THE AMERICAN LAW INSTITUTE Continuing Legal Education. Regulation D Offerings and Private Placements March 15-17, 2018 Scottsdale, Arizona

Transcription

1 1 THE AMERICAN LAW INSTITUTE Continuing Legal Education Regulation D Offerings and Private Placements March 15-17, 018 Scottsdale, Arizona Unregistered Offerings of Securities By David B.H. Martin Covington & Burling LLP Washington, D.C.

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3 3 Unregistered Offerings of Securities David B. H. Martin Covington & Burling LLP March 018 (All rights reserved) I. Statutory Exemptions from Registration for Primary Offerings A. Non-public Offerings 1. Section 4(a)() of the Securities Act of 1933 (the Securities Act ) provides an exemption from the registration provisions of section 5 of the Securities Act for transactions by an issuer not involving any public offering. a. The statute does not define public offering, but the Securities and Exchange Commission ( SEC ) and courts have developed certain standards for this so-called private offering exemption, the most prevalent of which involve: (1) sophisticated persons with access to the same kind of information that would be included in a registration statement; () limitations on the number of investors; and (3) lack of special selling efforts.. Using its exemptive authority under the Securities Act, the SEC has adopted a safe harbor under section 4(a)() in Rule 506 of Regulation D. B. Other Securities Act Exemptions 1. Section 3(b) grants the SEC authority to adopt two exemptions for issues of securities based on offering amounts. a. The first exemption under section 3(b)(1) applies to offerings where the offering amount does not exceed $5.0 million. b. The second such exemption is under section 3(b)(), added in 01 by Title IV of the Jumpstart Our Business Startups Act (the JOBS Act ), which required the SEC to create an exemption for offerings not in excess of $50 million in a 1- month period. DC:

4 4 c. The SEC has implemented these exemptions in Rule 504 of Regulation D, Regulation A and Rule 701, all summarized later in this outline.. Securities Act section 3(a)(11) provides an exemption from the registration requirements for any offer or sale of securities made exclusively to residents of a single state by an issuer which resides or is incorporated and does business in that state. a. This intrastate exemption has three components, which have been interpreted over the years by the SEC and courts. (1) The requirement for issuer to be doing business within the state has been interpreted to mean having substantial operational activities in the state. () All offers and sales must be to residents of the state. (3) The securities which are sold must come to rest with investors who are resident in the state. b. The SEC has adopted two safe harbors under section 3(a)(11) -- Rule 147 and Rule 147A. (1) Rule 147 provides a non-exclusive safe harbor with the following conditions: (a) (b) (c) (d) the issuer must be incorporated or organized and have its principal place of business in the state or territory in which the offering is being conducted; the issuer must satisfy at least one doing business requirement demonstrating the instate nature of its business; offers and sales of securities must be made only to residents of the state or territory in which the issuer is resident, which can be satisfied on the basis of an issuer s reasonable belief of a purchaser s in-state residency; a ban on resales other than to persons resident within the state or territory of the offering for a period of six months from the date of the sale;

5 5 (e) (f) the issuer must take precautions against interstate sales and resales, including: (i) disclosing to each offeree and purchaser of securities, at the time of the initial offer and sale, the intrastate nature of the offering and the limits on resales; (ii) obtaining a written representation of residence from each purchaser at the time of the initial offer and sale; (iii) placing a prominent legend on the stock certificate (or other document evidencing the security) that notes the limitations on resales; and (iv) issuing stop transfer instructions to the issuer s transfer agent, if any, or, if the issuer transfers its own securities, noting such limitations in the records of the issuer; and an integration safe harbor that covers both prior and subsequent offers and sales of securities by the issuer. () Rule 147A is a regional offering exemption adopted under section 8 of the Securities Act (see paragraph 5. below) for sales to persons in the same state but with offers permitted outside that state, a condition which would otherwise be inconsistent with both section 3(a)(11) and Rule 147. (a) (b) Rule 147A permits an issuer to be incorporated or organized in a state or territory which is different from the state or territory in which the offering is being made, on the condition that it can demonstrate the in-state nature of its business under the principal place of business and doing business requirements in Rule 147. Other conditions to Rule 147A are as follows: (i) (ii) a purchaser residency requirement similar to Rule 147, which can be satisfied on the basis of an issuer s reasonable belief of a purchaser s instate residency; a ban on resales other than to persons resident within the state or territory of 3