PRACTICAL TIPS FOR PRIVATE PLACEMENTS OF SECURITIES

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1 PRACTICAL TIPS FOR PRIVATE PLACEMENTS OF SECURITIES Exempt Offerings of Securities D. Scott Freed, Esquire

2 Two Types of Exemptions Exempt Securities: Municipal and federal government securities 3(a)(2) Commercial paper 3(a)(3) Securities of non-profit issuers 3(a)(4) Insurance policies and annuities 3(a)(8)

3 Types of Exemptions, cont. Exempt Transactions: Private placements under 4(2) of the Securities Act Limited offerings under 3(b) of the Securities Act Regulation D (Securities Act Rules 504, 505 and 506) Intrastate offerings 3(a)(11) and Rule 147

4 Private Placements under Section 4(2) of the Securities Act Transactions by an issuer not involving any public offering Offerees must be capable of fending for themselves SEC v. Ralston Purina Co. focus is on nature of offerees (access to information and sophistication) Securities sold under 4(2) are restricted securities

5 Section 4(2) Exemption, cont. Considerations for valid private placements under 4(2): 1. Offeree sophistication and access to information 2. The dollar amount of the offering and the number of units offered 3. Non-public manner of offering (i.e., no general solicitation or advertising) 4. Absence of redistribution (i.e., securities come to rest in hands of qualified purchasers) 5. Imposition of transfer restrictions

6 Rule 506 of Regulation D Safe harbor exemption under 4(2) of the Securities Act No limit on dollar amount of securities sold Offering to no more than 35 non-accredited investors that must be sophisticated and to an unlimited number of accredited investors Entities are generally counted as one purchaser if not formed for purpose of acquiring the securities offered Rule 506 offerings qualify for preemption of state laws under NSMIA

7 Accredited Investors A bank, insurance company, registered investment company, business development company or SBIC Certain employee benefit plans Charitable organizations, corporations or partnerships with assets exceeding $5 million A director, executive officer or general partner of the issuer

8 Accredited Investors, cont. Natural persons with individual net worth, or joint net worth with spouse, in excess of $1 million Net worth does not include equity in a private residence Increases in primary residence debt incurred within 60 days of the sale of the securities must be counted as a liability Natural persons with income exceeding $200,000 in each of the two most recent years and a reasonable expectation of the same income level in the current year

9 Rule Information Requirements No specific disclosure requirement for offerings to Accredited Investors Non-accredited Investors disclosure requirements imposed based on the nature of the issuer (reporting v. non-reporting) and the size of the offering Non-reporting issuers must provide financial and non-financial information specified in Rule 502(b). The financial statement and audit requirements depend on size of offering:

10 Rule Information Requirements, cont. Offerings up to $2.0 million - must provide financial statements required by Article 8 of Regulation S-X, but only balance sheet must be audited. Offerings up to $7.5 million - must provide audited financial statements required by Form S-1 for smaller reporting companies.

11 Rule Information Requirements, cont. Offerings over $7.5 million - must provide full audited financial statements required by applicable Securities Act registration form Certain exceptions available for limited partnerships or where audited financial statements would require unreasonable effort or expense

12 Rule Information Requirements, cont. Reporting issuers must furnish the same level of disclosure regardless of offering size Reporting issuers have the option of furnishing either: Most recent annual report to shareholders, the definitive proxy statement and, if requested in writing, the most recent Form 10-K; or Information contained in most recent Form 10-K or a Form 10 or Form S-1

13 Rule 504 of Regulation D Provides an exemption for limited offerings of up to $1 million in securities in any 12 month period Rule 504 is not available to issuers that are: Blank check companies Reporting companies Investment companies

14 Rule 504, cont. There is no SEC-mandated disclosure under Rule 504 General solicitation is prohibited with limited exceptions for certain state registered offerings No purchaser qualification requirements State blue sky law compliance required

15 Rule 505 of Regulation D Provides an exemption for limited offerings of up to $5 million in securities in any 12 month period Rule 505 is not available to investment companies Disclosure requirements apply if securities are purchased by non-accredited investors

16 Rule 505, cont. No purchaser qualification requirements General solicitation is prohibited State blue sky law compliance required

17 Integration in Private Placements Should purportedly separate offerings be combined for determining whether an exemption is available? SEC 5 factor test: used to determine whether offerings should be integrated where no safe harbor is available

18 SEC 5 Factor Test 1. Are the offerings part of a single plan of financing? 2. Do the offerings have the same general purpose? 3. Are the offerings of the same class of securities? 4. Are the offerings made at or about the same time? 5. Are the securities sold for the same type of consideration?

19 Integration Safe Harbors Rule 502(a) of Regulation D provides that offerings more than 6 months before or after Regulation D offerings will not be integrated Note: In Release No (Aug. 3, 2007) the SEC proposed to reduce the safe harbor from 6 months to 90 days Rule 152: a completed private offering will not be integrated with subsequent public offering Black Box and Squadron Ellenoff no action positions on Rule 152 Rule 155: Private and public offerings safe harbor

20 Rule 155 Safe Harbor Rule 155 provides a safe harbor for: A public offering immediately following abandoned private offering A private offering following an abandoned public offering Under Rule 155(b), an abandoned private offering will not be considered part of an offering for which an issuer files a registration statement if:

21 Rule 155 Safe Harbor, cont. No securities are sold in private offering Issuer terminates all activity for private offering prior to filing registration statement Prospectus discloses information about abandoned private offering Registration statement is not filed until 30 days after private offering activities have ceased

22 Rule 155 Safe Harbor, cont. Under Rule 155(c), an abandoned registered offering will not be considered to be part of a subsequent private offering if: No securities are sold in registered offering Issuer withdraws registration statement Private offering is not commenced until 30 days after withdrawal of registration statement Issuer provides certain notifications to offerees in the private offering

23 General Solicitation Issues General solicitation and advertising are prohibited in private placement transactions Issuer or others acting on its behalf must have reasonable criteria for selecting offerees Pre-existing relationship: Issuer and/or its agents should have prior contact and knowledge of each offeree s financial condition and sophistication