UNREGISTERED OFFERINGS OF CORPORATE SECURITIES
Mary E. T. Beach
May 2002 All Rights Reserved
I. Statutory Exemptions from the Registration Requirement and Exemptive Authority
A. Section 4(2) provides an exemption from the provisions of Section 5 for "transactions by an issuer not involving any public offering."
1. The so-called "private offering exemption" developed over the years through interpretations by the Commission and court cases.
2. Through a series of cases the requirement for "sophisticated persons" with "access to the information that would be included in a registration statement" was developed in addition to a simple numbers test.
3. In an attempt to introduce certainty into the area the Commission adopted Rule 146.
4. Rule 506 under Regulation D replaced Rule 146 and is intended to clarify and improve that Rule.
B. Section 3(a)(ll) provides an exemption from the registration requirements for any offer or sale of securities to residents of a single state by an issuer who resides in or is incorporated in the same state and does business in that state.
1. Statutory Provision
a. The "intrastate exemption" has three major components:
(1) The issuer must be doing business within the state, which has been interpreted to mean having substantial operational activities in the state;
(2) All offers and sales must be to residents of the state;
(3) The securities which are sold must "come to rest" in the hands of investors who are resident in the state.
b. The interpretation of the statutory language establishing the exemption has developed over the years through court cases and Commission releases. In an attempt to provide some certainty for those who wished to rely on the exemption, the Commission adopted Rule 147.
2. Rule 147
a. The Rule was adopted to provide more certainty in determining the parameters of the Section 3(a)(11) exemption.
b. To qualify under the Rule, the issuer must at the time of any offers and sales, be a person resident and doing business within the state.
c. Rule 147 also requires that the offerees and purchasers be residents of the state of the offering.
d. No resales may be made outside the state for a period of at least nine months after the date of the last sale.
e. No filing requirement exists to claim the exemption.
C. Section 4(6):
1. The Small Business Investment Incentive Act of 1980 creates an exemption under Section 4 of the Securities Act for transactions involving offers and sales of securities by an issuer solely to one or more "accredited investors" provided that:
a. The aggregate offering price does not exceed the amount allowed under Section 3(b) of the Securities Act;
Note: Unlike Rules 504 and 505 discussed below, the dollar limitation (currently $5 million) is not for a 12 month period, but is an offering limitation. Thus offerings aggregating more than $5 million can be made during a 12 month period relying on this exemption assuming no integration problems. Also unlike Rules 504 and 505, other offerings made in reliance on a Section 3(b) exemption do not have to be considered in calculating the dollar limitation.
b. No advertising or public solicitation is permitted;
c. Every issuer is required to file a notice-of-sales form to be used by any issuer
selling securities in reliance on the exemption. Form D serves as a notice-of- sales form under Section 4(6).
D. Section 3(b) grants the Commission authority to adopt special exemptions for issues of securities not exceeding $5 million. Rules 504 and 505 of Regulation D, Regulation A, Rule 701 and Rule 1001 were adopted pursuant to this authority.
E. On October 11, l996, the "National Securities Markets Improvement Act of 1996" ("the '96 Act"), became law. Pursuant to that Act, a new Section 28 was added to the Securities Act. This section provides the Commission with general rulemaking authority to exempt any person, security or transaction from the registration provisions of the Securities Act to the extent that such exemption is appropriate in the public interest and is consistent with the protection of investors. The Commission does not have the power to grant exemptions from the antifraud provisions of the Securities Act.
Prior to the adoption of Section 28, the Commission’s ability to exempt transactions from the registration requirements was limited primarily to the power granted under Section 3(b) to exempt issues up to $5 million. With the adoption of Section 28, it would seem that Section 3(b) loses most, if not all, of its importance. All of the exemptions adopted under Section 3(b) can now be adopted under Section 28 and the previous $5 million limitation on the size of the offering is not required. Therefore, the dollar limits on Rules 504 and 505, Regulation A and Rule 701 can all be raised to any number that the Commission believes is appropriate. New exemptions without dollar limitations could also be adopted by the Commission in the future. To date, the Commission has not adopted any new rules pursuant to the powers granted to it under Section 28. Some changes in the dollar limitations under Rule 701 have been made, relying on the new exemptive powers.
II. Regulation D - Rules Governing the Limited Offer and Sale of Securities Without Registration Under the Securities Act of 1933.
A. Overview of Regulation D (Rules 501 through 508)
1. The Regulation became effective on April 15, 1982 and replaced old Rules 240, 242 and 146. It has since been amended on November 19, 1982, October 2, 1986, March 3, 1988, March 14, 1989, July 30, 1992, and April 28, l993.
2. The Rule provides exemptions for three categories of limited offerings:
a. Offerings by non-reporting companies of less than $1,000,000 in a twelve month period. Blank check companies and investment companies may not rely upon Rule 504 (Rule 504).
b. Offerings by any issuer of less than $5 million in a twelve month period to an unlimited number of accredited investors plus 35 additional persons. An issuer could be disqualified from using the Rule if it or its affiliates or certain other persons associated with the offering were the subject of certain administrative, civil or criminal actions. Investment companies are precluded from relying upon Rule 505 (Rule 505).
c. Offerings of any amount by any issuer to an unlimited number of accredited investors plus 35 sophisticated persons. (Rule 506)
Note: Regulation T of the Federal Reserve Board imposes restrictions on the extension of credit by brokers and dealers in the sale of securities. Regulation T provides an exemption from these provisions for the arrangement of credit in a sale of securities that is exempt from the registration requirements of the Securities Act under Section 4(2). The Federal Reserve Board has expressed the view that the exemption from Regulation T is available for offerings in reliance on Rules 505 and 506 and not Rule 504. See Letters from Laura Homer, Securities Credit Officer, Board of Governors of the Federal Reserve System to Ardith Eymann, Esq., Chief Counsel, Division of Market Regulation, Securities and Exchange Commission, dated April 10, 1982; and to Mrs. Mary E. T. Beach, Associate Director, Division of Corporation Finance, Securities and Exchange Commission, dated January 8, 1982.
3. Rule 501 defines "accredited investor" and other terms used in the regulation; Rule 502 sets forth the information requirements under each of the exemptions; and Rule 503 describes the notice requirement that is applicable to each of the exemptions.
4. Regulation D is intended to be the basis for a Federal/state uniform exemption. In September 1983, the North American Securities Administrators Association (NASAA) endorsed a uniform limited offering exemption ("ULOE") based on Rules 501, 502, 503, 505 and 506 with some modifications. Subsequent amendments to Regulation D were made a part of ULOE by resolutions adopted by NASAA on April 22, 1988 and April 29, 1989.
B. Preliminary Notes -- Regulation D contains seven preliminary notes.
1. The first preliminary note reminds issuers that Regulation D offerings, although exempt from Section 5 of the Securities Act, are not exempt from anti-fraud or civil liability provisions of the Federal securities laws. The note also reminds issuers of their obligation to furnish whatever material information may be needed to make the required disclosure not misleading.
2. The second preliminary note underscores an issuer's obligation to comply with applicable state law. The note specifically refers to three anticipated areas of differences between Federal and state law:
a. State laws and regulations related to registration of persons involved in the offer of securities pursuant to Regulation D.
b. Provisions to disqualify issuers and other persons associated with offerings based on state administrative order or judgments in addition to the disqualification provisions included in Rule 505 based on Federal administrative orders and civil actions.
c. Specific requirements relating to the filing of notices of sale with the State.
3. The third preliminary note makes clear that reliance on any particular exemption in Regulation D does not act as an exclusive election. An issuer may always claim the availability of any other applicable exemption.
4. The fourth preliminary note specifies that Regulation D is available only to an issuer and not to its affiliates or others for resale.
Note: Regulation D is thus not available for firm commitment underwritten offerings.
5. The fifth preliminary note indicates that Regulation D is available for business combinations.
6. The sixth preliminary note provides that even though there is technical compliance with the Regulation, if an offering is part of a plan or scheme to evade the registration requirements, the Regulation is not available.
Note: (1) As an example, the definition of accredited investor includes directors, but if an issuer elected several directors in order to sell to these persons as accredited investors, the exemptions provided by the regulation would not be available.
(2) The staff, however, will not express a view on whether a particular transaction is or is not part of a plan or scheme to evade the registration requirements of the '33 Act since such a determination would depend upon the facts and circumstances of each case. See letter to Sorento, Inc. dated April 4, 1984.
7. The seventh preliminary note discusses a simultaneous overseas offering with a domestic Regulation D securities offering. In such a case, offers and sales to the foreign purchasers would not be integrated with the domestic Regulation D offering if the securities come to rest overseas. But, if the issuer wishes to rely upon the protection of the safe harbor for offers and sales to foreign investors, the issuer must fully comply with the requirements of Regulation D as to both domestic and foreign purchasers.
C. Rule 501 sets forth alphabetically definitions that apply to the entire regulation.
1. The definition of accredited investor includes eight categories of investors. The introductory language provides that any person who falls within one of the eight categories, or who the issuer reasonably believes falls within one of the categories is an accredited investor.
Note: (1) This formulation permits someone who in fact falls within one of the categories to qualify as an accredited investor even if the issuer had no reasonable basis for believing such person was an accredited investor.
(2) An investor is accredited if he falls into one of the enumerated categories "at the time of the sale of securities to that person," regardless of a later change in status of the person after the sale of securities, such as resignation by the purchaser from a position as a director of the issuer.
(3) "Reasonably believes" is a factual determination and the steps that must be taken to establish reasonable belief may vary with the circumstances of each case.
a. The first category of accredited investors is institutional investors. Rule 501(a)(1) repeats the listing of institutions included in Section 2(15)(i) of the Securities Act of 1933 which are banks, insurance companies, registered investment companies, and business development companies. In addition, savings and loan associations and similar institutions (e.g., credit unions) along with registered broker dealers purchasing for their own accounts are also given accredited status. Furthermore, the statute provides that only employee plans under ERISA advised by a bank, insurance company or registered investment advisor can qualify as an accredited investor. The definition in Rule 501(a)(1), however, extends accredited investor status to any employee plan under ERISA which is advised by a savings and loan association or which has total assets of at least $5 million or if the plan is self directed, with investment decisions made solely by accredited investors, and to plans established and maintained by the governments of the states and their political subdivisions, as well as their agencies and instrumentalities for the benefit of their employees if they have total assets in excess of $5 million.
Note: (l) A trust having a bank as a co-trustee is an accredited investor as interpreted under Rule 501(a)(1) so long as the bank is "acting" in its fiduciary capacity on behalf of the trust. See letter re Nemo Capital Partners L.P. dated March 11, 1987.
(2) Participants in pension and profit-sharing trusts qualified under Section 401 of the Internal Revenue Code may be deemed the purchaser for purposes of a sale of securities to the Plan where: a) the plan provides for segregated accounts for each plan participant; (b) the plan documents provide the participant with the power to direct the trustee to make each particular investment to the extent of the participants voluntary contributions plus that portion of employer contributions that have vested to the participant's benefit; and (c) the particular investment is made pursuant to an exercise by the participant of the power to direct the investments of his or her account in the plan trust. See letter re Diane P. Weiss dated December 21, 1983.
(3) U.S. branches or agencies of foreign banks whose securities are exempt under Section 3(a)(2) of the Securities Act are "accredited investors." See letter re Lawrence R. Uhlick dated January 4, 1989.
(4) An offering of shares of common stock to a credit union regulated under state law but not subject to the Federal Credit Union Act is an offering to an "accredited investor". See letter re Users Inc. dated March 1, 1989.
b. The second category of accredited investors is private business development companies (venture capital companies) which meet the definition in Section 202(a)(22) of the Investment Advisers Act of 1940.
c. The third category includes any organization described as exempt in Section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, limited partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5 million.
Note: (1) A state run, not-for-profit hospital exempt from federal income taxation need not have received a ruling on its tax status under Section 501(c)(3) of the Internal Revenue Code. Rather, the third category accredits an investor that falls within the substantive description in that section. See letter re Voluntary Hospitals of America, Inc. dated November 30, 1982 and letter re C.U. Brokerage Services, Inc. and C.U. Processing, Inc., dated February 4, 1985.
(2) If the financial statements of an organization described as exempt in Section 501(c)(3) of the Internal Revenue Code may be combined with those of a subsidiary under generally accepted accounting principles, then the assets of such subsidiary may be added to those of the organization in computing total assets of the investor for purposes of this third category. See letter re Voluntary Hospitals of America, Inc. dated September 10, 1982.
(3) "Governmental Units" which meet all of the substantive requirements of 501(c)(3) of the Internal Revenue Code and which have total assets in excess of $5 million would be deemed to be accredited investors under Rule 501(a)(3). See letter re The Equitable Life Assurance Society of the United States dated January 2, 1986.
(4) A limited liability company, although not specified in the list of organizations in Rule 501(a)(3), may be treated as an "accredited investor" as defined in that rule if it satisfies the other requirements of the rule. See letter re Wolf, Block, Schorr and Solis-Cohen dated December 11, l996.
Note: The following interpretive letters, although issued under the $150,000 purchaser category may be relied upon under Rule 501(a)(3) by substituting an asset test. See also paragraph II.C.1.e. below.
(4) The aggregate individual net worth of the general partners of an investment general partnership (not formed for the specific purpose of acquiring the securities being offered) may be considered for purposes of calculating the net worth of the general partnership. See letter re Smith Barney, Harris Upham & Co. dated July 14, 1982 and letter re DEF Fund dated November 7, 1983 and letter re AHNB Investment Fund dated April 25, 1986. See also letter re RP II Fund dated January 4, 1989.
(5) A wholly-owned subsidiary may use the consolidated net worth of its parent. See letter re Federated Financial Corporation dated May 13, 1982; Equitable Pacific Partners Limited Partnership dated December 17, 1987.
d. The fourth category includes directors, executive officers and general partners of the issuer, as well as directors, executive officers and general partners of general partners. The term executive officer is defined elsewhere as the president, vice president in charge of a principal business unit and any other persons, including officers of subsidiaries, who perform a policymaking function for the issuer.
Note: (1) An executive officer of a parent of an issuer's corporate general partner may qualify as an accredited investor only if that individual may be deemed an executive officer of the subsidiary.
(2) Rule 501(a)(4) does not accredit the directors and executive officers of the corporate general partner of the general partner of the issuer. Such individuals would be deemed accredited only if they perform policymaking functions for the issuer or the general partner of the issuer. See letter re Prometheus Development Co., Inc. dated November 6, 1985.
e. The fifth category is natural persons whose net worth at the time of purchase is $l,000,000. Net worth can be joint net worth of investor and investor's spouse.
Note: This is true even if the property is not held jointly; nor must the purchase be made jointly.
f. The sixth category is a natural person whose individual income has been in excess of $200,000 in each of the last two years or joint income with that person's spouse in excess of $300,000 in each of these years and who reasonably expects to reach that same income level in the current year.
(1) An individual may rely upon only one of the income tests for the entire three year period.
(2) The term income is not defined, but is left flexible. For example, the revenues of a sole proprietorship would not give an accurate picture of income without deducting operating expenses. On the other hand, an employee's salary would be a useful figure in determining income.
(3) The term income includes contributions to a profit sharing plan or pension plan to the extent that a participant's rights are vested. See letter re Raymond, James & Associates, Inc. dated November 19, 1984.
Note: Generally, a purchaser may not include unrealized capital appreciation in calculating income for purposes of this category.
g. The seventh category accredits any trust, with total assets in excess of $5 million, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in 230.506(b)(2)(ii).
Note: (l) Each trust in a group of family trusts that participates in an investment must be treated as a single purchaser. See letter re Gary P. Kreider, Esq. dated September 26, 1984.
(2) If the trustee of a trust is a bank, the trust qualified as an accredited investor under Rule 501(a)(1) which states that a bank is an accredited investor whether acting in its individual or fiduciary capacity. See Section II.C.1.a. supra.
h. The eighth category of accredited investor includes any entity in which all of the equity owners are accredited investors.
Note: (1) The beneficiaries of a trust are not considered its equity owners, thus a trust generally cannot qualify as an accredited investor in this category.
(2) When powers are retained by the grantors to amend or revoke the trust, a trust as a legal entity would be deemed not to exist. If the grantors of such a trust are accredited, the trust is accredited. See letter re Rule 501(a)(8) of Regulation D dated July 16, 1982.
(3) If securities are purchased by an Individual Retirement Account and the participant is an accredited investor, the account would be accredited. See Question No. 30, Q & A Release.
(4) If all participants of an employee benefit or retirement plan are accredited investors under any of the categories of Rule 501 except 50l(a)(8) then the plan is deemed accredited. See letter re Swartz dated June 10, 1982. But see also letter re Diane P. Weiss dated December 21, 1983, where the Division clarified this position.
(5) In a case involving a grantor trust where the terms of the trust provided that the entire amount of the grantor's contribution plus accrued interest will be paid to the grantor (or his estate) before any payments can be made to the beneficiary of the trust, and the grantor was also a trustee, the staff indicated that the grantor would be considered the equity owner of the trust. See letter re Herbert S. Wander dated October 26, 1983.
(6) If a general partnership has a corporation as a partner and all of the equity owners of the corporation are accredited investors, the partnership will be considered an accredited investor if the remaining partners are also accredited investors. See letter re Television Station Partners dated March 29, 1983.
2. In addition to defining the term accredited investor, Rule 501 defines the terms affiliate, aggregate offering price, business combinations, calculation of number of purchasers, executive officer, issuer, and purchaser representative.
a. An affiliate is a person who directly or indirectly controls or is controlled by, or is under common control with, the issuer.
b. Aggregate offering price is the sum of all consideration (cash, services, property, etc.) to be received by the issuer. Where securities are offered for both cash and non-cash, the aggregate offering price shall be calculated on the cash price.
Note: (l) Property contributed by a
general partner, in exchange for a general partnership interest in a limited partnership, need not be valued and included in the overall proceeds of the offering as part of the aggregate offering price. See Question No. 31, Q & A Release.
(2) Royalty payments to an owner of a mining or oil and gas property who retained a royalty interest in the property need not be included in the aggregate offering price of the interests in the property being sold to investors for cash. Royalty payments are treated as operating expenses rather than capitalized costs for the property. See Question No. 32, Q & A Release.
(3) Where investors pay for their securities in installments and these payments include an interest component, the issuer need not include the interest payments as part of the aggregate offering price because such payments are not part of the consideration received for such securities. See Question No. 33, Q & A Release.
(4) Voluntary assessments, undetermined at the time of the offering, which may be called at the general partner's discretion, are not required to be included in the aggregate offering price. However, the assessments normally would, if paid, be consideration received for the issuance of additional securities in the limited partnership. This issuance will have to be considered along with the original issuance for possible integration, or, if not integrated, will have to find its own exemption from registration. See Question No. 34, Q & A Release.
(5) Non-contingent, mandatory assessments are included in the aggregate offering price. See letter to Kim R. Clark, Esq. dated November 8, 1982. See also Question No. 35, Q & A Release.
(6) The full amount that may be
drawn down pursuant to irrevocable letters of credit delivered by investors as part of their purchase of securities must be included as part of the aggregate offering price. See Question No. 36, Q & A Release.
(7) If a limited partnership acquires property with the proceeds of an offering pursuant to Rule 504 and the value of the property exceeds the actual cash contributions and will be subject to a non-recourse mortgage, the amount of the mortgage need not be included in the aggregate offering price. See letter re Merging Interests, Inc. dated March 23, 1983.
(8) An issuer may make two offerings within 12 months, the first for $l.5 million under Regulation A and the second for $2.5 million under Regulation D and be in compliance with both exemptions assuming that two offerings should not be integrated. See letter re Suburban Bankshares, Inc. dated May 18, 1983. It should be noted that if the Rule 505 offering in the amount of $2.5 million were made first, a second offering could not be made within a 12 month period relying on the Regulation A exemption because Regulation A provides that the aggregate offering price may be no more than $1.5 million minus the aggregate offering price for any securities sold in reliance on a Section 3(b) exemption during the prior 12 months.
(9) For the purpose of calculating the ceiling for a Rule 504 offering in which employer stock is offered in exchange for voluntary employee wage concessions, the aggregate offering price may be determined by an independent appraisal of the fair market value of the stock immediately prior to the sale of the security, rather than the aggregate amount of employee wage concessions. See letter re Clark Tank Lines, Duff Truck Lines and System 99, dated August 22, 1984.
c. A business combination is defined as a Rule 145 transaction and an exchange offer.
d. In calculating the number of purchasers the following shall apply:
(1) The following purchasers shall be excluded:
(i) Any relative, spouse, or relative of a spouse who shares the same principal residence as the purchaser.
Note: If an individual purchases stock in an offering both directly and indirectly through a self-directed employee savings plan, the individual shall only count as one purchaser if non accredited. See letter re Lane Enterprises Inc. dated February 9, 1987.
(ii) Any trust or estate in which the purchaser and the persons designated in 1. above have more than 50 percent of the beneficial interest.
Note: An employee benefit plan can be excluded from the calculation of the number of purchasers in a Regulation D offering where another purchaser in the same offering has a vested interest in more than 50% of the assets of the plan. In contrast, an employee benefit plan that will purchase in a Regulation D offering and in which another purchaser in the same offering is the trustee of the plan who determines the investment policy of the plan could not be excluded from the calculation of the number of purchasers. Likewise, an employee benefit plan that will purchase in a Regulation D offering and for which another purchaser in the same offering is an investment advisor, but not a trustee, would not be excluded from the calculating of the number of purchasers. See letter re Equity Management Corporation, dated August 21, 1984.
(iii) Any corporation of which the purchaser and the persons designated in 1. above are the beneficial owners of more than 50 percent of the equity securities.
(iv) Any accredited investor.
Note: Where family members sharing the same residence, only one of whom is an accredited investor, all purchase into an offering, none of the individuals would be counted as purchasers pursuant to 501(d)(i) and (iv).
(2) A corporation, partnership or other entity shall be counted as one purchaser unless it was formed for the purpose of acquiring the securities offered in which case each beneficial owner will be counted as a separate purchaser; however, other provisions of this rule designed to avoid double-counting of related parties are available at the beneficial owner level.
Note: (l) In determining whether an entity was organized for the specific purpose of making a particular investment, all the facts and circumstances must be considered. Significant factors would include the existence and nature of prior activities by the entity, the structure of the entity (i.e., whether the entity has centralized management and decision making), the proposed activities of the entity, the relationship between the entity's investment in the particular offering and the entity's capitalization, and the extent to which all equity owners of the entity participate in all investments by the entity. The fact that the particular investment was the entity's first investment would not necessarily lead to the conclusion that the entity was formed for the purpose of making that investment. See letter re Hall Moneytree Associates Limited Partnership I dated October 3, 1983.
(2) If a limited partnership was formed for the purpose of making several investments but for each separate investment each limited partner can decide to participate or not participate, the limited partnership will be deemed to be reorganized for the specific purpose of acquiring the securities in each investment, thus each participating partner must be counted. See Question No. 59, Q & A Release. But see letter re AHNB Investment Fund dated April 25, 1986 where the Division held that an investment general partnership could be treated as a single purchaser. See also letter re RP II Fund dated January 4, 1989.
(3) A non-contributory employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1978 should be counted as one purchaser where the trustee makes all investment decisions for the plan.
3. The definition of executive officer is given in C.5. above.
Note: An executive officer of the parent of a Regulation D issuer performing a policymaking function for the subsidiary may be deemed an "executive officer" of the subsidiary. See Question No. 37, Q & A Release.
a. The definition of issuer in Section 2(4) of the Securities Act shall apply, except in a bankruptcy proceeding, the trustee or debtor in possession shall be deemed the issuer.
b. The purchaser representative is a person who has, or who the issuer reasonably believes has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the investment. Generally the purchaser representative may not be an affiliate, director, officer, employee or 10 percent security holder of the issuer. The purchaser representative must be acknowledged in writing as such by the purchaser during the course of the transaction and must disclose to the purchaser in writing prior to the sale of securities to that purchaser any material relationship between himself or his affiliates and the issuer or its affiliates.
Note: (1) Beyond the obligations imposed by the rule, any person acting as a purchaser representative must consider whether he is required to register as a broker-dealer under the Exchange Act or as an investment adviser under the Investment Advisers Act of 1940. See letters to Winstead, McGuire, Sechrest, Trimble dated February 21 and 25, 1975 and re Kenisa Oil Company dated April 6, 1982.
(2) An officer or director of a corporate general partner comes within the scope of "affiliate, director, officer or other employee of the issuer," and thus generally would be ineligible to act as a purchaser representative. See Question No. 38, Q & A Release.
D. Rule 502 sets forth certain general conditions that must be met for any offer and sale under Regulation D.
1. The first item of Rule 502 provides that all sales that are part of the same Regulation D "offering" must be integrated.
a. A safe harbor from integration is provided for all offers and sales that take place at least six months before the start of or after the termination of the Regulation D offering, so long as there are no offers and sales, excluding those to employee benefit plans , of the same securities within either of these six month periods.
Note: (l) Two stock option plans each of which limit exercises to separate one month windows at least 6 months apart shall not be integrated if during the 6 month period an independent intervening offering is made. See letter re Tallgrass Technologies Corporation dated March 20, 1986.
(2) The offering of common stock, through employee stock option plans in a series of offerings, each of which is exempt from '33 Act registration under Rule 504, but in which the aggregate exercise prices of all outstanding options will exceed $500,000, will not be integrated where for a period of at least six months following the completion of the first stage of offers and sales under the employee stock option plan, no exercise of employee stock options will be permitted and no offers or sales of common stock or securities of a similar class will be made. See letter re Mosaic Technologies, Inc. dated August 21, 1984. See also letter re California Casualty Management Company dated April 17, 1985.
(3) The Division reasserted its position as stated in Mosaic Technologies and California Casualty by indicating that once an option becomes exercisable it is an "offer" regardless of whether or not the issuer permits the exercise, and therefore must be considered for "integration" purposes. Furthermore, the Division took the position that all offers and sales made within a six month period pursuant to multiple employee stock option plans by a single issuer shall be integrated. See letter re Henkels and McCoy, Inc. dated September 30, 1986.
(4) Affiliated issuers, such as a corporate general partner and its limited partnership, simultaneously selling their securities as units in a single plan of financing for the same general purpose, would be considered to have an integrated offering. See letter re Intuit Telecom Inc. dated March 24, 1982.
b. Although the term "offering" is not defined in the Rule, if the safe harbor is not available, an issuer may also rely on the "five factor" test below in determining whether offers and sales should be integrated.
(i) Whether the sales are part of a single plan of financing;
(ii) Whether the sales involve issuance of the same class of securities;
(iii) Whether sales have been made at or about the same time;
(iv) Whether the same type of consideration is received; and
(v) Whether the sales are made for the same general purposes. (See Release No. 33-4552 (November 6, 1962)).
Note: (1) Two offerings properly made under Section 4(2) of the 1933 Act within one month of each other would not be integrated because they were not intended for the same purpose and were not part of a single plan of financing. The purpose of one offering was to raise capital for the operation of the company's business and for the acquisition of property while the purpose of the other was to offer stock to employees and independent contractors in order to provide them with the opportunity to acquire a proprietary interest in the company and to encourage them to remain in the company's employ and service. See letter re Pacific Physicians Services dated July 22, 1985 and letter re Royal LePage Limited dated May 16, 1986. See also letter re Lane Enterprises, Inc. dated February 9, 1987 (offering of stock to employees for leveraged employee buy-out is not integrated with sale of interests in the issuer's employee savings plan where trustee can not be directed to purchase issuer stock.)
(2) The offer and sale by a Company of beneficial interests in two separate trusts would be integrated under section 4(2) of the Act where both trusts had similar investment objectives, portfolio securities and portfolio risk/return characteristics and the securities in which each trust may invest were not specified in advance. See letter re Madison Park Investment Management, Inc. dated March 4, 1986.
(3) A company completed a Regulation D offering of common stock in April 1985 for the purpose of organizing the business, hiring employees and purchasing furniture and office supplies. The Company proposed to make a second Regulation D offering which would commence within five months of the first Regulation D offering, said offering to be of convertible, subordinated debentures for the purpose of raising funds to finance inventory and accounts receivable. A public offering of common stock to raise funds for the same purposes and also to raise money to finance acquisitions and technologies and to pursue research and development is contemplated within the six month period following the convertible debenture offering under Regulation D.
The Division was unable to concur that the proposed sale of debentures should not be integrated with the prior offering of common stock and the planned public offering of common stock. Particular note was taken of the following facts: (i) the debentures were convertible into the common stock of the company; (ii) the funds to be raised from the debenture offering and from the planned public offering were all part of a single plan of financing; (iii) the funds from all three offerings were to be used primarily for business operations; and (iv) the Regulation D offering of debentures was to occur less than six months after the termination of the first Regulation D offering and less than six months before the public offering of common stock. See letter re LaserFax dated August 15, 1985.
(4) The Division did not concur that a company's offering of its convertible performance stock pursuant to Regulation D need not be integrated with a proposed public offering of units consisting of Class B voting stock and convertible performance stock. It was particularly noted that (i) the offerings would both be made to raise funds for general purposes; (ii) shares of the convertible performance stock would be convertible into Class B common stock and the units in the public offering would consist in part of convertible performance stock; and (iii) the proposed public offering of units would take place less than 6 months after the offering of convertible performance stock. See letter re Financial Independence Investment Corporation dated October 30, 1985.
(5) The Division was unable to concur
that a registered Rule 504 offering need not be integrated with a subsequent public offering. It was particularly noted that (i) the offerings were part of a single plan of financing in that the issuer required the capital from both offerings to go forth with its operations; (ii) both offerings were for the same purpose; (iii) both were issuances of common stock (iv) the offerings were to be made within a 6 month period, and (v) both offerings were for cash. The Division also noted that the offerees in the Rule 504 offerings were not limited to those possessing first-hand information concerning the proposed venture and who are providing capital for organization and preliminary operations. See letter re Sonnenblick, Parker & Selvers dated December 3, 1985.
(6) The Division was unable to concur that offerings which appear to offer a single class of securities differing only in terms of duration, interest rates and face amount are separate and discrete offerings and would not be integrated. In addition, the purchase of a separate security financed by interest earned of the proceeds from matured securities would constitute a new sale of a security to be included in the aggregate offering price. See letter re Nigh Savings, Inc. dated June 24, 1987. After a follow-up letter from the issuer, the Division reconfirmed the previous integration interpretation and added that securities given as collateral by third parties for bank loans would not ordinarily be deemed to constitute offers or sales by the issuer; but that the issuer would be responsible for any unlawful unregistered distribution resulting from such a transaction. See letter re Nigh Savings, Inc. dated August 14, 1987.
c. Rule 152 provides that the phrase "transactions by an issuer not involving any
public offering" in Section 4(2) shall be deemed to apply to transactions not involving any public offering at the time of said transaction although subsequently thereto the issuer decides to make a public offering and/or files a registration statement.
(i) This rule was adopted in 1935 and has not been substantially amended since that time.
(ii) Generally if an issuer makes a private offering and shortly thereafter files a registration statement, the later public offering will not be integrated with the early private offering, if the purpose of the private offering was to raise seed money.
(iii)The rule specifically refers to the 4(2) exemption. Since Rules 504 and 505 are exempt under 3(b), Rule 152 does not apply.
Note: (1) Notwithstanding the fact that a company contemplated a public offering at the time of its private offering, the Division took the position based on Rule 152 that the two offerings need not be integrated even if offered within months of each other when the private offering is exempt under §4(2). See letter re Verticom, Inc. dated February 12, 1986.
(2) The Division extended its position in the Verticom letter regarding Rule 152 to include a proposed private offering under Rule 506 with a subsequent public offering. See letter re Vulture Petroleum Corporation dated December 31, 1986.
(3) Even though the issuer initially relied upon Rule 505 for its private placement, where Rule 506 was also available to exempt the transaction the Division would extend its position in the Verticom letter that a subsequent public offering made within six months of a private offering would not be integrated. See letter re The Immune Response Corporation dated October 2, 1987.
(4) In connection with a proposed recapitalization plan, the Division took the position that even though the private placement exchange offers would not close prior to the filing of a registration statement, Rule 152 would protect the private placement exchange offers provided that the private placement offerees are unconditionally obligated to take the securities at closing of the restructuring. The staff also took the position, for policy reasons, that a proposed private placement of convertible debt to a specified limited number of qualified institutional purchasers and accredited investors need not be integrated with a concurrent registered common stock offering. See letter re Black Box Incorporated dated June 26, 1990.
In January 2001, the Commission adopted Rule 155 which provides safe harbors for a registered offering following an abandoned private offering, or a private offering following an abandoned registered offering, without integrating the registered and private offerings in either case. In order to take advantage of the safe harbor, an issuer generally must wait 30 days between withdrawal of the registration statement and the commencement of the private offering or the filing of the registration statement and the termination of the private offering. However, if the private offering was made only to accredited investors and sophisticated persons, than the requirement to wait 30 days after the abandonment of the private offering before filing the registration statement does not apply.
Generally transactions otherwise meeting the requirements of an exemption will not be integrated with simultaneous offerings being made outside the U.S. See Preliminary Note 7 to Regulation D and Release No. 33-6863.
f. In a report included in the July 1982 Business Lawyer an ABA Subcommittee on Partnerships Trusts and Unincorporated Associations set forth a proposal to determine a discrete offering in a partnership. The proposal has not been endorsed or adopted by the Commission, however it may provide useful guidelines. Under the ABA proposal, limited partnership offerings with common general partners or sponsors would not be integrated if the following conditions were met.
(i) Separate Entity. The partnership shall be a separate legal entity with separate books and records, and funds received by or contributed to the partnership shall not be commingled with funds of a common sponsor or any other entity with a common sponsor.
(ii) Economic Independence. The partnership shall, at the time interests therein are offered and sold, have an independent opportunity to meet its primary investment objectives, i.e., the economic results of its investments shall not be substantially dependent upon the creation, continued existence or economic results of the investments of another entity previously, simultaneously or subsequently formed with a common sponsor.
(iii) Application of Proceeds. Whether or not the assets in which the partnership proposes to invest are specifically identified to offerees, no material portion of the gross offering proceeds of the partnership shall be invested in properties in which another entity with a common sponsor shall invest, or shall have invested (and continue to hold invested), a material portion of its gross offering proceeds.
If the assets in which the partnership intends to invest at least fifty percent of its gross offering proceeds (as its principal business or businesses) are not specifically identified to offerees, then: (i) each other entity with a common sponsor previously formed to conduct the same general types of activities shall have invested or committed for investment the major portion of its gross offering proceeds prior to the commencement of the offering of the partnership interests; and (ii) no simultaneous or subsequent offering interest in another entity with a common sponsor organized for the same general types of activities shall be commenced before the partnership has invested or committed for investment the major portion of its gross offering proceeds, unless the assets in which such other entity intends to invest at least fifty percent of its gross offering proceeds are specifically identified to its offerees.
2. The second item of Rule 502 provides when and what type of information must be furnished in Regulation D offerings:
Note: (1) An issuer may furnish to investors a short form offering memorandum in anticipation of actual selling activities as long as the initial disclosure document provides a fair and adequate summary and the complete disclosure document is provided to investors prior to sale. Disclosure in such a manner, however, should not obscure material information. See Question No. 40, Q & A Release.
(2) If a general partner of a limited partnership proposes, if necessary, to purchase enough interests for the issuer to sell a specified number of interests in a minimum-maximum offering before the specified expiration date of the offering, this possibility must be disclosed and the maximum possible amount of these purchases must be disclosed. In addition, these purchases must be made for investment and not for resale. See Question No. 79, Q & A Release.
(3) Where an issuer in an "all or none" offering wishes to extend the expiration date of such offering to sell the specified amount of securities, the issuer must (a) make a reconfirmation offer to subscribers disclosing the extension and any material information necessary to update previous disclosure; (b) make the reconfirmation offer enough in advance of the specified expiration date to allow subscribers electing not to continue their investment to receive their funds back promptly after the specified expiration date; and (c) return subscription funds to those requesting them as well as to subscribers who fail to respond at all to the offer. See Question No. 80, Q & A Release.
a. If an issuer sells securities under Rule 504 or to accredited investors, no specific disclosure is mandated. If securities are sold under Rules 505 or 506 to non-accredited investors, the type of information to be furnished depends on the size of the offering and whether the issuer is subject to the reporting requirements of the Securities Exchange Act of 1934.
Note: (1) An issuer may commence an offering intending to make sales only to accredited investors and thus use an abbreviated disclosure document. If before completion of the offering the issuer changes intentions and proposes to make sales to non-accredited investors, it may do so by providing a complete disclosure package to the non-accredited investors. The amendments to Regulation D adopted in March of l989 thus mark a change in Question No. 41, Q & A Release.
(2) The rule does specify, however, that disclosure must be made "to the extent material to an understanding of the issuer, its business and the securities being offered." Thus if it could be determined under certain circumstances that certain information, including certified financial statements, were not "material", they could be omitted. See Question No. 43, Q & A Release.
(3) In preparing Regulation D offering material, an issuer of interests in a real estate limited partnership should consider Guide 5 in determining the disclosure that will be material to the investor's understanding of the issuer, its business and the securities being offered. See Question No. 44, Q & A Release.
(4) An issuer's disclosure obligations with respect to the financial statements of the general partner include furnishing an audited balance sheet for a corporate general partner, or a statement of net worth for an individual general partner, consistent with the requirements of now rescinded Form S-18, and registrations following other Commission forms. See Release No. SAB-40, Topic 12.A.3.d. (January 23, 1981).
(1) With respect to non-financial information, non-reporting issuers are required to provide the same kind of information as is required by the registration form the issuer would be entitled to use. Non-reporting issuers eligible to use Regulation A have the option of providing the same kind of information as is required under any of the three alternative disclosure formats set forth in Regulation A.
(2) With respect to financial information, non reporting companies offering up to $7.5 million must furnish:
(a) Two years financial statements with only the most recent year audited.
Note: (1) An issuer must provide audited income statements of real estate operations to be acquired, consistent with the requirements of Item 310 of Regulation S-B. That item requires two years of statements unless an issuer meets certain conditions, in which case only one year is required. Regulation D permits an issuer of an under $7.5 million offering to present financial statements with only the most recent year audited, and this same treatment is available generally to real estate operations to be acquired by the issuer. Thus, an issuer may present one year of audited statements for the real estate operations to be acquired if it is offering under $7.5 million. If it is offering more than $7.5 million, then it should present two years of income statements, only the most recent year of which need be audited. See Question No. 46, Q & A Release.
(2) If property to be acquired by a limited partnership is used entirely in connection with the operation of the seller's business, such operation does not include rental to third parties, the seller will enter into a long term lease of the property, and the seller will continue the previous use of the property, and audited financial statements of the seller will be provided, audited operating history of the property need not be included. See letter re Acorn Property Partners II Limited Partnership dated September 2, 1983.
(3) If an issuer is raising capital to develop oil and gas leases by selling fractional undivided interests in the leases, the only financial statements of the issuer required to be furnished would be an audited balance sheet. Further, the requirement for an opinion of counsel on the legality of the securities being offered can be satisfied by counsel's opinion that the entity was duly organized and has the legal power to convey title to any oil and gas lease in which it has an interest. See letter to Peter I. Mason dated March 24, 1983.
(b) If audited financial statements cannot be obtained without undue effort and expense:
(i) Corporate issuers need file only a certified balance sheet dated within 120 days of the offering.
(ii) Limited partnerships may furnish tax basis financial statements reported on by an independent accountant.
Note: The provision permitting an issuer to furnish alternative financial information where audited financial statements cannot be obtained without undue effort and expense is available to all the financial statements that an issuer presents in an offering document, including those real estate properties or businesses to be acquired if financial statements for these acquisitions cannot be obtained without undue effort or expense. Thus the financial statements of a corporation to be acquired may be prepared in accordance with the treatment available to corporate issuers under Regulation D, and the financial statements of a limited partnership, and the financial statements of real estate operations to be acquired by a limited partnership may be prepared in accordance with the treatment available to limited partnerships. See letter re Winthrop Financial Co., Inc., dated May 25, 1982. See also Question No. 49, Q & A Release.
(3) Non-reporting companies offering more than $7.5 million must furnish:
(a) The same kind of information required by Part I of the appropriate registration form (Form S-l, S-ll, etc.)
(b) Three years audited financial statements.
(c) If audited financial statements cannot be obtained without undue effort and expense, the issuer is given options similar to those in offerings under $7.5 million.
Note: An investment company issuer must provide disclosure based upon the requirements included in Part I of Form N-1A. In addition, information as required by any registration form, including audited financial information, is subject to a materiality standard under Regulation D. See letter re Robert T. Willis, Jr., P.C. dated December 17, 1987.
(4) Reporting companies must furnish the same kind of information regardless of the size of the offering.
(a) A reporting company has the option of:
(1) providing its most recent annual report to shareholders if it complies with Rules 14a-3 or 14c-3, the most recent definitive proxy statement and, if requested, its most recent Form 10-K or Form 10-KSB; or,
(2) providing the information contained in its most recent Form 10-K or 10-KSB, or Form 10 or Form 10-SB, or in a registration statement on Form S-1 or Form SB-l or SB-2, whichever filing is the most recent required to be filed.
Note: Where a reporting issuer chooses to supply the information contained in its Form S-l, it need only supply the information contained in Part I of the registration statement. See Question No. 50, Q & A Release.
(b) In addition, the issuer must supplement the basic information furnished with updated information included in periodic or quarterly reports.
(c) If a reporting company is offering its securities in a business combination of the type described in Rule 145(a), in addition to information required by Form S-4, the issuer shall provide to each purchaser at the time the plan is submitted to security holders, or, with an exchange, during the course of the transaction and prior to sale, written information about any terms or arrangements of the proposed transaction that are materially different from those for all other security holders. An issuer which is not subject to the reporting requirements of section 13 or 15(d) of the Exchange Act may satisfy the requirements of Part I.B. or C. of Forms S-4.
b. Generally, exhibits required to be filed with the Commission as part of a registration statement or report need not be furnished to each purchaser if the contents of the exhibit are identified and the exhibits are made available to the purchaser, upon his written request, a reasonable time prior to his purchase.
Note: Any form of registration to which an issuer might refer in preparing a disclosure document under Regulation D requires that the issuer furnish, as an exhibit, an opinion of counsel regarding the legality of the securities being issued. An opinion regarding tax consequences of an investment in the offering would be required to support any representations in a prospectus as to material tax consequences. Regulation D issuers should indicate that the opinions of counsel are available to purchasers upon written request. See letters to Hecker & Phillip, dated December 22, 1982, Hopper, Kanouff, Smith and Peryam, dated September 10, 1982 and Robert T. Willis, Jr., P.C., dated December 17, 1987. See also Question No. 52, Q & A Release.
c. The issuer must also provide information regarding the terms of the offering.
d. All issuers must provide to non-accredited purchasers the right to review a reasonable time before sale all material information which was furnished to accredited investors and the right to ask questions of the issuer.
e. Written disclosure of any resale restrictions on the securities must be delivered to every non-accredited investor.
3. The third item of Rule 502 prohibits the use of general solicitation or general advertising in connection with Regulation D offerings except in certain cases under Rule 504.
Note: (1) The terms "general solicitation" and "general advertising" are not defined in the Rule nor were they discussed in the adopting release. These terms were also used in Rule 146 and the interpretations under this Rule may be of some guidance.
In a release issued in March 1989, there was a brief discussion of general solicitation which indicated that whether or not particular activities constitute a general solicitation must always be determined in the context of the particular facts and circumstances. It was further stated that while prior relationship is one way to show the absence of a general solicitation it is not the only way. See Footnote 12 and related textual discussion in Release No.l 6825 (March 14, 1989).
Rule 135c adopted in 1994 provides that a notice given by a reporting company (or a foreign issuer exempt from registration under the Securities Exchange Act of 1934 pursuant to Rule 12g3-2(b) of the rules and regulations under that Act) which states that it proposes to make, is making or has made an offering of securities not registered or required to be registered shall not be deemed to offer any securities for sale if such notice is not used for the purpose of conditioning the market in the United States for any of the securities being offered and such notice states that the securities will not be or have not been registered and may note be offered or sold in the United States absent registration or an applicable exemption. Only information specifically provided for in Rule 135c may be included in the notice.
(2) A solicitation by the general partner of a limited partnership to 330 sophisticated investors all of whom are limited partners in other active programs sponsored by the general partner would not be a general solicitation. See letter re Woodtrails-Seattle, Ltd. dated July 8, 1982.
(3) Mailing brochures to members of a particular trade or professional association, distributing brochures to a meeting or event attended primarily by members of such association, and advertising in a trade journal would not comply with the restrictions on the use of general solicitation and advertising. See letter re Aspen Grove dated November 8, 1982.
(4) A selling agent's proposal to contact trusts as potential customers where such trusts met specific criteria but with which neither the agent nor the issuer had any preexisting relationship and where the manner of the contact was not limited could be a general solicitation. See letter re Webster Management Assured Return Equity Management Group Trust dated January 6, 1987.
(5) A corporation was to be formed for the purpose of distributing to paid subscribers an analysis of private offering disclosure documents. No express written recommendation to purchase or not to purchase was to be made. The Division was unable to concur in the opinion that the distribution of the analysis would not constitute general solicitation or general advertising. See letter re Tax Investment Information Corporation dated January 7, 1983.
(6) An issuer was engaged in product advertisement through newspaper, radio and television media at the same time it was offering securities in reliance on a Regulation D exemption. Although product advertising is not prohibited, the question of whether a particular product advertisement program also constituted an offer of securities would require an evaluation of, not only the content of the specific advertisements, but also of the actual use of each advertisement in relation to the offering of securities. Thus the staff would not express a view on whether the promotional activities could be deemed part of its efforts to offer and sell its securities. See letter to Printing Enterprises Management Science, Inc. ("PEMS.") dated March 23, 1983.
(7) Oil and Gas Investor Magazine wanted to publish factual information relating to offerings, registered and unregistered, of securities in oil and gas drilling programs. The magazine would receive no consideration from the issuers and would make no recommendations or evaluations with respect to the offerings. The Division was asked to concur in the opinion that the publication of such information would not constitute a violation of Section 5(b) or 5(c) of the Securities Act. In responding to the letter the Division stated:
"...you have raised ... significant factual issues. These issues include not only the exact language of particular published material but also the issuer's role, if any, regarding the publication of information concerning the offering of its securities. If an issuer is involved in publicizing its offering, that involvement and such publicity must be measured against section 2(10) and 5(b) of the 1933 Act with respect to a registered offering and section 5(c) of the l933 Act, as well as any exemptions from registration, with respect to an unregistered offering. If, for instance, an issuer published the information in your letter regarding a registered offering, the issuer would need to determine whether or not that information came within the definition of "prospectus" under section 2(10) of the 1933 Act. It is worth noting in this regard that the information in question goes beyond the provisions of Rule 134 which specifies certain communications that do not fall within section 2(10). Similarly, if the issuer published the information in your letter regarding an offering relying on the exemption from registration in Rule 506 of Regulation D, the issuer would need to determine whether such publication constituted an offer or sale of securities by means of general solicitation or general advertising under Rule 502(c). This Division is not in a position to resolve these issues generally or on the basis of the facts presented in your letter and as a result can express no opinion on the questions you have raised." See letter re Oil and Gas Investor dated August 11, 1983.
(8) The Texas Investor Newsletter wished to publish factual representations of private placement offerings under Regulation D. The principals of the issuers were to prepare and pay for the publication of this information. No analysis of the offerings was to be made nor were express recommendations to purchase. The Division was of the view that an issuer whose offering was included in the Newsletter would be unable to rely on Regulation D as a basis for exemption from registration since the described material would be prepared by a principal of the issuer, who would also pay for its inclusion in the publication, thus constituting advertising on behalf of an issuer to offer to sell securities in contravention of Rule 502(c). See letter re The Texas Investor Newsletter dated December 23, 1983.
(9) A newsletter that included information on all limited partnerships formed within the state of Arizona with no analysis of the issuer or the offering, and where such information was not prepared, or paid for by the issuer, would not constitute a general solicitation. See letter re Richard Daniels dated December 19, 1984.
(10) A newsletter that contained a list and description of closely-held businesses and stated the estimated amount of capital such businesses expected to raise within the next twelve months, as prepared and paid for by participating business, would appear to constitute an offer within §2(3) of the Act and consequently the Division was unable to conclude that there would be no general solicitation for purposes of Rule 502(c). See letter re J.D. Manning dated January 29, 1986.
(11) A guide that included publicly available information and other limited factual information on completed offerings and where the publisher is not employed or acting as agent for the issuer listed in the guide would not constitute general solicitation. See letter re Nancy H. Blasberg dated June 12, 1986.
(12) Where an issuer planned to conduct a public solicitation in foreign newspapers of general circulation while engaged in concurrent offers and sales in the United States of the same offering pursuant to Rule 505, the Division was unable to concur that such public solicitation would not violate Rule 502(c) since the effect of the proposed advertising may be a solicitation of United States citizens or residents. See letter re Jack B. Strauss, Jr., Esq. dated July 22, 1985.
But see Release No. 33-6779 (June 10, 1988) Footnote 87; Release No. 6863 (April 24, 1990) pp. 27-39; and the definition of "Directed Selling Efforts" in Rule 902(b).
(13) Remco Energy Corporation wished to issue press releases periodically describing significant reportable events such as the successful completion of oil wells. At the time any such press release issued, Remco securities might be engaged in an offering of the limited partnership interests of an affiliate of Remco Energy pursuant to Regulation D. The Division was of the view that the publication of a press release by an affiliate of an issuer would, in the absence of unusual circumstances, be considered made on behalf of the issuer. Because the question involved a determination of facts best made by the issuer and its counsel, the Division was unable to express a view as to whether the issuance of press releases could be deemed an offer to sell the securities of affiliated limited partnerships. If the publication was an offer it would have violated Rule 502(c). See letter re Remco Securities Company, Inc. dated July 22, 1985.
(14) A syndicator contemplated placing an advertisement indicating that it sells securities in private placements and inviting members of the public to call or write for additional information. The Division was of the view that the advertisement constituted a "general" advertisement within the meaning of Rule 502(c) and that since the primary purpose of the advertisement was to sell securities of entities affiliated with the issuer or to condition the market for future sales, the advertisement would constitute an offer in violation of Rule 502(c). See letter re Rule 502(c) dated December 3, 1985.
(15) A large investment banking firm asked the Division to concur in its opinion that offering procedures which it proposed to use in offerings in which it acted as general partner or selling agent and which were made in reliance on Rule 506 did not involve general solicitations in violation of Rule 502(c). The Division concluded that a general solicitation does not exist where there is a substantive, pre-existing relationship between the issuer or its agent and the offerees. In reaching this conclusion, the Division agreed that offerees need not have previously invested in securities offered through the issuer or its agent in order to establish the pre-existing relationship. Further, the substantive relationship could be established where the offerees had provided satisfactory responses to questionnaires providing the issuer or its agent with sufficient information to evaluate the prospective offerees sophistication and financial circumstances. The Division also concluded that if the relationship occurred prior to the time the issuer or its agent began participating in the Rule 506 offering, an offer could be made to the person with whom the relationship had been established without violating Rule 502(c). See letter re E. F. Hutton Company dated December 3, 1985.
(16) A broker-dealer with offices in 47 states proposed to send generic information about its services to prospective offerees. The Division concurred that this program would not constitute a general solicitation so long as procedures were implemented to insure that persons solicited were not offered any securities offered or contemplated for offering at the time of the solicitation. Later offers to such individuals could be made so long as a substantive relationship had been established between the broker-dealer and the offeree. One method of establishing such relationship is described in E. F. Hutton above. See letter re Bateman Eichler, Hill Richards, Inc. dated December 3, 1985.
(17) An issuer proposing to rely on Rule 504 asked for the Division's concurrence in its view that offers by one of its officers, an insurance broker, to 600 of his existing clients would not constitute a general advertising or solicitation since the group was limited to individuals with whom the officer of the issuer had pre-existing business relationships. While agreeing that the existence of such a relationship is an important factor in determining whether offers violate Rule 502(c), the Division indicated that whether or not such a relationship existed is dependent upon the ability of the issuer to determine the financial circumstances or sophistication of the persons with whom the relationship exist or that otherwise are of some substance or duration. See letter re Mineral Lands Research and Marketing Corporation dated December 4, 1985.
(18) A preexisting substantive relationship for purposes of general solicitation under Rule 502(c) may be established through the proper use of a satisfactory questionnaire (as submitted). See letter re H. B. Shaine & Co., Inc. dated March 31, 1987.
(19) The Division was unable to conclude that offers made to new investors who were referrals from existing clients of the issuer would not constitute general solicitation. See letter re Robert T. Willis, Jr., P.C. dated December 17, 1987.
(20) The Division believes that under certain circumstances a "tombstone" advertisement could be published without being used to offer or sell securities. For example, such a notice announcing the completion of an isolated Regulation D offering having no immediate or direct bearing on contemporaneous or subsequent offers or sales of securities. See letter re Alma Securities Corporation dated July 2, 1982.
(21) While the mere filing of Form D does not constitute a general solicitation, additional usage of it and/or the provision of additional information with it may constitute a prohibited solicitation. See letter re Merit Communications Inc. dated August 6, 1987.
(22) A non-profit corporation with the objective of generating economic growth by matching business ventures in various stages of development (primarily start-up or emerging companies) with potential investors, developed a database of subscribers consisting of investors and entrepreneurs, all of whom pay an annual membership fee for subscription to and inclusion in the Network. The Division concurred in the view that for purposes of Rule 502(c) the activities of the Network, including the participation of the entrepreneurs therein, involved no general solicitation or general advertising. In reaching its conclusion, the Division particularly noted that:
* the Network is sponsored and operated by a non-profit corporation, receiving significant guidance and financial support from the University of Texas; it has not affiliation or association with any participating entrepreneur;* the Network is publicized through articles prepared by business magazines and newspapers; through business-related conferences attended by representatives of the Network, or direct mailing to the attendee lists from such conferences; through "word-of-mouth" referrals; though infrequent, through small classified ads in newspapers and magazines; such advertising is of a generic nature with respect to the Network and in no case are specific entrepreneurs mentioned;
* information placed into the computer data base is derived from questionnaires provided to the potential investors and entrepreneurs by the Network; no investigation of such information is undertaken by the Network;
* the merits of any potential investment are not assessed by the Network nor does it assist in the formulation of the terms of any possible investment opportunity;
* the Network offers no other service, receives no compensation from participants except for nominal administrative processing fees and takes no interest in any of the participating entrepreneurs;
* participating potential investors represent themselves to be accredited or sophisticated persons, and participation is limited to such persons; affiliates and associates of the Network are prohibited from such participation; while possible, it would be merely coincidental, that independent of the matching service, the University of Texas through its technology transfer department or other channel could have equity interests in or receive fees form some of the entrepreneur participants;
* potential investors receive information as a result of the matching service, and may but are not obligated to contact the entrepreneur for additional information; entrepreneurs do not receive lists of potential investors.
See letter re Texas Capital Network, Inc. dated February 23, 1994, but See letter re The Colorado Capital Alliance, Inc. dated May 4, l995.
(23) The Division took the position that a Symposium involved no solicitation or general advertising under the following circumstances:
* the Symposium co-sponsored by the University of Michigan and the Office for the Study of Private Equity Finance of its School of Business, was a vehicle to provide Michigan firms with efficient access to the national private equity finance markets
* presenter companies were selected by the Director of the Office for the Study of Private Equity Finance and were limited to private firms; companies currently "in registration" were barred from participation, although public companies seeking additional funds in the future might be eligible to participate
* while the Director may provide consulting services to some of the presenter companies, such services are limited to advising about the weaknesses of corporate structure, improving business plans and informing about available venture capital sources; such consultations have involved less than 5 percent of the presenters over the years
* the Symposium is publicized through targeted mailings to known accredited investors, limited generic advertising in the Venture Journal and by word of mouth from prior attendees
* the Symposium arranges no prior contacts between presenter firms and attendees; no specific financing details are a part of the presentations made at the Symposium and no private placement materials are distributed there
besides providing assistance in preparing the presentation, the Symposium and its Director offer no other service, and receive no compensation from presenters or attendees except for fees associated with the conduct of the Symposium; no conditional fees or brokerage-type commissions are charged to any participant.
See letter re Michigan Growth Capital Symposium dated May 4, l995
(24) The posting of a notice of a private offering on the World Wide Web in a password-protected page accessible only to persons who have been appropriately qualified as accredited investors would not involve any form of "general solicitation" or "general advertising" within the meaning of Rule 502(c). In reaching this conclusion the Division noted that (a) both the invitation to complete the questionnaire used to determine whether an investor is accredited or sophisticated and the questionnaire itself will be generic in nature and will not reference any specific transactions posted or to be posted on the password-protected page; (b) the password-protected page will be available to a particular investor only after the determination that the particular potential investor is accredited or sophisticated has been made; and (c) a potential investor could purchase securities only in transactions that are posted on the password-protected page after that investor's qualification as accredited or sophisticated. See letter re IPONET dated July 26, l996. The Division took a similar position as to investments in private investment funds but a potential investor generally would be permitted to invest in funds posted prior to the investor's qualification where the purchase occurred over 30 days after qualification. See letter re Lamp Technologies, Inc. dated May 29, 1997.
4. The last item of Rule 502 provides that, with the exception of certain offerings under Rule 504, securities issued in Regulation D offerings are "restricted securities" and the issuer must exercise reasonable care to assure that such securities are not sold without an appropriate exemption. Such reasonable care would be demonstrated by an inquiry as to investment purpose, disclosure of resale limitations, and placement of a legend on the certificate; however other actions may satisfy this requirement.
Note: (1) The rule restricts only the sale of unregistered securities, however, so that if the securities issued are later included in a registration statement, they may be resold pursuant to the registration. See Question No. 61, Q & A Release.
(2) Resales may be made pursuant to the provisions of Rule 144. Generally after two years holders of restricted securities may resell subject to restrictions as to the manner of offering, the amount of securities sold, and availability of public information. After a three year holding period, non-affiliates can resell securities with no restrictions. Resales also may be made in reliance on Rule 144A.
(3) The Commission generally has not raised any questions if a holder of restricted securities has sold or transferred such securities in a privately negotiated transaction to a person or persons who will take the securities subject to the same restrictions. This type of transaction is often referred to as a Section 4(l-l/2) transaction. However, if such a resale transaction was effected in order to evade the provisions of Regulation D, the exemption could be lost. See Preliminary Note 6.
(4) A foreign issuer satisfied its duty to exercise reasonable care to assure that securities are not resold improperly by taking certain steps to restrict transfers within the United States or among United States citizens and residents, while at the same time not restricting reoffers to non-United States citizens and non-United States residents. See letter re Trilogy Research Corporation dated July 3, 1984. See also letter re Wordplex Information System P.L.C. dated November 6, 1986, letter re Meridian Technologies Inc. dated February 28, 1989, and letter re Optometrics (U.S.A.) Ltd. dated February 28, 1989.
(5) Written disclosure of resale restrictions must always be provided to non-accredited investors in Rules 505 and 506 transactions.
E. Rule 503 Sets Forth the Filing Requirements for Form D
1. Form D is a uniform notice of sales form for use in offerings under both Regulation D and Section 4(6) of the Securities Act. The form is designed as a combined Federal/State form and may be used for state filings in those states which have adopted ULOE and the form. Issuers furnish information on the form mainly by checking boxes and filling in blanks. The form requires such information as:
a. The identity of the issuer, its promoters (if organized within the past five years), its chief executive officer, and each person who receives compensation for solicitation of purchasers,
b. A description of the type of securities offered and of potential investors.
c. The expenses of the offering and the use of proceeds.
d. There is a separate section which provides for a state signature to be used when the form is filed in a state. This section also requires some additional information by means of an appendix.
2. Rule 503(a) requires the Form D to be filed 15 days after the first sale. Subsequent notices are required only by means of an amendment which would be filed if an error was made on the original filing or if a material change in terms of the offering occurs, not to update.
Note: Generally the acceptance of subscription funds into an escrow account pending receipt of minimum subscriptions would trigger the filing requirements. See Question No. 82, Q & A Release.
3. Rule 503(c) requires an undertaking in Form D to furnish the staff, upon its written request, with the information provided to purchasers that are not accredited in a Rule 505 offering.
4. Filing the Form D was once a condition to the availability of any Regulation D exemption. This feature was eliminated in March of 1989; however, the obligation to file remains as an independent requirement by virtue of Rule 503.
Note: On May 31, l996, the Commission proposed to amend Rule 503 to require issuers to prepare and retain the Form D notice after the first sale of securities, but no filing would be required with the Commission. As proposed, Form D would be required to be retained by the issuer in its records for at least three years after the first sale of securities made in reliance on the Regulation, subject to possible inspection by the Commission's staff. Release No. 33-7301
B. Rule 504 provides an exemption pursuant to Section 3(b) of the Securities Act of 1933 for offerings up to $1 million subject to the following conditions:
1. The issuer may not be a reporting company, an investment company, or a development stage company that either has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person ("blank check" company).
2. The conditions in Rules 501 and 502 are met except that the information requirements do not apply.
Note: If a registered broker-dealer is engaged by the issuer to sell the securities, Rule 15g-9 under the Securities Exchange Act of 1934 (the "cold call" rule) will be applicable to the activities of such broker dealer.
3. The aggregate offering price may not exceed $1 million in a 12 month period. In computing the aggregate offering price any securities sold in reliance on any Section 3(b) exemption and any securities sold in violation of Section 5 must be included.
Note: Sales pursuant to Rule 506 would be considered Section 4(2) sales and not sales in reliance on any Section 3(b) exemption because Rule 506 was adopted pursuant to Section 4(2). Thus, sales in a Rule 506 offering need not be aggregated for Rule 504 (or Rule 505) purposes. However, Rule 504 and Rule 505 offerings completed within a twelve month period would be aggregated. This is true since both Rules were promulgated pursuant to Section 3(b) of the 1933 Act and both require that all sales made pursuant to Section 3(b) before the start of and during the offering of securities must be aggregated in determining the offering price. See letter re Pacific Physician Services, Inc. dated July 22, 1985. In both instances issuers should always examine whether the offerings must be integrated.
The ban on general solicitation and general advertising and the resale restrictions will not apply if offers and sales under the Rule are made
Exclusively in states that provide for the registration of the securities and require the public filing and delivery to investors of a substantive disclosure document;
If sales are made in a state without such a registration requirement, then the securities must have been registered in a state with such a requirement and the required disclosure document must be delivered to all purchasers regardless of their state of residence;
Exclusively according to a state exemption from registration that permits general solicitation and advertising so long as sales are made only to “accredited investors”.
G. Rule 505 provides an exemption for offerings up to $5 million pursuant to Section 3(b) of the Securities Act of 1933 subject to the following conditions:
1. The issuer may not be an investment company.
2. The conditions in Rules 501 and 502 must be met.
3. The aggregate offering price must not exceed $5 million in a twelve month period. In computing the aggregate offering price any securities sold in reliance on any Section 3(b) exemption and any securities sold in violation of Section 5 must be included.
Note: (1) The aggregate offering price concept includes all securities, and does not make a distinction as to whether a prior offering was for debt securities and the current offering is for equity.
(2) The aggregate offering price concept also would include securities sold in offerings not integrated with the current offering.
(3) A new offering need not include in the aggregate offering price sales of securities in violation of Section 5 taking place more than 12 months prior to the new offering despite a rescission offer being made in the interim.
4. There are no more than, or the issuer reasonably believes that there are no more than 35 purchasers who need not be sophisticated. Accredited investors are excluded from the count.
5. If the issuer, its promoters, officers, directors, general partners or 10 percent security holders or other persons associated with the offering have been the subject of certain administrative orders or actions this exemption cannot be used, absent a waiver from the Commission.
H. Rule 506 provides an exemption for limited offers and sales with regard to the dollar amount pursuant to Section 4(2) subject to the following conditions:
1. The conditions in Rules 501 and 502 must be met.
2. There are no more than, or the issuer reasonably believes there are no more than 35 purchasers who must be sophisticated. Accredited investors are excluded from the count.
3. An issuer must reasonably believe that each purchaser who is not an accredited investor must either alone or with his purchaser representative have such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.
Note: (1) Only purchasers must meet the "sophistication" test. There is no sophistication test for offerees.
(2) A corporation proposed to use Rule 506 for the purpose of effectuating a plan of reorganization in order to change its corporate domicile. The plan of reorganization required shareholder approval. In order to comply with the "reasonable belief" provisions of Rule 506(b)(2)(ii), the corporation proposed to furnish, at its expense, an independent purchaser representative to all shareholders not satisfying the sophistication standards of Rule 506 and who did not otherwise have a purchaser representative of their own choice. The Division concurred in the method by which the issuer proposed to comply with Rule 506(b)(2)(ii) but limited its decision to the facts of the particular reorganization. See letter to Ticketmaster Corporation dated March 1, 1984.
I. Rule 507 disqualifies issuers from the future use of Regulation D if a court finds that the filing requirements of Rule 503 have been violated. The Commission has the power to waive such disqualification upon a showing of good cause.
Note: If Rule 503 is amended to delete the requirement to file a Form D, Rule 507 will be eliminated. Release No. 33-7301
J. Rule 508 provides that the failure to comply with all of the terms, conditions and requirements of Regulation D will not necessarily cause a loss of exemption for an offer or sale to a particular individual if the issuer shows:
(a) The condition violated was not intended to protect the complaining individual,
(b) the failure to comply was insignificant to the offering as a whole (general solicitation, dollar ceilings and numerical purchaser limits are always significant to the offering as a whole), and
(c) a good faith and reasonable attempt was made to comply with all of the terms, conditions and requirements of Regulation D.
Rule 508 also preserves the Commission's right to pursue any failure in compliance regardless of significance.
F. Through amendments to Section 18 of the Securities Act, the '96 Act preempts state securities registration and "merit review" requirements for certain securities, including securities listed on the NYSE, AMEX, or NASDAQ National Market System; securities sold to "qualified purchasers" (in December 2001, the Commission issued Release No. 33-8041 that proposed a rule that would define a “qualified purchaser” to be any accredited investor as defined in Regulation D); and securities sold in private transactions under section 4(2), including private placements under Rules 506.
It would appear that the states could still regulate offerings made in reliance on Rule 504 and many offerings made in reliance on Rule 505; most offerings made in reliance on Regulation A and Rule 701; and registered offerings by companies whose securities were not listed on NYSE, AMEX, or NASDAQ National Market System and would not be so listed after the offering.
III. Regulation A, a small public offering exemption.
A. Overview of Regulation A (Rules 251 through 263)
1.This regulation (adopted pursuant to Section 3(b)) grants an exemption from the registration provisions of the Securities Act of 1933 for public offerings of securities of no more than $5 million in a 12 month period, including no more than $1.5 million in non issuer resales.
2. Except as provided by the test-the-waters provisions set forth in Rule 254, no offers may be made until an offering statement is filed with the Commission and no sales may be made until the offering statement has been qualified and an offering circular is delivered.
3.Pursuant to the test-the-waters provisions, an issuer may obtain indications of interest in a proposed offering prior to filing an offering statement; however no solicitation or acceptance of money nor any commitment to purchase is permitted until the offering statement is qualified. Copies of any written document shall be submitted to the Commission.
B. Rule 251 sets forth the scope of the exemption
1. The issuer:
a. must be organized in the U. S. or in Canada;
b. must not be a reporting company nor an investment company;
c. must not be a development stage company that either has no specific business plan or purpose, or has indicated that its business plan is to merge with an unidentified company or companies;
d. may not be issuing fractional undivided interests in oil or gas rights or similar interests in other mineral rights;
e. must not be disqualified because of administrative or court orders as set forth in Rule 262;
2. The aggregate amount offered and sold in reliance on the Regulation A exemption may not exceed $5 million in any 12 month period. Not more than $l.5 million of such amount may be offered and sold by selling securityholders and no affiliate resales are permitted if the issuer has not had net income in at least one of its last two fiscal years.
Note: (1) Unlike Rules 504 and 505, in computing the aggregate amount offered, sales made in the preceding l2 months in reliance on other Section 3(b) exemptions or sales made in violation of Section 5 need not be included.
(2) If securities are offered for both cash and non-cash consideration, the offering price should be based on the cash price. If the securities are not offered for cash, the offering price should be based on the value of the consideration as established by bona fide sales of that consideration or, in the absence of sales, on the fair value as determined by an accepted standard.
3. Integration with other offerings
a. There is a specific safe harbor provision relating to integration which states that offers and sales made in reliance on Regulation A will not be integrated with any prior offers or sales. It further provides that there will be no integration with subsequent offers or sales that are (1) registered under the Securities Act, (2) made in reliance on Rule 701 or Regulation S, (3) made pursuant to an employee benefit plan, or (4) made more than six months after the Regulation A offering is completed.
b. If the safe harbor rule does not apply to particular offers or sales, such offers and sales still may not be integrated depending upon the particular facts and circumstances. See Securities Act Release No. 4552 (November 6, l962) and Section D.1.b. of this outline.
4.Offers and Sales
After seven copies of the offering statement have been filed with the Commission's regional office in the region in which the issuers principal business operations are or are proposed to be conducted or with the Commission's office in Washington D.C. the following activities are permissible:
a. Oral offers may be made and copies of the preliminary offering circular may be delivered to prospective investors. The preliminary offering circular must be clearly marked as such, must contain substantially the same information as the final offering circular and must indicate that no securities may be sold until a final offering circular is delivered.
b. Advertisements indicating only (1) the name of the issuer, (2) the amount being offered and the offering price, (3) the general type of the issuer's business and (4) the general character and location of its property may be used, if they state from whom an offering circular may be obtained.
c. After the offering statement has been qualified oral offers and written offers, if accompanied or preceded by a an offering circular, may be made if a preliminary or final offering circular is furnished to the purchaser at least 48 hours prior to the mailing of the confirmation and a final offering circular is delivered with the confirmation, unless it has previously been delivered.
C. Offering Statement and Offering Circular
1. An offering statement is qualified without Commission action twenty days after filing, unless a delaying notification is included providing that it shall only by qualified by order of the Commission.
2. The offering statement must be signed by the issuer, its chief executive officer, chief financial officer, a majority of the members of its board of directors and any selling securityholder. A $500 fee must be paid with the initial filing of the offering statement.
3. The offering circular which is a part of the offering statement shall include the narrative and financial information required by Form 1-A in a clear, concise and understandable manner and the cover page of every offering circular shall include a legend indicating the Commission has not passed upon the merits or given its approval to any securities offered.
D. Test-the-Waters Rule -- Rule 254
1. Prior to the filing of the offering statement an issuer may publish or deliver a written document or make scripted radio or television broadcasts to determine whether there is any interest in the securities intended to be offered. A copy of this document should be submitted to the Commission's regional office for the region in which the issuer's operations are or are proposed to be conducted or with the Commission's main office in Washington, D.C.
2. The written document or script of the broadcast shall
a. state that no money or other consideration is being solicited and, if sent in response, will not be accepted;
b. state that no sales of the securities will be made or commitment to purchase accepted until delivery of an offering circular that includes complete information about the issuer and the offering;
c. state that an indication of interest made by a prospective investor involves no obligation or commitment of any kind; and
d. identify the chief executive officer of the issuer and identify briefly and in general its business and products.
NOTE: An issuer may describe its business in as much detail as it chooses. The rule sets forth the minimum information that must be provided and does not limit the information that may be included. See letter re Michael I. Keller Enterprises, Ltd. dated December 1, 1994.
3. Material which has been submitted to the Commission in accordance with the terms of the rule is not a Securities Act "prospectus", and therefore is not subject to liability under section 12(2) of the Securities Act. It is, however, subject to the other anti-fraud provisions of the federal securities laws, such as section 17(a) of the Securities Act and section 10(b) of the Exchange Act.
4. No sales may be made until 20 days after the last publication or delivery of the document or radio or television broadcast.
5. Any written document may include a coupon, returnable to the issuer, indicating interest in a potential offering.
6. If an issuer has a bona fide change of intention and decides to register an offering after using the test-the-water process, it must wait at least 30 days before filing a registration statement with the Commission.
E. Sales material and subsequent reports regarding sales and use of proceeds
1. Advertisements and other sales material may be used as indicated in Section B.4.b. and c. of this outline. Copies of such material should be filed with the office of the Commission where the offering statement was filed when the material is first published or delivered.
2. The issuer should report information concerning the amount of securities sold and the use of proceeds every six months after the offering statement has been qualified until substantially all of the proceeds have been applied or within 30 days after the completion of the offering, whichever is the latest event.
F. Information required to be disclosed in offering circular
1. The offering circular must include a balance sheet as of the end of the most recent fiscal year and statements of income, cash flows and other stockholders equity for each of the two fiscal years preceding the date of the balance sheet. Financial statements covering similar periods must be furnished for businesses acquired or to be acquired. Financial statements must be prepared in accordance with generally accepted accounting principles in the U.S. but need not be audited; however, if audited financial statements are available they just be provided.
2. For non-financial disclosure, the issuer may choose from three options:
a. A question and answer format substantially similar to the SCOR document used by many states to register securities for small offerings may be used by a corporate issuer. The requirements for this format are set forth in Model A of Part II of Form 1-A.
b. The traditional Regulation A format which is similar to a prospectus used in a registered offering may be used by any issuer. The requirements for this format are set forth in Model B of Part II of Form 1-A.
c. Any issuer may choose to furnish the information required by Part I of Form SB-2.
G. Substantial Good Faith Compliance Defense
l. Rule 260 provides that a failure to comply with a term, condition or requirement of Regulation A will not result in the loss of the exemption for any offer or sale to a particular individual, if the person relying on the exemption establishes:
a. the condition violated was not intended to protect the complaining individual;
b. the failure to comply was insignificant to the offering as a whole ( issuer requirements, aggregate offering limitations and the requirements to file an offering statement and deliver an offering circular are always significant to the offering as a whole); and
c. a good faith and reasonable attempt was made to comply with all of the requirements of Regulation A.
2. Rule 260 preserves the Commission’s right to pursue any failure in compliance regardless of significance.
H. Disqualification Provisions
1. Rule 262 provides that if the issuer, any of its predecessors or any affiliated issuer, any of its directors, officers, general partners or 10% equity owners, any promoter, any underwriter or partner, director or officer of such underwriter are subject to certain specified civil, criminal or administrative actions, the exemption provided by Regulation A will not be available.
2. The rule provides that the Commission, upon a showing of good cause, may waive the disqualification provisions.
IV. New Rule 1001 -- California Exemption
A. On May 1, l996 the Commission adopted Rule 1001 which provides a Federal exemption for offerings of up to $5 million that meet the qualifications of a new California exemption designed to assist small business.
B. The California law provides an exemption from state law registration for offerings made to specified classes of qualified purchasers that are similar, but not the same as, accredited investors under Regulation D. Unlike Regulation D, various methods of general solicitation are permitted under the California law. Section 25102(n), California Corporations Code
C. While new Rule 1001 is based on a California statute, the Commission proposed also to provide the same exemption for each state that enacts a transaction exemption incorporating the same standards used by California.
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