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Securities Act Secondary Distributions. Rule 144A Coverage Resales of “restricted shares” Offers/sales only to “qualified institutional buyers” Brokers facilitating resales Conditions: Notice to purchasers Non-fungibility Disclosure. (last updated 27 Mar 08). Practitioner’s Query.

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Securities Act Secondary Distributions


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    1. Securities Act Secondary Distributions Rule 144A Coverage Resales of “restricted shares” Offers/sales only to “qualified institutional buyers” Brokers facilitating resales Conditions: Notice to purchasers Non-fungibility Disclosure (last updated 27 Mar 08)

    2. Practitioner’s Query Certain "Offered Warrants" (among other securities) are registered on an S-3 "for resale" by Selling Holders. Selling Holder "A" resells Offered Warrants to Selling Holder "B“ – a possibility not mentioned in the prospectus. Selling Holder "B" is part of control group. Hence, these are control securities in B's hands even though resale restrictions were supposedly "cleansed" by the resale registration.  Is current registration useless if B resells? Must transfer agent place a restrictive legend upon the warrant certificates delivered to B? Am I missing something here? Or is it possible that the resale registration also covers the resale by B?  Patrick Daugherty seclawyer@aol.com Patrick Daugherty partner Foley & Lardner {} Best Lawyers in America America's Leading Business Lawyers("top of the class for capital raising”)

    3. What is a “Rule 144A offering” ….

    4. Trading market Institutional Investor Broker Institutional Investor Broker Institutional Investor Broker Institutional Investor Firm-commitmentunderwriting Best-effortsunderwriting Institutional Investor Broker Underwriter Underwriter Purchaser Restricted securities Issuer

    5. § 4 Exempted transactions    The provisions of section 5 shall not apply to--     (1) transactions by any person other than an issuer, underwriter, or dealer.     (2) transactions by an issuer not involving any public offering. § 2(a)(11) Definitions The term "underwriter" means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security … As used in this paragraph the term "issuer" shall  include, in addition to an issuer, any [control person].

    6. Rule 144A (b) Sales by persons other than issuers or dealers. Any person, other than the issuer or a dealer, who offers or sells securities in compliance with the conditions set forth in paragraph (d) of this section shall be deemed not to be engaged in a distribution of such securities and therefore not to be an underwriter of such securities … (c) Sales by Dealers. Any dealer who offers or sells securities in compliance with the conditions set forth in paragraph (d) of this section shall be deemed not to be a participant in a distribution of such securities within the meaning of section 4(3)(C) of the Act and not to be an underwriter …, and such securities shall be deemed not to have been offered to the public within the meaning of section 4(3)(A) of the Act [statute].

    7. Rule 144A (d) Conditions to be met. • securities offered/sold only to QIB or reasonably believed to be QIB • seller (and broker) take reasonable steps to ensure that purchaser aware relying on Rule 144A • securities not of same class as securities listed on US stock exchange or Nasdaq • for non-reporting issuer, exempt foreign issuer, or foreign government, Rule 144A holders and prospective purchasers can obtain from issuer, upon request: • “very brief” statement about issuer and business • issuer's most recent balance sheet, P&L and retained earnings statements for last 2 fiscal years

    8. Some hypotheticals …(4 hypotheticals and thought problem)

    9. Hypotheticals #1-4 Island Tours wants to raise additional capital to expand its operations internationally to provide tours in Aruba and the Maldives. Island Tours’ common stock has traded on Nasdaq since its IPO three years ago. Skipper, the CEO of Island Tours, does not want to expose the company (or himself) to potential § 11 liability from the offering.

    10. Hypothetical #1 Island Tours proposes to sell $50 million of a new class of preferred stock to about ten large mutual funds. Island Tours cold calls 100 mutual funds (assume that these are QIBs) as potential purchasers and provides each mutual fund with some basic information on Island Tours and three years worth of audited financials. Can Island Tours offer and sell to the mutual funds under Rule 144A?

    11. Hypothetical #2 Island Tours hires Goldbucks Brothers to act as its selling agent. Through Goldbucks Brothers, Island Tours sells $50 million of a new class of preferred shares to ten accredited purchasers under Rule 506. Lovey, one of the accredited purchasers, bought $1 million in the offering. Two days after the offering, Lovey cold calls Fidelity (a qualified institutional buyer) and Fidelity agrees to purchase all of her preferred shares in Island Tours. Is this okay? sell Accreditedinvestor Accreditedinvestor Lovey Reg D Island Tours Not current ’34 Act filing

    12. Hypothetical #3 Lovey sells to Fidelity three months after she purchases the securities from Island Tours. Fidelity in turn sells the securities to Vanguard (also a QIB) the next week. What if Fidelity sells the securities to the Professor, an academic with a net worth of $900,000, the next day in a transaction (without involving a broker)? Accreditedinvestor Accreditedinvestor Lovey Reg D Island Tours

    13. Hypothetical #4 ?? Nasdaq Instead of a preferred stock offering, Island Tours places $10 million of its common stock with ten accredited investors (including Lovey). The offering is exempt under Rule 506. Lovey wants to sell $1 million of the common stock she purchased in the Rule 506 offering to Fidelity (a QIB) under Rule 144A? Accreditedinvestor Accreditedinvestor Lovey Reg D Island Tours

    14. Thought problem …

    15. Compare the following … Ten years ago Fraud-By-Mail (FBM) placed $5 million common shares under Rule 505. FBM is a small non-reporting company with an active policy of not disclosing any information to the market or to broker-dealers. Last month International Business Machines (IBM) places $5 million common shares under Rule 505. IBM is a large reporting company, with an active NYSE following. Which shares are liquid? Does this make sense?