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Securities Act Registration Exemptions

Securities Act Registration Exemptions. Intrastate offering - §3(a)(11) “part of issue” “only to residents within a single state” “issuer doing business within such state” Rule 147: safe harbor. (last updated 27 Feb 13). Regulation A.

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Securities Act Registration Exemptions

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  1. Securities Act Registration Exemptions Intrastate offering - §3(a)(11) “part of issue” “only to residents within a single state” “issuer doing business within such state” Rule 147: safe harbor (last updated 27 Feb 13)

  2. Regulation A

  3. * N/A – if offering state-registered or subject to state exemption for accredited investors ** Non-accredited must be sophisticated or have purchaser rep *** amended by Dodd-Frank // **** amended by JOBS Act

  4. Use of Reg D (2008-2010) * Based on sample of 1,000 Reg D offerings ** Extrapolated from 2005-2011 data (23/year)

  5. Use of Reg D (2008-2010) * Based on sample of 1,000 Reg D offerings

  6. When would you useintrastate offering?

  7. Compare §4(2) to §3(a)(11) and Rule 147 safe harbor …

  8. (*) State blue sky laws

  9. § 3(a) Exempted securities (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.

  10. And the intrastate exemption details …(5 hypotheticals)

  11. Hypothetical #1 E-B Corp, a furniture retailer planning to expand to online sales, wants to raise $5 million in a stock offering. Management thinks there will be enough investor interest in North Carolina to do the deal.  E-B is incorporated in North Carolina; its showroom, warehouse and order center are in North Carolina. Identify problems: • E-B buys 60% of its furniture from North Carolina manufacturers.  Most of its orders come from out-of-state buyers. • E-B will use the proceeds of the offering to build a new warehouse in South Carolina and to create an order center in High Point.

  12. (*) State blue sky laws

  13. Hypothetical #2 While pursuing its in-state offering, E-B looks for other sources of financing: • a VC firm from California that will buy $2 million in common stock, but not as part of the North Carolina offering • Edgar (E-B’s CEO) lines up his wealthy uncle, Senator Jim, who lives in North Carolina to buy $1 million of Edgar's own personal holdings in E-B

  14. Rule 147(b)(2) For purposes of this rule only, an issue shall be deemed not to include offers … or sales of securities of the issuer pursuant to the exemption provided by section 3 or section 4(2) of the Act or pursuant to a registration statement filed under the Act, that take place prior to the six month period immediately preceding or after the six month period immediately following any offers, offers for sale or sales pursuant to this rule, … Introduction to Rule 147: … in determining whether offers and sales should be regarded as part of the same issue and thus should be integrated any one or more of the following factors may be determinative:     (i)  Are the offerings part of a single plan of financing;     (ii)  Do the offerings involve issuance of the same class of securities;     (iii) Are the offerings made at or about the same time;     (iv)  Is the same type of consideration to be received; and     (v)  Are the offerings made for the same general purpose.

  15. Rule 147 The rule provides an exemption for offers and sales by the issuer only. It is not available for offers or sales of securities by other persons. Section 3(a)(11) of the Act has been interpreted to permit offers and sales by persons controlling the issuer, if the exemption provided by that section would have been available to the issuer at the time of the offering. See Securities Act Release No. 4434.

  16. Hypothetical #3 First Lynch Securities will be a “firm commitment” (somewhat unusual) underwriter for E-B’s intrastate offering.   • First Lynch is a regional securities firm, incorporated in Delaware with its headquarters in Atlanta. • First Lynch will mail offering circulars to selected in-state investors and follow up with phone calls by reps working in First Lynch’s Charlotte office.

  17. Hypothetical #4 First-Lynch distributes the E-B offering circular to various investors. Problems?   • Ann, a doctor whose office is in Charlotte, actually resides in South Carolina. • Ginny, who recently moved to Virginia, gives a notarized promise to be subject to North Carolina jurisdiction. • Carl spends 6 months each year in Hilton Head, SC -- his mailing address remains in North Carolina. • First Lynch has its customers fill out a form stating they are NC residents and attaching a photo-copy of their NC driver's license.

  18. (*) State blue sky laws

  19. Hypothetical #5 In October Carl buys 1000 shares in the offering.   • In April Carl's daughter is admitted to a prestigious private law school.  To raise cash for this emergency, Carl sells his shares to Ginny in Virginia. • Advise E-B what precautions it should take to avoid Securities Act registration and the liability “put” exposure under § 12(a)(1).

  20. The end

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