a particular transaction, an issuer may seek advance stockholders consent to these arrangements at any earlier time.[6]   Presentation of Five Years of Selected Financial Data in Form 10-K An EGC may include as few as three years of selected financial data in its initial Form 10-K filing (including the most recently completed fiscal year and all prior fiscal years for which audited financial statements were presented in its first effective registration statement) and subsequently will present an additional year of selected financial data in each Form 10-K filing until a full five years are presented.  The Staff has stated that, when an issuer ceases to be an EGC, the Staff will not object if the issuer does not present selected financial data in its Form 10-K filings for periods prior to the earliest audited period presented in its initial registration statement.[7] Compliance with New or Amended Accounting Standards Issued by the FASB[8] If the issuer ceases to be an EGC during the extended transition period for adopting the financial accounting standard (i.e., after the beginning of the fiscal year or period with respect to which it would have first been required to adopt the standard if it were not an EGC, but before the fiscal year or period with respect to which it would first be required to adopt the standard if it had remained an EGC): Although the Staff has not provided transition guidance, it appears that adoption would be required in the issuer’s first periodic report after it ceases to be an EGC; and Absent transition guidance from the Staff, the issuer would likely be required to apply the accounting standard retrospectively to the beginning of the fiscal year if such standard requires adoption as of the beginning of an entity’s fiscal year. If the issuer ceases to be an EGC prior to the effective date that applies to public companies, adoption would be required following the effective date that applies to non-EGC public companies. Note that, if the new or amended accounting standard requires retrospective application, the issuer would also be required to apply the accounting standard retrospectively to financial statements and financial information for prior fiscal years (and interim periods within those fiscal years) that it presents in its periodic reports. Pay-Ratio Disclosure[9]    To be determined based on transition periods set forth in the final pay-ratio disclosure rules adopted by the SEC, but not earlier than the first periodic report required to include pay-ratio disclosure after the issuer ceases to be an EGC. Pay-Versus-Performance Disclosure[10] To be determined based on transition periods set forth in the final pay-versus-performance disclosure rules adopted by the SEC, but not earlier than the first proxy statement filed after the issuer ceases to be an EGC. New PCAOB Rules To be determined based on transition provisions in any such final rule; provided that, while the issuer is an EGC: any rule requiring a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements will not apply to an audit of the issuer; and any rules not described in the previous bullet point will apply to the issuer only if the SEC determines that the application of such requirements to the audit of EGCs is necessary or appropriate in the public interest.    [1]   For a more complete discussion of the JOBS Act and these exemptions, see our alert of March 28, 2012, which is available at the following link: http://www.gibsondunn.com/publications/Pages/JOBSActChangesPublic-PrivateCapitalMarketsLandscape.aspx    [2]   In most cases, an EGC will lose its EGC status at the end of its fiscal year.  As noted below, however, an EGC may also lose its EGC status mid-year if it issues non-convertible debt securities in an aggregate principal amount that, together with all issuances of non-convertible debt securities during a rolling three-year period, exceeds $1 billion.    [3]   A company qualifies as a large accelerated filer if: (a) the company’s public float of its common equity was $700 million or more as of the last business day of its most recently completed second fiscal quarter, (b) the company has been subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act for at least twelve calendar months, (c) the company has filed at least one annual report to stockholders under Section 13(a) or 15(d) of the Exchange Act and (d) the company is not able to use the smaller reporting company requirements for its annual and quarterly reports.    [4]   Notably, this transition is more accelerated than the transition that applies to issuers that cease to be smaller reporting companies, which need only provide the full executive compensation disclosure with respect to the fiscal year that begins after the issuer ceases to be a smaller reporting company.    [5]   Unlike with respect to the say-on-pay vote, the statute does not provide an explicit transition period for the first say-on-frequency vote, so it appears that the say-on-frequency vote would be required at the first annual meeting taking place after the issuer ceases to be an EGC.    [6]   Because an EGC may choose to forego some or all of the exemptions available to it under Section 14A of the Exchange Act, it appears that the issuer may seek advance stockholder consent to these arrangements while it remains an EGC.    [7]   See Generally Applicable Questions on Title I of the JOBS Act, Question 50 (available at: http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm#q42).    [8]   Assuming the issuer has not opted out of the extended accounting transition relief afforded to EGCs.    [9]   The SEC is required by the Dodd-Frank Act to adopt rules requiring "pay-ratio" disclosure.  The SEC issued a rules proposal on Sept. 18, 2013 (available at: http://www.sec.gov/rules/proposed/2013/33-9452.pdf), but has not yet adopted final rules.  The proposed rules would not apply the pay ratio disclosure requirements to smaller reporting companies, so an issuer that loses its EGC status but is a smaller reporting company would continue to be exempt from this disclosure obligation.   [10]   The SEC is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") to adopt rules requiring "pay-versus-performance" disclosure.  However, the SEC has not yet proposed or adopted such implementing rules.     Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following: Stewart L. McDowell – San Francisco (415-393-8322, smcdowell@gibsondunn.com)Glenn R. Pollner – New York (212-351-2333, gpollner@gibsondunn.com)Blaise F. Brennan – Washington, D.C. (202-887-3700, bbrennan@gibsondunn.com)Sean Sullivan – San Francisco (415-393-8275, ssullivan@gibsondunn.com) © 2014 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 3, 2014 |
Bitcoin arrest shows risk of virtual currency

Washington, D.C. partner Judith Lee is the author of "Bitcoin arrest shows risk of virtual currency" [PDF] published in the February 3, 2014 issue of the Los Angeles Daily Journal.

November 19, 2013 |
California’s New ‘Digital Eraser’ Evaporates Embarrassment

New York partner Alexander Southwell and California-based associates Joshua Jessen, Vivek Narayanadas and Danielle Serbin are the authors of "California’s New ‘Digital Eraser’ Evaporates Embarrassment, Part 2 of 2: New California privacy laws will make it easier for kids to remove inappropriate posts from websites."  [PDF] published in the November 19, 2013 issue of ALM’s Law Technology News.   "California Tightens Privacy Protection, Part 1 of 2: New California data privacy laws impose restrictions on third-party tracking and data breach notification" [PDF] was published November 18, 2013.

August 1, 2013 |
How to use company data efficiently to detect fraud and corruption

Washington, D.C. partners Joseph Warin and Michael Diamant, and associate Oleh Vretsona are the authors of “How to use company data efficiently to detect fraud and corruption” [PDF] published in the August 2013 issue of Financier Worldwide.

July 22, 2013 |
SEC Approves Final Rules to Permit Advertising in Rule 506 and Rule 144A Offerings; Also Proposes Rules to Add Additional Investor Protections

At an Open Commission Meeting on July 10, 2013, the Securities and Exchange Commission (the "Commission" or "SEC") adopted long-awaited final rules to allow advertising of private securities offerings, as required by the Jumpstart Our Business Startups Act (the "JOBS Act").[1]  The Commission approved the rules by a vote of 4-1, with Commissioner Aguilar dissenting.  As discussed in greater detail below, the final rules (the "General Solicitation Adopting Release") include a non-exclusive list of methods that an issuer conducting a private placement under Rule 506 of Regulation D may use to verify that purchasers who are natural persons are accredited investors. The Commission also adopted final rules to prohibit certain "felons and other ‘bad actors’" from participating in private offerings using Rule 506 (the "Bad Actor Adopting Release").[2]  These rules are required by Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") and were adopted by a unanimous vote.  Finally, the Commission issued a proposing release (the "Regulation D Proposing Release")[3] that proposed new and amended rules: relating to the content, timing and consequences of failing to file Form D; requiring that written general solicitation materials be submitted to the Commission; and providing guidance relating to when information in sales literature by private funds could be fraudulent or misleading under the federal securities laws.  The Regulation D Proposing Release also requested comment on other matters, including potential changes to the definition of "accredited investor" under Regulation D.  The amendments are intended to enhance the Commission’s ability to evaluate changes in the private offering market and to address the development of practices in Rule 506 offerings.  The Regulation D Proposing Release was approved by a vote of 3-2, with Commissioners Paredes and Gallagher dissenting. The final rules permitting the use of general solicitation and providing for the disqualification of "bad actors" from Rule 506 offerings will become effective on September 23, 2013.  The comment period relating to the additional proposed amendments to Regulation D, Form D and Rule 156 will also end on September 23, 2013.  For an analysis focusing on the impact of the two adopting releases and the proposing release on private funds, please refer to a companion Client Alert issued by Gibson Dunn dated July 17, 2013 entitled SEC Lifts Ban on General Solicitation, Allowing Private Funds to Advertise.[4] Background Rule 506 permits an issuer to raise an unlimited amount of capital in an offering sold only to accredited investors[5] and up to thirty-five nonaccredited investors who meet certain sophistication requirements.  Rule 144A permits the resale of an unlimited amount of securities to qualified institutional buyers, or QIBs.[6]  Under Rules 506 and 144A as currently in effect, issuers and other participants may not use general solicitation to attract investors.  Section 201(a) of the JOBS Act, however, directed the SEC to revise its rules to eliminate the prohibition on general solicitation in securities offerings conducted pursuant to Rules 506 and 144A so long as all purchasers of the securities are accredited investors (in the case of an offering pursuant to Rule 506) or persons reasonably believed to be QIBs (in the case of an offering under Rule 144A).  In addition, Section 201(a)(1) provides that the revised provisions relating to offerings under Rule 506 must require that the issuer "take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission." Separately, Section 926 of the Dodd-Frank Act instructed the Commission to issue rules to disqualify securities offerings involving felons or certain "bad actors" from reliance on Rule 506.[7] The Commission issued a proposing release relating to the removal of the ban on general solicitation (the "General Solicitation Proposing Release")[8] in August 2012, and issued a proposing release relating to the disqualification of felons and other "bad actors (the "Bad Actor Proposing Release") in May 2011.[9]  This Client Alert, in part, updates our Client Alert issued on August 31, 2012, entitled SEC Proposes Amendments to Permit Advertising in Rule 506 and Rule 144A Offerings,[10] which analyzed the General Solicitation Proposing Release. Highlights of the Final and Proposed Rules             Final General Solicitation Rules The final rules to remove the prohibition against general solicitation in offerings pursuant to Rule 506 and Rule 144A are largely unchanged from the General Solicitation Proposing Release, except that the final rules include a non-exclusive list of methods that issuers may use to satisfy the verification requirement with respect to investors who are natural persons.  The following are highlights of the final rules: Rule 506 will be amended by adding a new paragraph (c), which will allow general solicitation if (i) the issuer takes reasonable steps to verify that all purchasers are accredited investors; and (ii) all purchasers of the securities fall within one of the eight categories of persons who are accredited investors under Rule 501(a) of the Securities Act, or the issuer reasonably believes that all purchasers fall within one of those categories.  Notably, the existing exemption under paragraph (b) for offerings conducted without engaging in general solicitation will continue to permit up to 35 non-accredited investors and will not be subject to the heightened verification requirements for accredited investors. The determination of whether the steps taken to verify that a purchaser is an accredited investor are reasonable will be an objective determination by an issuer based on the facts and circumstances.  A non-exclusive list of factors that an issuer should consider in this determination includes: (i) the nature of the purchaser and the category of accredited investor that the purchaser claims to satisfy; (ii) the amount and type of information the issuer has about the purchaser; and (iii) the nature of the offering, including the manner in which purchasers were solicited, and the terms of the investment, such as the minimum investment amount. In addition to the principles-based approach described above, the final rule will describe a new, non-exclusive list of methods that an issuer may use to satisfy the verification requirement for a purchaser that is a natural person.  These methods will include: (i) reviewing copies of any IRS form that reports the income of the purchaser and obtaining a written representation that the purchaser will likely continue to earn the necessary income in the current year; (ii) reviewing copies of bank, brokerage and similar statements, certificates of deposit, tax assessments and appraisal reports as evidence of the purchaser’s assets, and a consumer credit report as evidence of the purchasers indebtedness, and obtaining a written representation from the purchaser that all liabilities necessary to make a determination of net worth have been disclosed; and (iii) receiving written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchasers accredited status. The use of general solicitation in offerings by privately offered funds such as hedge funds, venture capital funds and private equity funds pursuant to Rule 506(c) will not cause an issuer to be deemed an "investment company" under the Investment Company Act. Rule 144A will be amended to permit "offers" to persons who are not QIBs, and thus to permit general solicitation in offerings conducted pursuant to Rule 144A. The use of general solicitation in connection with a Rule 506 or Rule 144A offering will not be a barrier to a concurrent offering by the issuer in an offshore transaction in reliance on Regulation S.             Final Rules Disqualifying Bad Actors from Offerings Under Rule 506 The following are highlights of the final rules to disqualify "felons and other ‘bad actors’" from reliance on the exemption from Securities Act registration pursuant to Rule 506: Persons covered by the rule will include issuers; 20 percent beneficial owners of the issuer; promoters; investment managers to issuers that are pooled investment funds; persons compensated for soliciting investors; any director, executive officer, or other officer participating in the offering of an issuer, such investment manager or such solicitor; and any general partner or managing member of the issuer or such solicitor. "Disqualifying events" that would disqualify a person from participating in Rule 506 offerings will include: (i) criminal convictions, court injunctions, and restraining orders in connection with the purchase or sale of a security, making a false filing with the SEC, or the conduct of certain financial intermediaries; (ii) certain final orders from the Commodity Futures Trading Commission ("CFTC"), state securities regulators and other federal and state banking, insurance and similar regulators; (iii) certain SEC disciplinary, cease-and-desist, and stop orders; (iv) suspension or expulsion from membership in a self-regulatory organization; and (v) U.S. Postal Service false representation orders.  Some of these disqualification events will be subject to look-back periods of up to ten years. An issuer will not be subject to disqualification if it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering. Issuers relying on Rule 506 will be required to disclose events that took place prior to the effective date that would otherwise be disqualifying. Participation in an offering for purposes of the rule would have to be more than transitory or incidental involvement, and could include activities such as conducting due diligence activities, involvement in the preparation of disclosure documents, and communication with the issuer, prospective investors or other offering participants.             Proposed Regulation D Amendments and Related Amendments In addition to adopting the final rules discussed above, the Commission proposed for public comment broader revisions to Regulation D, Form D and Rule 156 under the Securities Act, which are oriented to investor protection and providing more information to the Commission, but some of which could potentially hamper the use of general solicitation in private offerings. In particular, the proposals would: Require that an issuer file a Form D 15 days before engaging in general solicitation for a Rule 506(c) offering, and that an issuer update the information contained in its Form D filings within 30 days of completing a Rule 506 offering; Significantly expand the information required to be included on Form D to include more extensive information about the issuer and the offered securities, the types of purchasers in the offering, the use of proceeds from the offering, and, in the case of Rule 506(c) offerings, the types of general solicitation used and the methods used to verify the accredited investor status of purchasers; Disqualify an issuer from relying on Rule 506 for one year if the issuer fails to comply with its Form D filing obligations in connection with a Rule 506 offering; Require issuers to include, in any written general solicitation materials, legends stating that the offering is limited to accredited investors and that the offering may involve certain risks; In the case of written solicitation materials relating to securities of private funds, require issuers to include additional legends, including, if the materials include information about the fund’s past performance, language highlighting the limitations on the usefulness of this type of information and the difficulty of comparing this information with past performance information of other funds; For a period of two years from the effective date of the rule, require issuers to submit written general solicitation materials to the SEC; and Extend the guidance contained in Rule 156 under the Securities Act, which currently describes when information in sales literature by a registered investment company could be fraudulent or misleading under the federal securities laws, to apply to sales literature of private funds.  In this regard, the Commission noted several specific areas that it believes are vulnerable to misleading statements, including misrepresenting prior investment performance; exaggerating personal qualifications; omitting disciplinary information; misrepresenting holdings; making fraudulent performance claims; and falsely valuing investments. Furthermore, unrelated to any of the proposed rules, the Commission solicited comment on the definition of accredited investor as it related to natural persons, potentially laying the foundation for the Commission to adopt final rules to amend the definition without issuing a further proposing release. Overview of the Final Rules Removing the Prohibition on General Solicitation Revised Rule 506 will effectively include two related exemptions: one for offerings using general solicitation and one for offerings that do not use general solicitation.  The rules governing offerings that do not use general solicitation will remain in paragraph (b) of the rule, and will be unchanged from the provisions that have heretofore governed offerings conducted under Rule 506.  Offerings that use general solicitation will be governed by new paragraph (c).  We have included a "Rule 506 Decision Tree" at the end of this Client Alert that sets forth the considerations for analyzing whether a Rule 506 offering should be conducted pursuant to paragraph (b) or (c).Rule 506(c) will provide that general solicitation is permitted if the issuer takes reasonable steps to verify that purchasers of securities sold in the offering are accredited investors, and all purchasers in the offering are accredited investors.  The Commission confirmed that the legal standard for accredited investor under the proposal will be the same for purposes of Rule 506(c) as it is under the existing exemption under Rule 506 – that is, "any person who comes within one of the definition’s enumerated categories of persons,[11] or whom the issuer ‘reasonably believes’ comes within any of the enumerated categories, at the time of the sale of the securities to that person."[12]  Thus, Rule 506(c) will allow general solicitation where the issuer takes reasonable steps to verify, and reasonably believes, that each purchaser in the offering satisfies one of the categories of persons defined as an accredited investor.  As a result, an issuer will not lose the benefit of new Rule 506(c) even if a purchaser that does not meet the criteria for any category of accredited investor circumvents the issuer’s verification measures, so long as the issuer has taken reasonable steps to verify, and reasonably believed at the time of purchase, that the purchaser was an accredited investor.[13]  Conversely, the Commission noted that an issuer that fails to take reasonable steps will lose the benefit of Rule 506(c) even if all purchasers are accredited investors.[14]  In this case, the offering would likely not qualify for the exemption provided by Section 4(a)(2), and thus would violate Section 5 of the Securities Act – a highly consequential outcome for the issuer. It is also notable that Rule 506(c) may serve as a "safety net" for a Section 4(a)(2) offering or a "quiet" Rule 506 offering in which the issuer inadvertently makes a communication that is deemed a general solicitation.[15]  Importantly, in such a case, the issuer (or a person acting on its behalf) would need to comply with the heightened verification requirements for accredited investors.  Otherwise, as noted above, the offering would likely violate Section 5.             Reasonable Steps to Verify The final rules will not specify the methods that an issuer can or must employ to satisfy its obligation to "take reasonable steps to verify" that a purchaser is an accredited investor, other than four non-mandatory, non-exclusive methods that an issuer may use for natural persons as described below.  In light of the different types of issuers and the different types of accredited investors that may be involved in an offering pursuant to Rule 506(c), the Commission instead adopted a principles-based approach.  Thus, the adopting release provides that the determination of whether the steps taken to verify that a purchaser is an accredited investor are reasonable will be an objective determination by an issuer based on the facts and circumstances that apply to each purchaser.[16]  The adopting release provides the following non-exclusive list of factors that an issuer should consider when determining the reasonableness of its steps to verify that a purchaser is an accredited investor: The nature of the purchaser, including the category of accredited investor that the purchaser claims to satisfy; The amount and type of information that is available to the issuer about the purchaser; and The nature of the offering, including the manner in which investors were solicited and the terms of the investment. These factors will interact with each other.  Thus, the stronger the support is under one factor indicating that a purchaser is an accredited investor, the less the need for support under the other factors. The adopting release recognizes that differences among purchasers can affect the reasonableness of steps to verify whether an entity is an accredited investor.  It notes that "the steps that may be reasonable to verify that an entity is an accredited investor by virtue of being a registered broker-dealer – such as by going to FINRA’s BrokerCheck website – will necessarily differ from the steps that may be reasonable to verify whether a natural person is an accredited investor."[17]  The Commission recognizes that "the verification of natural persons as accredited investors may pose greater practical difficulties as compared to other categories of accredited investors, particularly for natural persons claiming to be accredited investors based on the net worth test," and that "[t]hese practical difficulties likely will be exacerbated by privacy concerns about the disclosure of personal financial information."[18]  While the four non-exclusive methods discussed below potentially offer a solution, issuers that opt not to make use of those methods may otherwise need to rely more heavily upon other factors relevant to a natural person’s accredited investor status.  Regarding the amount and type of information that is available to the issuer about the purchaser, the adopting release notes that, "[t]he more information an issuer has indicating that a prospective purchaser is an accredited investor, the fewer steps it would have to take, and vice versa."[19]  Information that issuers could consider relevant in verifying accredited investor status includes: (i) publicly available information in filings with a federal, state or local regulatory body; (ii) third-party information that provides reasonably reliable evidence that a person is an accredited investor; and (iii) verification of a person’s status as an accredited investor by a third party, such as a broker-dealer, attorney or accountant, whom the issuer has a reasonable basis to rely upon.[20] The adopting release discusses two relevant aspects of the nature of the offering – the manner in which purchasers were solicited and the terms of the investment.  With respect to the manner of solicitation, the release states that "[a]n issuer that solicits new investors through a website accessible to the general public, through a widely disseminated email or social media solicitation, or through print media, such as a newspaper, will likely be obligated to take greater measures to verify accredited investor status than an issuer that solicits new investors from a database of pre-screened accredited investors created and maintained by a reasonably reliable third party"[21]  The adopting release notes that an issuer would fail to take reasonable steps to verify the accredited investor status of a person solicited through media such as generally accessible websites by requiring merely that the person represent as to their accredited investor status.  In such circumstances, an issuer will need to obtain additional information about the purchaser or otherwise take reasonable steps sufficient to establish a reasonable a belief that the purchaser is an accredited investor.  The terms of the investment, such as the minimum investment amount, may also be relevant to determining accredited investor status.  For example, if the minimum investment amount is high enough that only accredited investors could reasonably be expected to meet it, and a purchaser can do so with a direct cash investment that is not financed by the issuer or by any other third party, those facts could be viewed as evidence verifying the purchaser’s accredited investor status.  In such a case, the adopting release states that it may be reasonable for an issuer to take no further steps to verify the accredited investor status of a natural person it otherwise knows little about. In addition to the principles-based approach to the "reasonable steps" requirement under Section 201 of the JOBS Act, the final rule will also describe a list of "non-exclusive and non-mandatory" methods that an issuer may use to satisfy the verification requirement for a purchaser that is a natural person.[22]  These methods will include: (i) reviewing a copy of any IRS form[23] that reports the income of the purchaser and obtaining a written representation that the purchaser will likely continue to earn the necessary income in the current year; (ii) reviewing copies of bank, brokerage and similar statements, certificates of deposit, tax assessments and appraisal reports as evidence of the purchaser’s assets, and a consumer credit report as evidence of the purchaser’s indebtedness, and obtaining a written representation from the purchaser that all liabilities necessary to make a determination of net worth have been disclosed; (iii) receiving written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser’s accredited status; and (iv) with respect to a purchaser who invested in a Rule 506(b) offering as an accredited investor prior to the effective date of Rule 506(c) and intends to invest in a Rule 506(c) offering by the same issuer, obtaining a certification from the purchaser that he or she qualifies as an accredited investor.  Regardless of the methods used by the issuer in its effort to verify the accredited investor status of the purchasers of its securities, the Commission reminded such issuers of the importance of maintaining adequate records of its verification process.             Revision to Form D Form D will be amended to include a checkbox indicating that an offering was conducted pursuant to new Rule 506(c).  The checkbox is intended to allow the Commission to monitor the use of general solicitation in offerings and to assess the impact of the changes in the market, including the effectiveness of various verification practices used by issuers.  The existing rules requiring issuers to file a Form D with the SEC within 15 days of the first sale of securities pursuant to Regulation D, but providing that the failure to file a Form D will not result in the loss of the Rule 506(c) exemption, remain unchanged.  As discussed below, however, the Commission has separately proposed significant changes to the content, filing requirements and consequences of failing to file a Form D.             Implications of General Solicitation in Rule 506 Offerings for Privately Offered Funds Privately offered funds, such as hedge funds, venture capital funds and private equity funds, generally rely on one of two statutory exclusions[24] from the definition of "investment company" under the Investment Company Act, and thus are not subject to the regulatory provisions under that Act.  Those exemptions are unavailable, however, to a fund that engages in a public offering of its securities.  The Commission reaffirmed its view, stated in the General Solicitation Proposing Release, that the use of general solicitation in offerings by privately offered funds pursuant to Rule 506(c) will not cause an issuer to be deemed an investment company under the Investment Company Act. It is important to note that other laws applicable to private funds may be impacted by a private fund’s use of general solicitation.  For example, usage of Rule 506(c) may impact the availability of certain exemptions available under rules promulgated by the CFTC, including the de minimis exemption from registration as a commodity pool operator under CFTC Rule 4.13(a)(3).  The de minimis exemption requires that interests in each applicable fund be "offered and sold without marketing to the public in the United States."  Therefore, absent CFTC action, it appears that private funds seeking to engage in general solicitation may not be able to rely on the 4.13(a)(3) exemption.              Revisions to Rule 144A Rule 144A(d)(1) will be amended to eliminate the restriction on "offers" to persons who are not QIBs, and thus to permit general solicitation in offerings conducted pursuant to Rule 144A.  The rule will continue to condition the exemption on the securities being sold only to QIBs or to purchasers that the seller and any person acting on its behalf reasonably believe is a QIB.  The amendments will not add any additional standards for whether a seller reasonably believes a purchaser to be a QIB or otherwise.[25]  As a transitional matter, the adopting release provides that, with respect to offerings that were launched before the effective date of the amendment to Rule 144A(d)(1), offering participants may engage in general solicitation for the segment of the offering that is conducted after the effective date.             No Integration with Regulation S Offering Issuers and offering participants that conduct an offering pursuant to Rule 506 or Rule 144A often conduct a simultaneous offshore offering of the issuer’s securities in reliance on the exemption from registration provided by Regulation S.  One condition to the availability of the Regulation S exemption is that there be no "directed selling efforts" in the United States.[26]  In practice, "directed selling efforts" under Regulation S has been treated as effectively synonymous with "general solicitation" for purposes of Rule 506 and Rule 144A. While the Regulation S prohibition on "directed selling efforts" within the United States remains in place following the JOBS Act amendments discussed herein, the adopting release reaffirmed that the use of general solicitation in connection with a Rule 506 or Rule 144A offering will not be a barrier to a concurrent offering in reliance on Regulation S.  Regulation S only offerings will, however, continue to be subject to the traditional restrictions on publicity which could be deemed a directed selling effort.  Further, for foreign private issuers in Global Rule 144A (or Rule 506) / Regulation S offerings, we expect such issuers to continue to follow the restrictions set forth in the Rule 135e safe harbor for offshore press conferences in which the offshore offering is discussed.  In contrast, following the amendments eliminating the prohibition on general solicitation, no such restrictions would be imposed on similar publicity and other statements made within the United States if related to the 144A (or 506) tranche of the offering.             Anti-Fraud Provisions Will Apply to General Solicitations It is important to note that communications used to solicit prospective investors are subject to the general anti-fraud provisions under the federal securities laws.  Furthermore, for investment advisers that are registered with the Commission, certain advertisements may also trigger specific advertising rules and regulations.  For example, an investment adviser is severely limited in its ability to utilize an advertisement that refers to any testimonial concerning the investment adviser or refers to past specific investment recommendations.  The Investment Advisers Act of 1940 (the "Advisers Act") also limits the ways in which an investment adviser can present its track record.  Separately, entities registered with regulatory agencies other than the Commission, including the CFTC or the National Futures Association, may be subject to other agency specific marketing rules and regulations.  Finally, many states and non-U.S. jurisdictions have their own anti-fraud and market rules that must be considered before marketing materials can be disseminated.             Rule 135c Implications One consequence of permitting general solicitation in Rule 506(c) and Rule 144A offerings is that notices of such offerings need not be limited to the information permitted by Rule 135c or include the legend prescribed by Rule 135c.  Notices of offerings pursuant to Rule 506(b), however, must still comply with Rule 135c.             Consequences of Failing to Comply with Requirements of Rule 506(c) As we noted in our Client Alert relating to the General Solicitation Proposing Release, although the JOBS Act did not amend Section 4(a)(2), and the adopting release notes that "even after the effective date of Rule 506(c), an issuer relying on Section 4(a)(2) outside of the Rule 506(c) exemption will be restricted in its ability to make public communications to solicit investors for its offering because public advertising will continue to be incompatible with a claim of exemption under Section 4(a)(2)," this principle may come under pressure if issuers and offering participants seek in good faith to comply with Rule 506(c) or Rule 144A but inadvertently fail to comply with a condition or requirement of those safe harbors.  Under those circumstances, the effect of such a failure could be that the offering violated Section 5 of the Securities Act – an effect that would have significant consequences for the issuer.  As a result, in the absence of further guidance from the Commission or court decisions that are binding on the Commission, issuers and offering participants should adhere rigorously to Commission rules relating to offering communications and verification of an investor’s accredited investor status in offerings involving the use of general solicitations. Rule 506 Decision Tree (PDF format). Overview of Final Rules Disqualifying Bad Actors from Offerings Under Rule 506 The final rule to disqualify felons and other "bad actors" from participating in Rule 506 offerings will be contained in a new paragraph (d) to Rule 506.  This rule is generally consistent with the Bad Actor Proposing Release, except that events that occurred prior to the effective date of the new rules will not result in a person’s disqualification.  Instead, the Commission adopted a new paragraph (e) to Rule 506, which will require that the issuer disclose these prior events to each purchaser in the offering. The disqualification provisions will apply to the following persons: the issuer (including any predecessors and any affiliated issuers); any director, executive officer, other officer participating in the offering, general partner or managing member of the issuer; beneficial owners of 20% or more of the issuer’s outstanding voting equity securities; promoters; any investment manager of an issuer that is a pooled investment fund; any person that is paid to solicit purchasers in connection with the offering; any general partner or managing member of any such investment manager or solicitor; and any director, executive officer or other officer participating in the offering of any such investment manager or solicitor, or of any general partner or managing member of such investment manager or solicitor. "Disqualifying events" that would disqualify a person from participating in Rule 506 offerings will include: certain criminal convictions, court injunctions, and restraining orders in connection with the purchase or sale of a security, involving making a false filing with the SEC, or the conduct of certain financial intermediaries; certain final orders from the CFTC, state securities regulators and other federal and state banking, insurance and similar regulators; certain SEC disciplinary, cease-and-desist, and stop orders; suspension or expulsion from membership in a self-regulatory organization; having filed (as a registrant or issuer), or having been an underwriter or having been named as an underwriter in a registration statement or Regulation A offering statement that was the subject of certain Commission orders, investigations or proceedings; and U.S. Postal Service false representation orders.  Some of these disqualification events will be subject to look-back periods of up to ten years.  The release notes that the determination of whether officers are "participating in an offering will be a question of fact" and that "[p]articipation . . . would have to be more than transitory or incidental involvement."  Participation could include: participation or involvement in due diligence activities; involvement in the preparation of disclosure documents; and communication with the issuer, prospective investors or other offering participants. The disqualification provisions will include a "reasonable care" exception for an issuer that can "establish[] that it did not know and, in the exercise of reasonable care, could not have known that" a covered person with a disqualifying event participated in the offering."  The instructions to the rule will note that the issuer must conduct a factual inquiry, in light of the particular circumstances, to establish that the issuer exercised reasonable care.  As a consequence, an issuer that anticipates that it may conduct a private offering pursuant to Rule 506 should conduct appropriate due diligence with respect to persons that are covered by the rule, including its directors, officers and large shareholders and, in the case of a pooled investment fund, its investment manager (and the relevant persons associated with its investment manager), well in advance of any potential offering in order to ensure that no covered person is subject to a disqualifying event.  In addition, prior to conducting a planned Rule 506 offering, the issuer will need to ensure that other offering participants, such as placement agents, are not subject to such events.[27]  The Commission also noted in the adopting release that, for continuous, delayed or long-lived offerings, reasonable care would include updating the factual inquiry on a reasonable basis, with the frequency and degree of updating dependent on the circumstances. Finally, the disqualification provisions will provide that the Commission can waive the disqualification, either upon a showing of good cause if the Commission determines that it is not necessary to deny the exemption, or if the court or regulatory authority that entered the order, judgment or decree that would result in disqualification advises in writing that disqualification should not arise as a consequence of its action. For disqualifying events that occurred before the effective date of the final rule, the rule will require written disclosure of such matters.  The Commission expects the disclosure to have "reasonable prominence" to ensure that this information is "appropriately presented in the total mix of information available to investors,"[28] and that it be made a reasonable time prior to sale.[29]  The rule will also include a reasonable care exception, similar to the one included in the disqualification provision. Overview of Proposed Regulation D Amendments and Related Amendments In addition to adopting the final rules discussed above, the Commission proposed broader revisions to Regulation D, Form D, and Rule 156 under the Securities Act.  The proposed rules, if adopted, would enable the SEC to collect additional information on the private offering market, including the effects of general solicitation on the market and on developing offering practices.  In addition, in response to concerns raised by some commenters in connection with the General Solicitation Proposing Release, the Commission proposed other significant provisions, which are oriented to investor protection, but some of which could potentially hamper the use of general solicitation in private offerings.  We summarize below the main proposals and requests for comment in the Regulation D Proposing Release, which principally relate to changes to the content, filing requirements, and consequences of failing to file a Form D; requirements to include legends and other disclosure in written general solicitation materials and to submit such materials to the Commission; a "comprehensive work plan" to be conducted by the SEC’s staff (the "Staff") regarding the use of Rule 506(c); and amendments to the definition of accredited investor.  We emphasize, however, that the scope of the requests for comment in the proposing release is broader in many respects than the amendments that were formally proposed.  As a result, participants in the private offering market should carefully review the release in order to fully understand the scope and nature of the potential amendments.  The comment period for the proposing release will expire on September 23, 2013.             Expanded Content of Form D The Commission proposed to dramatically expand the information required to be included on Form D in connection with Rule 506 offerings,[30] whether or not the issuer will rely on new Rule 506(c) permitting the use of general solicitation, reasoning that the expanded information would assist the Commission in evaluating the impact of Rule 506(c) on the existing Rule 506 offering market and would be useful to state regulators and investors.  The additional information requirements would include, among other information: The issuer’s publicly accessible website address, if any; The name and address of any person who directly or indirectly controls the issuer; The number of accredited investors and non-accredited investors that have purchased in the offering, whether they are natural persons or legal entities, and the amount raised from each category of investors; Certain information regarding the use of proceeds of the offering;[31] The number and types of accredited investors that purchased securities in the offering (e.g., natural persons who qualified as accredited investors on the basis of income or net worth); The name of the exchange, alternative trading system or trading venue, if any, on which any class of the issuer’s securities is traded, and whether the securities being offered under Rule 506 are of the same class or are convertible into or exercisable or exchangeable for such class; If the issuer used a registered broker-dealer in connection with the offering, whether any general solicitation materials were filed with FINRA; In the case of a pooled investment fund, the name and SEC file number for each registered investment adviser or exempt reporting adviser who functions directly or indirectly as a promoter of the issuer; For Rule 506(c) offerings, the types of general solicitation used or to be used (e.g., mass mailings, emails, public websites, social media, print media and broadcast media); and For Rule 506(c) offerings, the methods used or to be used to verify accredited investor status (e.g., principles-based method using publicly available information, documentation provided by the purchaser or a third party, reliance on verification by a third party, or other sources of information; one of the methods in the non-exclusive list of verification methods in Rule 506(c)(2)(ii); or another method).             Revisions to Form D Filing Requirements The proposed rules would also require issuers that intend to engage in general solicitation under Rule 506(c) to file an initial Form D (an "Advance Form D") at least 15 calendar days before the issuer commences general solicitation for the offering.  The Advance Form D would include certain identifying and general information about the issuer and the offering, including information on the issuer’s related persons, the type(s) of security to be offered and the use of proceeds of the offering, but could exclude more detailed information about the issuer and the offering required by Form D, such as the issuer’s size, the intended duration of the offering, and the minimum investment amount. In addition, no later than 15 calendar days after the first sale of securities under the offering (which is the date on which the Form D is required to be filed under current rules), the issuer would be required to file an amendment to the Form D with the remainder of the information required by Form D.[32]  The Advance Form D filing requirement is intended to enhance the ability of the Commission, state securities regulators, and investors to gather timely information about Rule 506(c) offerings and the use of Rule 506(c). The proposed rules would also require that issuers file a final amendment to Form D (a "Closing Amendment") no later than 30 calendar days after the termination of any offering relying on Rule 506(b) or Rule 506(c).  The Commission anticipates that the Closing Amendments will provide the Commission with substantially complete information about the Regulation D market, given that the vast majority of Regulation D offerings rely on Rule 506.              Revised Penalties for Non-Compliance with Form D Filing Requirements Currently, an issuer is penalized for failing to comply with the Form D filing requirements only if it is enjoined by a court for non-compliance.  Under the proposed amendments, an issuer would be automatically disqualified from using Rule 506 in any new offering if the issuer, or any predecessor or affiliate of the issuer, failed to comply, within the past five years (excluding any failure before the effective date of the rule amendment), with the Form D filing requirements in a Rule 506 offering.  The disqualification period would terminate one year after the required Form D filings are made or, if the offering has been terminated, after the Closing Amendment is filed. Issuers would have 30 calendar days to cure a failure to comply with the filing deadlines for a Form D or Form D amendment.  However, this cure period would only be available for an issuer’s first failure to file timely a Form D or Form D amendment in connection with an offering.  The Commission would also reserve for itself (and likely delegate to the Director of the Division of Corporate Finance) the ability to waive non-compliance with the Form D filing requirements if, upon the issuer demonstrating good cause, the Commission determines that it is not necessary to deny the exemption.             Legends and Information Required in Written General Solicitation Materials The Commission proposed a new rule[33] to require all issuers to include, in any written general solicitation materials,[34] legends stating that[35]: The securities may be sold only to accredited investors; The securities are being offered in reliance on an exemption from the registration requirements, and therefore are not required to comply with certain specific disclosure requirements; The Commission has not passed upon the merits of or approved the securities, the terms of the offering, or the accuracy of the materials; The securities are subject to transfer restrictions; and Investing in securities involves risk and investors should be able to bear the loss of their investment. The proposal would require private funds (such as hedge funds, venture capital funds, and private equity funds) to include an additional legend on written solicitation materials  disclosing that the securities offered are not subject to the protections of the Investment Company Act.[36]  In addition, if the written general solicitation materials include performance data, then the private funds would also be required to disclosure that[37]: Performance data represents past performance; Past performance does not guarantee future results; Current performance may be different than the performance data presented; The private fund is not required by law to follow any standard methodology when calculating and representing performance data; and The performance of the fund may not be directly comparable to the performance of other private or registered funds. In addition, the proposed rules would require that performance data be given as of the latest practicable date and that, if the data do not reflect the deduction of fees and expenses, the fund disclose this fact. Under the proposal, the failure to include any required legends or other disclosures or to submit written general solicitation materials to the Commission would not render Rule 506(c) unavailable for the offering, as the Commission believes that the loss of the exemption would be a "disproportionate consequence[]."[38]  However, an issuer that is subject to an injunction for failure to comply with these requirements would be disqualified from engaging in all future Rule 506 offerings. The Commission also proposed to extend the guidance contained in Rule 156 under the Securities Act, which currently describes when information in sales literature by a registered investment company could be fraudulent or misleading under the federal securities laws, to apply to sales literature of private funds.  In this regard, the Commission noted several specific areas that it believes are vulnerable to misleading statements, including misrepresenting prior investment performance; exaggerating personal qualifications; omitting disciplinary information; misrepresenting holdings; making fraudulent performance claims; and falsely valuing investments.[39]  Furthermore, the Form D Proposing Release noted that, even before rules are adopted and become effective to formally extend Rule 156 to the sales literature of private funds, the Commission is "of the view that private funds should now be considering the principles underlying Rule 156 to avoid making fraudulent statements in their sales literature."[40]             Proposed Temporary Rule for Mandatory Submission of Written General Solicitation Materials The Commission also proposed a new rule[41] to require, for a period of two years from the effective date of the rule, that issuers conducting Rule 506(c) offerings submit to the Commission all written general solicitation materials used in connection with the offerings.[42]  This rule is intended to assist the Commission in understanding developments in the market regarding how issuers solicit potential purchasers of securities in Rule 506(c) offerings.[43]  The written general solicitation materials submitted would not be considered "filed" or "furnished," and thus would not expose issuers to liability provisions that apply to materials furnished or filed with the Commission.[44]  The content of such solicitations would, of course, still be subject to general anti-fraud provisions of the securities laws.  Furthermore, for investment advisers that are registered with the SEC, certain advertisements may also trigger specific advertising rules and regulation.  For example, an investment adviser is severely limited in its ability to utilize an advertisement that refers to any testimonial concerning the investment adviser or refers to past specific investment recommendations.  The Advisers Act also limits the ways in which an investment adviser can present their track record.  Separately, entities registered with regulatory agencies other than the Commission, including the CFTC and/or the National Futures Association, may be subject to other agency specific marketing rules and regulations.  Finally, many states and non-U.S. jurisdictions have their own anti-fraud and market rules that must be considered before marketing materials can be disseminated.             SEC Work Plan Related to General Solicitation The amendments proposed in the Regulation D Proposing Release are intended to support a "comprehensive work plan" the Commission has directed the Staff to execute regarding the use and effectiveness of Rule 506(c) (the "Rule 506 Work Plan").  The Rule 506 Work Plan will, among other things: evaluate the range of purchaser verification practices used by issuers and other participants in Rule 506(c) offerings, including whether these verification practices are excluding or identifying non-accredited investors; evaluate whether the absence of the prohibition against general solicitation has been accompanied by an increase in sales to non-accredited investors; assess whether the availability of Rule 506(c) has facilitated new capital formation or has shifted capital formation from registered offerings and unregistered non-Rule 506(c) offerings to Rule 506(c) offerings; examine the information submitted or available to the Commission on Rule 506(c) offerings, including the information in Form D filings and the form and content of written general solicitation materials submitted to the Commission; monitor the market for Rule 506(c) offerings for increased incidence of fraud and develop risk characteristics regarding the types of issuers and market participants that conduct or participate in Rule 506(c) offerings and the types of investors targeted in these offerings to assist with this effort; incorporate an evaluation of the practices in Rule 506(c) offerings in the Staff’s examinations of registered broker-dealers and registered investment advisers; and coordinate with state securities regulators on sharing information about Rule 506(c) offerings. The Commission believes that the proposed amendments will support the Rule 506 Work Plan by improving the timeliness, quality, and comprehensiveness of information on issuers, investors and financial intermediaries participating in Rule 506 offerings and by mandating that written general solicitation materials be submitted to the Commission.             Definition of "Accredited Investor" The Commission expressed its belief in the Regulation D Proposing Release that "the definition of accredited investor as it relates to natural persons should be reviewed and, if necessary or appropriate, amended."[45]  Section 415 of the Dodd-Frank Act requires the Government Accountability Office to complete a study of the definition by July 20, 2013, and Section 413(b) of the Dodd-Frank Act requires the Commission to review the definition by July 20, 2014.  Because the Commission noted that any proposed changes to the accredited investor definition would benefit from considering these two studies, and because the Dodd-Frank Act stipulates the net worth thresholds in the definition through July 2014, the Commission did not propose any specific amendments.  However, the proposing release noted that the Staff has begun a review of the accredited investor definition, and the release explicitly solicits comment regarding the net worth and income tests, and the tests’ respective financial thresholds.  Significantly, this request for comment potentially lays the foundation for the Commission to adopt final rules to amend the definition without a further proposing release.             What Should Investment Banks, Broker-Dealers and Private Funds Do Now? The elimination of the prohibition on general solicitation in Rule 506(c) and 144A offerings presents risks and opportunities for investment banks, broker-dealers and privately offered funds.  On one hand, this change will create new opportunities for these entities to expand their businesses, and will subject those entities to the risk of losing business and investors to competitors that respond more quickly.  On the other hand, those that move aggressively without appropriate controls, policies and procedures will face significant compliance risks that could result in reputational damage, fines, penalties, injunctions or other legal ramifications. Accordingly, banks, broker-dealers and funds that intend to participate in Rule 506(c) offerings should use the time before the effective date of the new rules to prepare for a fundamentally changed legal environment.  For decades, policies, procedures and legal forms relating to a wide array of business practices – from customer and investor intake procedures and handling investor inquiries, to dealing with the press, to transaction agreements – have been crafted with a view to avoiding general solicitation under all circumstances.  With the liberalization of the private offering communication rules, these entities should revise these policies, procedures and form transaction documents so that they can quickly and safely take advantage of the new legal environment.  To help our clients and friends to begin this process, we have included below a chart identifying some of these policies, procedures and forms that should be included in this review. * * * * * The following are links to the General Solicitation Adopting Release, the Bad Actor Adopting Release, the Regulation D Proposing Release and the related Fact Sheets: Final Rule – Lifting General Solicitation Ban Fact Sheet – Lifting General Solicitation Ban Final Rule – Disqualification of Felons and Other "Bad Actors" from Rule 506 Offerings Fact Sheet — Disqualification of Felons and Other "Bad Actors" from Rule 506 Offerings Rule Proposal—Regulation D Amendments Fact Sheet – Regulation D Amendments Revisions to Policies, Procedures and Forms To Take Advantage of General Solicitation Under Rule 506(c) and Rule 144A The chart below lists certain policies, procedures and forms that issuers and other persons that participate in Rule 506(c) and Rule 144A offerings should review in light of the removal of the prohibition on general solicitation and advertising ("general solicitation").  Note that the prohibition on general solicitation will remain for Rule 506 offerings in which any purchaser is not an accredited investor ("AI").  For these transactions and for other Rule 506 transactions in which a decision is made not to engage in general solicitation, existing policies, procedures and forms will need to be maintained to ensure compliance with Rule 506(b).  Offering participants should also design and implement appropriate controls to identify upfront whether an offering will rely on Rule 506(b) or (c) and to ensure the appropriate policies, procedures and forms are used.  Finally, consideration should be given to such other matters as whether an issuer anticipates undertaking a public offering, as the gun-jumping rules for public offerings remain in effect. Function / Document Responsible Person Potential Revisions to Policies / Procedures / Forms Customer / Investor Intake Back office AI verification procedures and documentation Consider methods to make process faster / more efficient (while permitting increased verification per first bullet point) to allow for new customers to be added DURING an offering (as lifting the general solicitation ban will permit sales to investors with whom an entity does not have a preexisting substantive relationship) Inquiry Handling Back office No longer need staff scripts to turn away inquiries; instead, develop controls and procedures to screen inquiries arising from general solicitation, based on AI status, and to funnel into customer intake process where appropriate Press Interactions Legal department Consider revising policies to reflect that the securities laws no longer prohibit discussion that might lead to publicity for an offering Offering Materials Legal department Consider revising / easing policies calling for strict numbering and tracking of private placement memorandum, offering memorandum or offering circular Websites (offerings) Legal department Consider revising / easing policies calling for password-protection or questionnaires that confirm preexisting relationship Websites (issuers) Deal team / legal due diligence Consider policies and practices for scrubbing issuer websites for discussion of fundraising plans or other materials that could be construed as priming the market Advertising / Publicity Legal and marketing departments Consider policies regarding content of general solicitations for an offering Consider effectiveness of advertising and solicitation practices for an offering, and potential legal ramifications of use Engagement Letter Legal department Consider whether revisions are necessary / appropriate regarding investor verification procedures and advertising Investor Purchase / Subscription Agreement (private placement) Legal department and outside counsel Consider revisions to investor representations and warranties Agreement Among Initial Purchasers (144A) Industry Consider revisions to representations and covenants from syndicate members regarding advertising of offering Purchase Agreement – Initial Purchaser (144A) Industry Consider revisions to representations and covenants regarding advertising of offerings    [1]   "Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings," Securities and Exchange Commission (July 10, 2013).     [2]   "Disqualification of Felons and Other ‘Bad Actors’ from Rule 506 Offerings," Securities and Exchange Commission (July 10, 2013).    [3]   "Amendments to Regulation D, Form D and Rule 156 under the Securities Act," Securities and Exchange Commission (July 10, 2013).    [4]  See Gibson, Dunn & Crutcher Client Alert, SEC Lifts Ban on General Solicitation, Allowing Private Funds to Advertise (July 17, 2013).     [5]   "Accredited investor" is defined in Rule 501(a) of Regulation D to include any person who falls within one of eight enumerated categories, or who the issuer reasonably believes falls within one of those categories, at the time of sale.    [6]   "Qualified institutional buyer" is defined in Rule 144A(a)(1) to include any entity who falls within one of six enumerated categories.    [7]   Dodd-Frank Act, Sec. 926.    [8]   "Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings," Securities and Exchange Commission (August 31, 2012).    [9]   "Disqualification of Felons and Other ‘Bad Actors’ from Rule 506 Offerings," Securities and Exchange Commission (May 25, 2011).   [10]   Gibson, Dunn & Crutcher Client Alert, SEC Proposes Amendments to Permit Advertising in Rule 506 and Rule 144A Offerings (August 31, 2012).   [11]   These categories generally include natural persons, public and private for-profit and not-for-profit corporations, general and limited partnerships, business and other types of trusts, and funds and other types of collective investment vehicles.  See Rule 501(a)(1)-(8).   [12]   General Solicitation Adopting Release at 5 n.17.    [13]   Conversely, the Commission noted that an issuer that fails to take reasonable steps will lose the benefit of Rule 506(c) even if all purchasers are accredited investors.  See id. at 26.  In this case, the offering would likely not qualify for the exemption provided by Section 4(a)(2), and thus would violate Section 5 of the Securities Act.    [14]   See id. at 26.    [15]   As discussed below, however, the Commission has issued additional rule proposals that would require, among other things, that an issuer in a Rule 506(c) offering file a Form D 15 days prior to engaging in any general solicitation, include certain legends and disclosures in any written general solicitation materials, and submit such materials to the Commission at the time of first use.  If some or all of these provisions are adopted, the ability to rely on Rule 506(c) as a "safety net" for an inadvertent statement constituting a general solicitation may be limited.   [16]   In this regard, the Commission notes that "we anticipate that many practices currently used by issuers in connection with existing Rule 506 offerings will satisfy the verification requirement for offerings pursuant to Rule 506(c)."  General Solicitation Adopting Release at 35.  The SEC also stated its desire to leave room for future methods of ascertaining accredited investor status, such as third-party services.  Id. at 35.   [17]   Id. at 30.   [18]   Id. at 31.    [19]   Id. at 31.   [20]   Id. at 32-33.   [21]   Id. at 33.   [22]   Rule 506(c)(2)(ii).   [23]   Such as Form W-2, Form 1099, Schedule K-1 to Form 1065 or Form 1040.   [24]   Provided by either Sections 3(c)(1) or 3(c)(7) under the Investment Company Act.   [25]   Rule 144A specifies non-exclusive methods by which a seller may establish that an investor is a QIB.   [26]   See Rule 902(c).  The Commission notes that the adopting release for Regulation S made clear 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."  General Solicitation Adopting Release at 57.   [27]   While market practices for conducting the requisite factual inquiry with respect to such participants will likely develop over time, the release helpfully noted that, in the case of a registered broker-dealer that is acting as placement agent, it may be sufficient for the issuer to inquire with the placement agent concerning the relevant set of covered officers and controlling persons, and to consult publicly available databases concerning the past disciplinary history of the relevant persons via FINRA’s BrokerCheck website.   [28]   Id. at 78.   [29]   Id. at 78   [30]   Certain proposed changes would also require additional information on offerings relying on Rule 504, Rule 505 and Securities Act Section 4(a)(5).   [31]   This requirement would apply only to Rule 506 offerings by issuers that are not pooled investment funds.   [32]   The issuer could also include all of the information required by Form D in the Advance Form D.  See Regulation D Proposing Release at 25.   [33]   Rule 509.   [34]   The Commission uses phrase "written general solicitation materials" in the text of the release to refer generally to a written communication that would constitute a general solicitation or general advertising.  The proposed rules do not define the phrase, however, which may raise questions regarding what may be deemed to constitute a written communication subject to the proposed rules.   [35]   Regulation D Proposing Release at 64.   [36]   Id. at 66.   [37]   Id. at 67-68.   [38]   Id. at 69.   [39]   Id. at 81.   [40]   Id. at 78.   [41]   Rule 510T.   [42]   Regulation D Proposing Release at 87.   [43]   Id. at 88.   [44]   Id. at 89.   [45]   Id. at 93.    An abbreviated version of this Alert was posted on July 11, 2013, as a blog on the Gibson Dunn Securities Regulation and Corporate Governance Monitor, available at https://securitiesregulationmonitor.com.  We encourage you to sign up at the Monitor website to receive email alerts when we post information on developments and trends in securities regulation, corporate governance and executive compensation.  Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed above.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following:    CaliforniaJennifer Bellah Maguire (213-229-7986, jbellah@gibsondunn.com)Michelle Hodges (949-451-3954, mhodges@gibsondunn.com)Ari Lanin (310-552-8581, alanin@gibsondunn.com)Jonathan K. Layne (310-552-8641, jlayne@gibsondunn.comDavid C. Lee (949-451-4069, dlee@gibsondunn.com)Stewart L. McDowell (415-393-8322, smcdowell@gibsondunn.com)James J. Moloney (949-451-4343, jmoloney@gibsondunn.com)Douglas D. Smith (415-393-8390, dsmith@gibsondunn.com)Peter W. Wardle (213-229-7242, pwardle@gibsondunn.com) DallasJeffrey A. Chapman (214-698-3120, jchapman@gibsondunn.com)Robert B. Little (214-698-3260, rlittle@gibsondunn.com) DenverRobyn E. Zolman (303-298-5740, rzolman@gibsondunn.com)  InternationalJoseph M. Barbeau – Hong Kong (+852-2214-3888, jbarbeau@gibsondunn.com)Claibourne S. Harrison – London (+44-(0)20-7071-4220, charrison@gibsondunn.com)Paul Harter – Dubai (+971 (0)4 704 6821, pharter@gibsondunn.com) New YorkJ. Alan Bannister (212-351-2310, abannister@gibsondunn.com)Barbara L. Becker (212-351-4062, bbecker@gibsondunn.com)Andrew L. Fabens (212-351-4034, afabens@gibsondunn.com)John T. Gaffney (212-351-2626, jgaffney@gibsondunn.com)Lois F. Herzeca (212-351-2688, lherzeca@gibsondunn.com)Kevin W. Kelley (212-351-4022, kkelley@gibsondunn.com)Emad H. Khalil (212–351–2677, ekhalil@gibsondunn.com)Edward D. Nelson (212-351-2666, enelson@gibsondunn.com)Glenn R. Pollner (212-351-2333, gpollner@gibsondunn.com)Edward D. Sopher (212-351-3918, esopher@gibsondunn.com) Sean Sullivan (212–351–2453, ssullivan@gibsondunn.com) Washington, D.C.Howard B. Adler (202-955-8589, hadler@gibsondunn.com)Anne Benedict (202-955-8654, abenedict@gibsondunn.com)Blaise F. Brennan (202-887-3700, bbrennan@gibsondunn.com)Stephen I. Glover (202-955-8593, siglover@gibsondunn.com)Amy L. Goodman (202-955-8653, agoodman@gibsondunn.com)Elizabeth Ising (202-955-8287, eising@gibsondunn.com)Brian J. Lane (202-887-3646, blane@gibsondunn.com)Ronald O. Mueller (202-955-8671, rmueller@gibsondunn.com)John F. Olson (202-955-8522, jolson@gibsondunn.com)C. William Thomas, Jr. (202-887-3735, wthomas@gibsondunn.com)   © 2013 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. 

July 17, 2013 |
SEC Lifts Ban on General Solicitation, Allowing Private Funds to Advertise

On July 10, 2013, the Commissioners of the U.S. Securities and Exchange Commission ("SEC" or the "Commission") voted 4-1 to adopt a rule that will eliminate the prohibition against general solicitation and general advertising (together, "general solicitation") in private offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act of 1933 (the "Securities Act").[1]  Specifically, the Commission voted to amend Rule 506 to add a new paragraph (c), which will permit general solicitation so long as certain conditions are met by the issuer.  Rule 506(c) was adopted to implement a requirement contained in Section 201(a) of the Jumpstart Our Business Startups Act (the "JOBS Act").  Rule 506(c) will become effective 60 days after the rule amendment is published in the Federal Register, or mid to late September 2013.[2]  Once Rule 506(c) becomes effective, private issuers–including hedge funds, private equity funds, venture capital funds and start-up companies–will be permitted to engage in general solicitation, so long as the issuer takes "reasonable steps" to verify that purchasers in the offering are accredited investors, and all purchasers of the securities are in fact accredited investors as defined in Rule 501(a).  Alternatively, private issuers may forgo advertising to the general public and can continue to rely on Rule 506’s legacy framework. During the same open meeting in which Rule 506(c) was adopted, the Commission adopted final rules to disqualify securities offerings involving certain "felons and other ‘bad actors’" from participating in Rule 506 offerings, as required by Section 926 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, by a unanimous vote.[3]  In addition, the Commission proposed additional amendments to Regulation D, Form D, and Rule 156 under the Securities Act that are intended collectively to enhance the Commission’s ability to evaluate changes in the private offering market and to address the development of practices in Rule 506 offerings.[4]  Gibson Dunn will be issuing a companion client alert in the near future containing additional information regarding these new rules. Background Most hedge funds and private equity funds rely on the private placement exemption and the procedures of Rule 506 as a means to avoid the registration requirements of Section 5 of the Securities Act with respect to offerings in the United States.  Rule 506 permits issuers to raise an unlimited amount of capital in private offerings sold to an unlimited number of accredited investors and up to 35 non-accredited investors.  However, until Rule 506(c) was adopted, the exemption provided by Rule 506 was explicitly conditioned on issuers and other participants in the offering not engaging in any form of general solicitation or general advertising to attract investors.  This prohibition has restricted the use of any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media shared or broadcasted over television, the radio, or the Internet to sell a private offering. Title II of the JOBS Act, entitled "Access to Capital for Job Creators," was designed to broaden the pool of potential investors for private offerings and expand access to capital.  Section 201(a) directed the Commission to eliminate the prohibition on general solicitation in securities offerings conducted pursuant to Rule 506, so long as all purchasers of the securities of such offerings are accredited investors.  In addition, Section 201(a)(1) requires that the issuer "take reasonable steps to verify that purchasers of the securities are accredited investors," using such methods as determined by the Commission.   On August 29, 2012, the Commission proposed rules to implement Section 201(a) of the JOBS Act.  On July 10, 2013, the Commission approved final rules, leaving the proposed rules largely unchanged, except for including a nonexclusive list of methods that issuers may use to satisfy the verification requirement with respect to investors who are natural persons, in addition to the principles-based approach that was described in the proposing release, as discussed below. Summary of the Commission’s New Rule Revised Rule 506(c) will permit general solicitation so long as:  (i) the issuer takes reasonable steps to verify that the purchasers are accredited investors; and (ii) all purchasers of the securities fall within one of the eight categories of persons who are accredited investors under Rule 501(a) of the Securities Act, or the issuer reasonably believes that the purchasers fall within one of those categories.[5]  The determination of whether the steps taken to verify that a purchaser is an accredited investor are reasonable will be an objective determination by an issuer based on the facts and circumstances of each purchaser and transaction.[6]  The adopting release enumerates a non-exclusive list of factors that an issuer should consider in making this determination, including:  (1) the nature of the purchaser and type of accredited investor that the purchaser claims to be; (2) the amount and type of information that the issuer has about the purchaser; and (3) the nature/terms of the offering. Verifying the accredited investor status of natural persons using this principles-based approach may prove challenging for private fund issuers.  Under Rule 501(a), natural persons may qualify as accredited investors under either a net worth test[7] or income test.[8]  However, public information is not generally available on the personal finances of individuals, and there may be privacy concerns related to collecting this type of information. To address this issue, the Commission has identified certain categories of information that issuers could rely upon which, depending on the circumstances, may satisfy Rule 506(c)’s verification requirements.  Examples of such information include publicly available information contained in filings with a federal, state or local regulatory body, or information available through a third party, such as a broker-dealer, accountant, or attorney. In addition to the principles-based approach described above, Rule 506(c) provides a non-exclusive list of methods that an issuer may use to satisfy the verification requirement for a purchaser who is a natural person. These methods include:  (1) reviewing copies of any IRS form that reports the income of the purchaser and obtaining a written representation that the purchaser expects to continue to earn the necessary income in the current year; (2) reviewing copies of bank, brokerage and similar statements, certificates of deposit, tax assessments and appraisal reports as evidence of the purchaser’s assets, and a consumer credit report as evidence of the purchaser’s indebtedness, and obtaining a written representation from the purchaser that all liabilities necessary to make a determination of net worth have been disclosed; (3) receiving written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant that such entity or person has taken reasonable steps to verify the purchaser’s accredited status; and (4) with respect to a purchaser who invested in a Rule 506(b) offering as an accredited investor prior to the effective date of Rule 506(c) and intends to invest in a Rule 506(c) offering by the same issuer, obtaining a certification from the purchaser that he or she qualifies as an accredited investor. Private funds may choose to operate under the legacy Rule 506 regime, and thus forgo engaging in general solicitation, for a variety of reasons, including avoiding the more stringent accredited investor verification requirements applicable to Rule 506(c) offerings or in order to allow for sales to up to 35 non-accredited investors.  Interaction with Other Regulatory Frameworks The adopting release for Rule 506(c) expressly confirms that an offering made pursuant to this rule will not constitute a public offering for purposes of Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (the "Investment Company Act").  By way of background, Section 3(c)(1) of the Investment Company Act provides that an issuer will not be considered an investment company if its outstanding securities are beneficially owned by 100 or fewer persons and if it is not making and does not propose to make a public offering of its securities, and Section 3(c)(7) excludes from being an investment company any issuer, the outstanding securities of which are owned exclusively by persons who, at the time of the acquisition of such securities, are "qualified purchasers" (as defined in the Investment Company Act), and which is not making and does not propose to make a public offering of such securities.   Notwithstanding the foregoing, it is important to note that other laws applicable to private funds can be impacted by a fund’s use of general solicitation.  For example, usage of Rule 506(c) may impact the availability of certain exemptions available under rules promulgated by the Commodity Futures Trading Commission ("CFTC"), including the de minimis exemption from registration as a commodity pool operator under CFTC Rule 4.13(a)(3).  The de minimis exemption requires that interests in each applicable fund be "offered and sold without marketing to the public in the United States."  Therefore, absent CFTC action, it appears that private funds seeking to engage in general solicitation may not be able to rely on the Rule 4.13(a)(3) exemption.  Additionally, marketing materials used to solicit prospective investors are subject to the antifraud provisions promulgated under the Securities Act, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940 (the "Advisers Act").[9]  Furthermore, for investment advisers that are registered with the SEC, certain advertisements may also trigger specific advertising rules and regulations.  For example, an investment adviser is limited in its ability to utilize an advertisement that refers to any testimonial concerning the investment adviser or refers to its past specific investment recommendations.  The Advisers Act also limits the ways in which an investment adviser can present its track record.  Separately, entities registered with regulatory agencies besides the SEC, including the CFTC and/or the National Futures Association, may be subject to other agency-specific marketing rules and regulations.  Finally, many states and non-U.S. jurisdictions have their own antifraud and market rules that must be considered before marketing materials can be disseminated. Conclusion Rule 506(c)’s elimination of the prohibition on general solicitation presents risks and opportunities for the private fund industry.  On the one hand, the ability to engage in general solicitation will create new opportunities for private fund managers to expand their businesses. On the other hand, those managers that move aggressively without proper controls, policies and procedures face significant compliance risks that could result in reputational harm, regulatory scrutiny, and possible legal ramifications.  So, with the liberalization of the private offering communication rules, private fund managers must reexamine their policies, procedures and form transaction documents, which up until now have generally not included provisions that contemplate general solicitation, so that they can ensure safe operation in this new legal environment.    [1]   "Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings," Securities and Exchange Commission (July 10, 2013), http://www.sec.gov/rules/final/2013/33-9415.pdf (the "General Solicitation Adopting Release").    [2]   "FACT SHEET: Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings," Securities and Exchange Commission (July 10, 2013), http://www.sec.gov/news/press/2013/2013-124-item1.htm.    [3]   "Disqualification of Felons and Other ‘Bad Actors’ from Rule 506 Offerings," Securities and Exchange Commission (July 10, 2013), http://www.sec.gov/rules/final/2013/33-9414.pdf.    [4]   "Amendments to Regulation D, Form D and Rule 156 under the Securities Act," Securities and Exchange Commission (July 10, 2013), http://www.sec.gov/rules/proposed/2013/33-9416.pdf (the "Regulation D Proposing Release").     [5]   The SEC noted that an issuer that fails to take reasonable steps will lose the benefit of Rule 506(c) even if all purchasers are accredited investors.  See General Solicitation Adopting Release at 26.         [6]   In this regard, the SEC notes that "we anticipate that many practices currently used by issuers in connection with existing Rule 506 offerings will satisfy the verification requirement for offerings pursuant to Rule 506(c)."  General Solicitation Adopting Release at 35.     [7]   A potential investor satisfies the net worth test if his or her individual net worth, or joint net worth, exceeds $1 million (excluding the value of the investor’s primary residence).      [8]   A potential investor satisfies the income test if his or her individual income in each of the two most recent years exceeds $200,000, or joint income exceeds $300,000, and he or she has a reasonable expectation of reaching the same income level in the current year.     [9]   In this regard, it is notable that, in the Regulation D Proposing Release, the Commission proposed to extend the guidance contained in Rule 156 under the Securities Act, which currently describes when information in sales literature provided by a registered investment company could be fraudulent or misleading under the federal securities laws, to apply to sales literature of private funds.  Furthermore, the Form D Proposing Release noted that, even before rules are adopted and become effective to formally extend Rule 156 to the sales literature of private funds, the Commission is "of the view that private funds should now be considering the principles underlying Rule 156 to avoid making fraudulent statements in their sales literature."   Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work or any of the following: Los AngelesJennifer Bellah Maguire (213-229-7986, jbellah@gibsondunn.com) New YorkEdward D. Nelson (212-351-2666, enelson@gibsondunn.com)Edward D. Sopher (212-351-3918, esopher@gibsondunn.com) Washington, D.C.C. William Thomas, Jr. (202-887-3735, wthomas@gibsondunn.com) © 2013 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.