Exempt Transactions - Securities Regulation

Exempt Transactions

1. In General

   1. § 4 provides for Transaction Exemptions (except § 3(a)(11) is actually a transaction exemption)

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

      2. Securities placed under one of these exemptions remain subject to both the '33 Act and the '34 Act AND cannot be resold unless either they are registered pr another exemption applies to the resale.

   2. § 3 provides for Exempt Securities (except § 3(a)(11) of which is a transaction exemption)

      1. Exempt securities need not be registered.

      2. Exempt securities can be resold free of registration burdens.

      3. Exempt securities nonetheless remain subject (to varying degrees) to the anti-fraud provisions of the '33 Act and the '34 Act

2. § 4(1)

   1. § 4(1) exempts transaction by everyone except transactions by an "an issuer, underwriter, or dealer."

      1. See "The Underwriter Concept" below.

3. Intrastate Offerings

   1. § 3(a)(11) of the '33 Act exempts:

      1. Any security which is 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.

   2. Scope of the Exemption

      1. "A basic condition of the exemption is that the entire issue of securities be offered and sold exclusively to the residents of the state in question." Securities Act Release No. 4434 (pg. 255)

         • "[A]n offer to a nonresident which is considered a part of the intrastate issue will render the exemption unavailable to the entire offering." Securities Act Release No. 4434 (pg. 255)

      1. "Whether an offering is 'part of an issue' . . . is a question of fact and depends essentially upon whether the offerings are a related part of a plan or program. . . ." Securities Act Release No. 4434 (pg. 255)

         • "Thus, the exemption should not be relied upon in combination with another exemption for the different parts of a single issue where a part is offered or sold to nonresidents." Securities Act Release No. 4434 (pp. 255-56)

      2. "[T]he phrase 'sold only to persons resident cannot refer merely to the initial sales by the issuing corporation to its underwriters, or even the subsequent resales by the underwriters to distributing dealers." Securities Act Release No. 4434 (pg. 256)

         • "[I]t is necessary that the entire issue of securities shall be offered and sold to, and come to rest in the hands of residents within the state." Securities Act Release No. 4434 (pg. 256)

         • "If any part of the issue is offered or sold to a nonresident, the exemption is unavailable not only for the securities so sold, but for all the securities forming a part of the issue, including those sold to residents. . . ." Securities Act Release No. 4434 (pg. 256)

      3. "[T]he requirement that the issuer be doing business in the State can only be satisfied by the performance of substantial operational activities in the State of incorporation." Securities Act Release No. 4434 (pg. 256); see also Chapman v. Dunn ("[T]he issuer must offer and sell his securities only to persons resident within a single State and the issuer must be a resident of the same State. In addition to this, the issuer must conduct a predominant amount of his business within the same State. . . .")

         • "The doing business requirement is not met by functions in the particular State such as bookkeeping, stock record and similar activities or by offering securities in the State. . . ." Securities Act Release No. 4434 (pg. 256)

         • "If the proceeds of the offering are to be used primarily for the purpose of a new business conducted outside the State of incorporation and unrelated to some incidental business locally conducted, the exemption should not be relied upon. . . ." Securities Act Release No. 4434 (pg. 256); see also SEC v. McDonald Investment (concluding that the exemption was not available where the issuer sells to Minnesota residents and the proceeds will be used to make loans to land developers outside Minnesota)

           • "The issue is . . . whether subsequent proceeds are to be employed in that same state. . . ." Busch v. Carpenter (pg. 258)

         • "So also, [the] exemption should not be relied upon for each of a series of corporations organized in different States where there is in fact and purpose a single business enterprise or financial venture whether or not it is planned to merge or consolidate the various corporations at a later date. . . ." Securities Act Release No. 4434 (pg. 256)

      4. The exemption "requires that the entire issue be confined to a single State in which the issuer, the offerees and the purchasers are residents." Securities Act Release No. 4434 (pg. 256)

         • "The mere presence in the State is not sufficient to constitute residence as in the case of military personnel at a military post. . . ." Securities Act Release No. 4434 (pg. 256)

      5. "A secondary offering by a controlling person in the issuer's State of incorporation may be made in reliance on [the exemption] provided the exemption would be available to the issuer for a primary offering in the State." Securities Act Release No. 4434 (pg. 256)

         • "It is not essential that the controlling person be a resident of the issuer's State of incorporation." Securities Act Release No. 4434 (pg. 256)

      6. "[I]f 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." Securities Act Release No. 4434 (pg. 257)

         • "[T]he exemption is applicable only if the entire issue is distributed pursuant to the statutory conditions." Securities Act Release No. 4434 (pg. 257)

         • "This is not to suggest, however, that securities which have actually come to rest in the hands of resident investors . . . may not in due course be resold by such persons, whether directly or through dealers or brokers, to nonresidents without in any way affecting the exemption. . . ." Securities Act Release No. 4434 (pg. 257)

         • "If the securities are resold but a short time after their acquisition to a nonresident[,] this fact, although not conclusive, might support an inference that the original offering had not come to rest in the State, and that the resale therefore constituted a part of the process of primary distribution; a strong inference would arise if the purchaser involved were a security dealer." Securities Act Release No. 4434 (pg. 257)

           • Securities that have actually come to rest in the hands of resident investors who purchased without a view to resales to nonresidents may be resold without jeopardizing the exemption. Securities Act Release No. 4434 (pg. 260)

   3. Rule 147 Safe Harbor

      1. Rule 147 provides for a safe harbor with respect to the resale of securities by any person where there has been a holding period of nine months such that the resale will not be considered a part of the issue. Rule 147(e) (pg. 260)

         • THUS such a person who has held the security for nine months can resell to nonresidents without causing the intrastate exemption to be lost.

         • Rule 147(e) provides that "[d]uring the period in which securities that are part of an issue are being offered and sold by the issuer, and for a period of nine months from the date of the last sale by the issuer of such securities, all resales of any part of the issue, by any person, shall be made only to persons resident within such state or territory." (Stat. Supp. pg. 87)

         • Prior to this rule, an early operating rule of thumb was that a one-year holding period establishes a presumption of investment intent. See Brooklyn Manhattan Transit Corp., 1 S.E.C. 147 (pg. 260)

      2. Integration: The determination of what constitutes "part of an issue" (i.e., what should be integrated) is governed by the following FACTORS

         • (1) Are the offerings part of a single plan of financing;

         • (2) Do the offerings involve issuance of the same class of security;

         • (3) Are the offerings made at or about the same time;

         • (4) Is the same type of consideration to be received;

         • (5) Are the offerings made for the same general purpose.

           • Exchange Act Release No. 5450 (pg. 263)

         • BUT, there is a safe harbor in Rule 147(b)(2) whereby if an issuer offers the same class of securities more than six months after the first offering, the new issuance will not be deemed part of the issue.

      3. The Commission has generally deemed intrastate offerings to be integrated with those registered or private offerings of the same class of securities made at the same time.

         • NOTE from Rule 147: "In the event that securities of the same or similar class as those offered pursuant to the rule are offered, offered for sale or sold less than six months prior to or subsequent to any offer, offer for sale or sale pursuant to this rule . . . as to which offers, offers to sell, offers for sale, or sales are part of an issue." (Stat. Supp. pg. 86)

      4. The doing business requirements are viewed strictly

         • (1) The business should be located within the state and the principal or predominant business must be carried on there. See Rule 147(c)(2)(i) (providing for a requirement that at least 80% of its gross revenue be derived from the state)

         • (2) Substantially all of the proceeds of the offering must be put to use within the local area.

      5. Rule 147 may be lost if the issuer inadvertently deviates from its requirements, even if the departure is "innocent and immaterial."

      6. Although the preliminary notes to Rule 147 provide that the "rule...