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Securities Registration– Exemptions

Securities Registration– Exemptions. Last updated 02 Feb 11. Securities Act § 5(a) Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly --

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Securities Registration– Exemptions

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  1. Securities Registration– Exemptions Last updated 02 Feb 11

  2. Securities Act § 5(a) Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly --  "(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell or offer to buy such security through the use or medium of any prospectus or otherwise;

  3. Securities Act § 4 The provisions of section 5 shall not apply to-- (2) transactions by an issuer not involving any public offering.

  4. SEC v. Ralston-Purina (US Supreme Court 1953) IRAC • Facts • Issue • Rule (holding) • Analysis • Conclusion

  5. SEC v. Ralston-Purina (US Supreme Court 1953) “The design of the statute is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions. … “The applicability of § 4 (2) should turn on whether the particular class of persons affected needs the protection of the Act. An offering to those who are shown to be able to fend for themselves is a transaction "not involving any public offering."

  6. SEC v. Ralston-Purina (US Supreme Court 1953) “The employees here were not shown to have access to the kind of information which registration would disclose. “We agree that some employee offerings may come within § 4(2), e. g., one made to executive personnel who because of their position have access to the same kind of information that the Act would make available in the form of a registration statement .”

  7. Some hypotheticals … Happy Drilling Ltd, an oil & gas LLC, is raising money. It identifies a number of investors.  Who are qualified?

  8. Hypothetical #1 Donald is a petroleum engineer with a graduate degree in the area.  He has worth more than $5 million.  He holds an investment portfolio of $2.7 million, which includes oil and gas properties worth $850,000.  He reviews HDL's drilling logs and has access to other relevant business information.

  9. Hypothetical #2 Darleen has limited wealth and almost no investment experience, but signs the following document: Consider : Securities Act § 14

  10. Gentlemen:   _______________________ (the "Purchaser") intends to purchase the Securities from the Happy Drilling Limited Partnership (the "Seller").   For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Purchaser certifies, represents and warrants to, and covenants with, the Seller that:   1. The Purchaser understand that (a) the Securities have not been registered or qualified under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of any state, (b) the Seller is not required, and does not intend, to so register or qualify the Securities and (c) the Securities cannot be resold unless (i) they are registered and qualified under the Securities Act and applicable state securities laws or (ii) an exemption from registration and qualification is available.   2. The Purchaser (a) is a substantial, sophisticated investor having such knowledge and experience in financial and business matters, and in particular in such matters related to securities similar to the Securities, that it is capable of evaluating the merits and risks of investment in such business and the Securities, and (b) is able to bear the economic risks of such an investment.   3. The Purchaser has been furnished with, and has had an opportunity to review, all financial data and other information relating to Happy Drilling Ltd. and the Securities requested by the Purchaser. The Purchaser has had any questions arising from or relating to such review answered to the satisfaction of the Purchaser.   4. The Purchaser is acquiring the Securities for her own account and not with a view to or for sale in connection with a distribution within the meaning of Section 5 of the Securities Act.   5. If the Purchaser sells or otherwise transfers any of the Securities, the Purchaser will obtain from any subsequent purchaser the same certifications, representations, warranties and covenants contained in the foregoing paragraphs and in this paragraph.  Very truly yours,  Darlene

  11. Hypothetical #3 Doris manages Oil&Gas Fund, a $200 million mutual fund.  She has the fund invest in HDL, but never receives drilling logs, though she had requested them.

  12. Hypothetical #4 HDL offers securities under a "Employee Stock Ownership Plan" that allows any "special employee"  (that is, one who takes the initiative to ask) to purchase up to 1,000 shares a year at $5 per share.  Many employees participate including riggers, loading foremen, stenographers, office clerks, production trainees, and electricians. ESOPs today! • Non-public companies See Rule 701 • Public companies See Form S-8

  13. Regulation D E-B Corp., a mail-order furniture retailer, is looking to expand its business to the Internet.  It wants $6 million in new capital. First Lynch, E-B’s investment banker, has identified 25 investors. Can this offering be done without a formal disclosure document? Unsophisticated Sophisticated E-B Corporation

  14. Regulation D – the basics

  15. Regulation D – the basics

  16. Accredited investors? • Ivan, a home builder, will have his bank buy the stock.  See Rule 501(a)(1). • Iris, E-B's VP for sales, has no investment experience or financial background.  See Rule 501(a)(1) / Rule 501(f) • Imelda, who owns a $1.3 million collection of shoes, will buy.  See Rule 501(a)(5) [and introductory sentence]. • A venture capital firm with $4 million in assets.  See Rule 501(a)(2). • A state pension fund, with assets of $30 million, run by a political yahoo.  See Rule 501(a)(1). • A "dink" couple:  she's a doctor and he's a lawyer each with income last year of $160,000.  See Rule 501(a)(6). • First Lynch fails to get documentation on the "dink" couple.  See Rule 501(a)(1) [introductory sentence].

  17. Marketing OK? E-B plans to send an investment package (cover letter, offering circular and reply card) to the following potential investors.  In each case, E-B will only sell to accredited investors. See Rule 502(c) • All North Carolina physicians and lawyers with a full-time practice. • All chief executives of companies (128 of them) that are members of the NC Furniture Manufacturing Association. • FL’s customers who had invested or indicated prior interest in mail-order or furniture company investments.

  18. Failure to file? E-B fails to notify the SEC of its Rule 505 offering.  What effect?  See Rule 503

  19. The end

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