Chapter 5

 

SECURITIES REGISTRATION EXEMPTIONS

 

A. SMALL ISSUERS

 

Small issuers, attempting to sell not more than $5 million of securities, can have a public offering by filing a notification with the Securities and Exchange Commission pursuant to Regulation A.[1] This notification will include an offering circular and exhibits.[2]

B.     EMPLOYEE OFFERINGS

 

It is important for small businesses to be able to offer securities to employees as investment incentive programs.[3] It is likewise important that the company give such employees full disclosure about its business, including any established pension plans.[4]

 

C.     INTRASTATE OFFERINGS

 

An issuer of securities can avail itself of an intrastate exemption from registration for a public offering by selling the securities only to residents of a single state.[5] All of the purchasers must be actual residents of that state and the issuer must conduct at least 80% of its business within such state of the investors.[6]

 

SECTION 3(a)(11) OF THE SECURITIES ACT OF 1933, 15 U.S.C. 77c(a)(11) (1988)

SEC RULE 147, 17 C.F.R. 230.147 (1990)

D.     PRIVATE OFFERINGS

 

An issuer can rely on an exemption from registration for the sale of securities not involving a public offering.[7] This will allow a private placement of securities by an issuer who sells to a limited number of investors without any general advertising or mass solicitation of investors.[8]

 

SECTION 4(2) OF THE SECURITIES ACT OF 1933, 15 U.S.C. 77d(2) (1988)

 

SEC v. RALSTON PURINA CO., 346 U.S. 119 (1953)

 

NONPUBLIC OFFERING EXEMPTION, Securities Exchange Act Release No. 33-4552 (November 6, 1962)

 

In 1974, Rule 146 provided a safe harbor for private placements.[9] In 1978, an amendment to this safe harbor rule required a notice filing with the SEC.[10]

 

SEC REGULATION D, 17 C.F.R. 230.501-.508 (1990)

 

SEC RULE 215, 17 C.F.R. 230.215 (1990)

 

SEC RULE 152, 17 C.F.R. 230.152 (1990)

 

E.      SECONDARY SALES

 

SECTION 4(1) OF THE SECURITIES ACT OF 1933, 15 U.S.C. 77d(1) (1988)

SECTION 15 OF THE SECURITIES ACT OF 1933, 15 U.S.C. 77o(15) (1988)

Since investors who purchase securities from an issuer in an unregistered offering have restrictions against resales, these investors must usually hold such securities indefinitely.[11] In addition, if an investor is a controlling person or an underwriter by definition, a resale is very difficult to accomplish.[12] Over the years, a mechanism devised by securities attorneys provided for such resales by a Section 4(1-1/2) exemption.[13] This was not an actual exemption, since there is obviously not a Section 4(1-1/2) in the Securities Act of 1933.[14] This was a procedure whereby an investor who had held restricted securities for quite a while could sell such restricted securities to a purchaser who would, in turn, agree to hold the securities indefinitely subject to the same restrictions on resale.[15] Such an investor would become a substitute investor, but would then be subject to a very long additional time of holding the securities before even considering any additional restricted resale.[16]

Investors who purchase restricted securities in an unregistered offering must hold the securities until such time as the issuer might file for a registration with the Securities and Exchange Commission and allow the investors to include the restricted securities in the registration.[17] Rule 144[18] allows many of those investors to sell restricted securities pursuant to an exemption from registration, provided a necessary holding period exists and subject to limitations on the amount of the sales of securities within a given period of time.[19]

Rule 144A[20] allows certain qualified institutional buyers to sell restricted securities pursuant to an exemption from registration.

SEC RULE 144, 17 C.F.R. 230.144 (1990)

 

SEC RULE 144A, 17 C.F.R. 230.144A (1990)

2000 Harry Stansbury

 

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[1] 15 U.S.C. 77c(b) (1988); 17 C.F.R. 230.251-.264 (1990).

[2] See LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 309-13 (2d ed. 1988); Ezra Weiss, Regulation A Under the Securities Act of 1933 - Highways and Byways, 8 N.Y. L.F. 3, 40-115 (1962); Ezra Weiss, Highways and Byways Revisited, 15 N.Y. L.F. 218, 251-68 (1969); Guy P. Lander, SEC Adopts Guidelines on Raising Capital, N.Y. L.J., Dec. 7, 1992, at 9.

 

[3] See DAVID R. HERWITZ, BUSINESS PLANNING 273-87 (1966); Stephen J. Friedman, The Securities Act of 1933 and Employee Compensation Plans, in FOURTH ANNUAL INSTITUTE ON SECURITIES REGULATION 353, 354-56 (Robert H. Mundheim, Arthur Fleischer, Jr. & John D. Schupper eds., 1973).

 

[4] See, e.g., ROBERT C. POZEN, FINANCIAL INSTITUTIONS: INVESTMENT MANAGEMENT 627-51 (1978); Robert C. Clark, The Four Stages of Capitalism: Reflections on Investment Management Treatises, 94 Harv. L. Rev. 561, 571-73 (1981); James J. Junewitz, Portfolio Theory and Pension Plan Disclosure, 53 N.Y.U. L. Rev. 1153, 1155-60 (1978).

[5] 15 U.S.C. 77c(a)(11) (1988); 17 C.F.R. 230.147 (1990); SEC Securities Act Release No. 5450 (Jan. 7, 1974), reprinted in 3 SEC DOCKET 349 (1974).

 

[6] See LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 295-305 (2d ed. 1988).

[7] 15 U.S.C. 77d(2) (1988); 17 C.F.R. 230.501-.508 (1990); SEC Securities Act Release No. 6389 (Mar. 8, 1982), reprinted in 24 SEC DOCKET 1166 (1982).

[8] See MOIRA JOHNSTON, TAKEOVER 151-52 (1986); LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 317-50 (2d ed. 1988); Marc H. Morgenstern, Private Placement Guidelines - A Lawyer's Letter to a First-Time Issuer, 48 Bus. Law. 257, 259-76 (1992); see also Robert McGough, Money to Burn, FW, June 26, 1990, at 18.

 

[9] 17 C.F.R. 230.146 (1981); SEC Securities Act Release No. 5487 (Apr. 23, 1974), reprinted in 4 SEC DOCKET 154 (1974); see Jerry C. Paradis, Safe Harbor for the Non-Public Sale of Securities - Rule 146, 22 La. B.J. 167, 173-77 (1974); Robert L. Frome, `Continental Tobacco' Decision Analyzed, N.Y. L.J., Mar. 7, 1977, at 1; see, e.g., SEC v. Continental Tobacco Co. of South Carolina, 463 F.2d 137 (5th Cir. 1972); Hill York Corp. v. American Int'l Franchises, Inc., 448 F.2d 680 (5th Cir. 1971).

[10] SEC Securities Act Release No. 5912 (Mar. 3, 1978), reprinted in 14 SEC DOCKET 306 (1978).

[11] . See RICHARD W. JENNINGS & HAROLD MARSH, JR., SECURITIES REGULATION 504-07 (6th ed. 1987).

[12] See A.A. Sommer, Jr., Who's "In Control"? ‑ S.E.C., 21 Bus. Law. 559, 559-62 (1966).

[13] See Carl W. Schneider, Section 4(1-1/2) ‑ Private Resales of Restricted or Control Securities, 49 Ohio St. L.J. 501, 501-14 (1988); Lawrence R. Seidman, Comment, SEC Rule 144A: The Rule Heard Round the Globe - Or the Sounds of Silence?, 47 Bus. Law. 333, 334-36 (1991).

[14] See LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 375-76 (2d ed. 1988).

 

[15] See 3 LOUIS LOSS & JOEL SELIGMAN, SECURITIES REGULATION 1499-1502 (3d ed. 1989).

[16] See DAVID L. RATNER, SECURITIES REGULATION 317-40 (3d ed. 1986); Stephen Glover, Good Intentions in a Bad Economy, Legal Times, Dec. 31, 1990, at 20.

 

[17] See LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATION 365-66 (2d ed. 1988).

 

[18] 17 C.F.R. 230.144 (1990); SEC Securities Act Release No. 5223 (Jan. 11, 1972); see James F. Olson, SEC Makes Unheralded Changes in Rule 144 On Sales Volume, Manner, Legal Times of Wash., Oct. 2, 1978, at 14.

 

[19] See 3 LOUIS LOSS & JOEL SELIGMAN, SECURITIES REGULATION 1502-75 (3d ed. 1989).

 

[20] 17 C.F.R. 230.144A (1990); SEC Securities Act Release No. 6862 (Apr. 23, 1990), reprinted in 46 SEC DOCKET 26 (1990); see Simon Brady, Evolution, Not Revolution, Euromoney, June 1990, at 47.