#13096 - Exempt Transactions - Securities Regulations (Duke Cox)

Types of exemptions

1. Transaction exemptions provide an exemption only from the registration provisions of §5 of the ’33 Act

   1. Securities placed under one of these exemptions cannot be resold unless either they are registered or another exemption is available

2. Securities exemptions: if it is exempt, it is exempt all the way every time it is sold or resold. Need not be registered, but also may be resold free of registration burdens

3(a)(11): Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory

1. Issuers, purchasers must be residents of the State

2. Substantial proceeds has to be in the State

3. It follows that if during the course of distribution any underwriter, any distributing dealer, or any dealer or other person purchasing securities from a distributing dealer for resale were to offer or sell such securities to a nonresident, the exemption would be defeated (as to all securities)

   1. The SEC has maintained consistently that a single offer or sale to a nonresident destroys the availability of the exemption regardless of whether the mistake was in good faith

   2. You can resale if the offers come to rest (holding it for period of time)

4. It is possible to advertise in a newspaper that also has circulation in other states. You must include a legend (i.e. Only for Texas residents)

Rule 147: provides a safe harbor under 3(a)(11)

1. a 9-month holding period before securities may be sold to nonresidents.

2. Only issuer protected; not available to a control person

3. (c)(2)(iii): 80% of net proceeds must be used in the state

4. If you can’t fit within 147 does not mean that you’re not in intrastate exemption. You will fall into common law and limited SEC guidelines.

5-1 Boston global: ok, must have legend saying offer only available in MA

5-2 not sure, 80% proceeds must be in state. But businesses frequently buy things out of state and sell them in state. The managerial efforts are in state.

4(a)(2) exempts “transactions by an issuer not involving any public offering”

1. Only exempts the issuer

2. Access: offeree must have access to information that a registration would have made available

   1. Senior managers

   2. Outside sophisticated investors

   3. Market power: warren buffet

   4. Family members

3. Sophisticated: offeree must be sophisticated enough to be able to evaluate the risks of the offering

4. The burden is on the issuer to control who the offeree is.

5-11: they are sophisticated, can evaluate risks. Negotiated for three months (they learn in the negotiating process).

1. But they know nothing about oil and gas.

5-12: if lawyers know about oil and gas more sophisticated

Regulation D provides 3 exemptions (504, 505, and 506) that, taken together, cover the vast majority of offerings exempt from registration

1. 504: maximum aggregate offering price of $1 million; not available for reporting companies or investment companies; no limitations on the number of purchasers; no affirmative disclosure obligations; resale of securities is restricted except under limited circumstances

2. 505: maximum aggregate offering price of $5 million (any amount raised in the preceding 12 months pursuant to an exemption authorized by 3(b) will reduce the amount); no more than 35 non-accredited purchasers and unlimited number of accredited purchasers; affirmative disclosure obligations applicable when there are non-accredited investors; resale of securities is restricted

3. 506: no limitation on the maximum aggregate offering price (no aggregation rule); no more than 35 non-accredited purchasers and unlimited number of accredited purchasers; affirmative disclosure obligations applicable when there are nonaccredited investors; non-accredited investors or their representatives must be sophisticated; resale of securities is restricted

501(a): accredited investor

1. Financial institutions,

2. pension plans,

3. venture capital firms (including angel investors and small business investment companies),

4. corporations and other organizations exceeding a certain size (assets exceeding $5 million),

5. insiders of the issuer

   1. directors

   2. executive officers

   3. general partners

      1. not just title, but also their duty and whether they manage the firm

6. natural persons with wealth or income exceeding threshold standards (net worth over $1 million, and/or annual income over $200k single or $300k as a couple for each of the last two years),

   1. 501: primary residences are now excluded from the net worth calculation

   2. Primary residence: the home where a person lives most of the time

   3. Gaming possibilities: you can take out mortgage on PR

7. entity owned by accredited investors

1. 5-14: yes, director of the issuer is accredited

2. 5-15: no, net worth<1M (PR doesn’t count)

Some issuers limit their 505 and 506 offerings to accredited investors in order to avoid inquiries into sophistication (in the case of 506) and affirmative disclosure obligations under 502(b)

506 is the exemption under which most hedge funds raise capital, and by limiting their offerings to accredited investors and otherwise complying with the requirements of Regulation D the funds are able to limit disclosures and operate in an environment that critics contend lacks necessary transparency

502(c): limits general solicitation or general advertising

1. Apply to all three of the Regulation D exemptions

2. You may only approach individuals with whom you have a pre-existing relationship

   1. Pre-existing relationship between offeree and broker (rather than issuer) is OK.

3. What is surprising is the extent to which 502(c) reaches more targeted communications not commonly thought to be “general solicitations”

The nature of the communication (general or limited) is going to be very fact-dependent. Websites may pose a unique problem, though

JOBS Act: 502(c)’s ban on general solicitations or general advertising does not apply to offers and sales under 506(c), provided that all purchasers are accredited investors

1. Essentially, managers will be able to engage in advertising, media broadcasts, public websites, social media, email campaigns, and any number of other marketing strategies to generate interest in their fund

2. Proposed rule change: But issuers must take reasonable steps to verify that all purchasers are accredited

504 ($1 million) and 505 ($5 million) limit the aggregate offering price on offerings within any 12-month period

1. The aggregate offering price limitations for offerings under either rule are reduced by the aggregate offering price of securities sold within the previous 12 months in reliance upon any of the §3(b) exemptions OR in violation of the registration requirements of 5(a)

Integration means that two ostensibly distinct offerings will be treated as one for purposes of determining the availability of an exemption from registration requirements different from aggregation

501(c): aggregate offering price is the sum of all cash, services, property, notes, cancellation of indebtedness, and other consideration the issuer receives for the securities

Regulation D does not impose affirmative disclosure obligations if the only purchasers are accredited investors

1. Any nonaccredited investor in a 505 or 506 offering, however, must be given specified information “a reasonable time prior to sale”

   1. In addition to required disclosure, nonaccredited investors must be given “any material written information concerning the offering that has been provided by the issuer to any accredited investor”

Non-reporting issuers having offerings larger than $2 million generally must provide extensive audited financial statements

The required disclosures for non-reporting companies are required only “to the extent material to an understanding of the issuer, its business, and the securities being offered”

502(b): requires the issuer to provide nonaccredited investors with a summary of “material written information” that has been given to any accredited investor

Resales: must wait until the offerings are settled

508 substantial compliance: provides a safeguard for “insignificant” deviations from the express terms of Regulation D if the error was made in good faith

1. It does not waive the general solicitation prohibition

2. Does not waive dollar limits

3. Does not waive 35 non-credited purchaser limit

4. Any deviation that’s waived must be a deviation not for the benefit of that particular purchaser

Crowdfunding is the collective effort of a large number of individuals who pool their resources to support a third party’s effort to achieve a stated goal or engage in a defined activity

4(a)(6): Crowdfunding exemption

1. Key requirements:

   1. Issuer’s aggregate amount sold during a 12 month period cannot exceed $1 million

   2. If the purchaser’s annual income or net worth is less than $100k, the aggregate amount sold purchaser during any 12 month period cannot exceed the greater of $2k or 5% of the purchaser’s annual income or net worth

   3. If the purchaser’s annual income or net worth exceeds $100k, the applicable limitation is 10% of annual income or net worth

   4. The transaction must be conducted through a broker or funding portal registered with the SEC

2. No investor over a 12 month period may purchase securities under...