Securities Law Compliance and Disclosure

Katherine LofftFrom our colleague at Epstein Becker Green Katherine R. Lofft, on the TechHealth Perspectives blog:

There are myriad opportunities right now for new businesses and talented entrepreneurs targeting healthcare, particularly in the IT sector. It’s an exciting time for people and companies looking to harness the promise of innovation and the power of technology to improve health care delivery, empower patients and lower costs.

However, even the best ideas usually require money to get off the ground. Sometimes they require more capital than the founders or management, or their family and friends, have available. While there are many individuals and institutions around the country with money to invest, it can be hard for the average start-up or emerging business to identify and appeal to them, or to distinguish itself from competing investment opportunities.

In view of existing prohibitions on the use of general solicitation and advertising in private offerings of equity, many entrepreneurs, founders and early-stage business leaders turn to so-called “finders” (sometimes called “brokers” or “promoters”) to access capital. Finders are typically individuals, often with no other relationship to the company, who commit to leverage their network of contacts and connections to help a company identify investors and/or secure funding. The consideration under these arrangements often involves payment of a fee or commission based on a percentage of the funds invested.

Now, you might be asking, what’s the problem with this kind of arrangement? Only this: If an individual is involved in the purchase or sale or securities and receives or expects to receive a commission (whether payable in cash or other consideration, such as stock) as a result of the transaction, the individual must be properly licensed under federal, and often under state, law. The use of unlicensed “finders” or brokers can result in serious consequences not only for the individual finder or broker, but also for the company/issuer.

Read the full post on the TechHealth Perspectives blog

On March 22, 2011 the U.S. Supreme Court handed down a decision which is likely to have serious repercussions for companies in the bio/pharma tech space.  In MATRIXX INITIATIVES, INC., ET AL. v. SIRACUSANO ET AL., the Court rejected Matrixx argument that reports regarding the adverse effect of Zicam, its leading revenue generating product, were not statistically significant and therefore not material.

Noting that the analysis of materiality under the securities laws in fact specific, the Court appears to have relied heavily on two factors:

1. The methodologies and requirements of the FDA; and 

2. Public statements issued by Matrixx regarding its future revenues and  also that reports indicating that Zicam caused anosmia were “ ‘completely unfounded and misleading’ ” and that “ ‘the safety and efficacy of zinc gluconate for the treatment of symptoms related to the common cold have been well established.”

Methodologies and requirements of the FDA. As to the FDA methodologies, the Court noted, that “Both medical experts and the Food and Drug Administration rely on evidence other than statistically significant data to establish an inference of causation.  Because adverse reports can take many forms, assessing their materiality is a fact-specific inquiry, requiring consideration of their source, content, and context. The Court conceded that “Something more than the mere existence of adverse event reports is needed to satisfy that standard, but that something more is not limited to statistical significance and can come from the source, content, and context of the reports.”  Significantly the Court noted that the FDA defines an “[a]dverse drug experience” as “[a]ny adverse event associated with the use of a drug in humans, whether or not considered drug related.” 21 CFR §314.80(a) (2010). Federal law imposes obligations on pharmaceutical manufacturers to report adverse events to the FDA. During the relevant class period of the case, manufacturers of over-the-counter drugs, such as Zicam Cold Remedy, had no obligation to report adverse events to the FDA. However, in 2006, Congress enacted legislation to require manufacturers of over-the-counter drugs to report any “serious adverse event” to the FDA within 15 business days. See 21 U. S. C. §§379aa(b), (c).

Public statements issued by Matrixx regarding its future revenues. The Court Noted that Matrixx told the market that revenues were going to rise 50 and then 80 percent “when it had information indicating a significant risk to its leading revenue-generating product.”  And as  Court observed, Matrixx had not, in fact, conducted any studies and had “… received reports from medical experts and researchers that plausibly indicated a reliable causal link between Zicam and anosmia.”

The Court’s decision points to the importance of analyzing adverse product reports’ content and context and not relying on the fact that statistics may appear to render the reports merely anecdotal.  As always, public statements need to be made with care and with a  recognition that external factors can render what is said or even what is not said, actionable under the securities laws.