Spring 2013
Securities Regulation
Linda Boss
Module VI Notes
March 14, 2013
7. SECONDARY MARKET TRANSACTIONS
I.
Introduction
a. For most secondary market transactions, direct negotiations between purchasers and sellers are
simply impractical
b. NYSE still uses physical market space
c. NASDAQ—
i. Securities dealers are willing continuously throughout the trading day, to buy and sell
securities for their own account at particular prices
ii. Known as market makers
iii. The bid price is always set below the ask price, so they make money on the ‘spread’
iv. Any single security may have multiple market makers all competing—competition
reduces transaction costs
d. Section 5 continues to apply indefinitely in secondary markets
i. Secondary market transactions are made possible through exemptions from § 5 [mainly
§§ 4(1) & 4(4)
ii. 4(1) exempts transactions from § 5 so long as no ‘issuer, underwriter, or dealer’ is present
in the transaction
iii. 4(4) exempts unsolicited broker’s transactions
e. this is a transaction by insiders where we won’t consider the transaction part of an offering, but
instead part of a trading market. We accept them w/ concern and many times we’ll say insiders
have informational advantages and there’s asymmetries that are as concerning as when an issuer
offers securities to the public.
f. Turns out deciding whether we’re concerned about asymmetry depends on the definition of
underwriter.
g. If we call someone an underwriter, we treat the transaction as subject to the registration
requirements. If we say no underwriter is involved, we in effect turn off that concern.
h. So who is an underwriter, in the statutory definition, legal sense. There are two kinds
i. Underwriters that have purchase securities and are planning to resell to the public
1. ‘purchase…with view to…the distribution’
ii. Those who help an issuer sell securities to the public
1. ‘offers to sell for an issuer…’
iii. Distribution means public offering, which also include intrastate offerings.
i. Types of underwriters
i. A firm commitment underwriter is going to purchase w/ view to distribute.
ii. A best efforts underwriter is going to ‘offer or sell for an issuer in connection with the
distribution’ [agency relationship]
iii. A purchaser who purchases restricted securities and re-sells them to the trading market.
Does that resale concern us, because it now looks a lot like a firm commitment
underwriter. Is this purchase someone who purchased ‘with a view to distribute’
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Securities Regulation
II.
iv. An insider who acquires securities [restricted or not] and distributes them into the trading
market. If that insider has people helping out, we might argue those people are acting
either for an issuer or purchasing with a ‘view to distribute’ this scenario also concerns us
because we view the insider as being, in effect, like the issuer.
Who is an Underwriter?
a. § 2(a)(11)
i. any person who does the following is an underwriter
1. purchase from an issuer with a view to, or offers or sells for an issuer in
connection with, the distribution of any security
2. participates or has a direct or indirect participation in any such undertaking
3. participates or has a participation in the direct or indirect underwriting of any such
undertaking
b. Gilligan, Will & Co. v. SEC
i. Applicable law
1. ‘distribution’ requires a ‘public offering’
2. court found that the resales contemplated and executed by petitioners were
themselves a distribution or public offering
3. the governing fact is whether the persons to whom the offering is made are in
such a position with respect to the issuer that they either actually have such
information as a registration would have disclosed, or have access to such
information
ii. reasoning
1. here, the purchasers ‘were not supplied with the material information of the scope
and character contemplated by the Act nor were the purchasers in such a relation
to the issuer as to have access to such information concerning the company and its
affairs’
2. the intention to retain the securities only if the issuer continued to operate
profitably was equivalent to ‘purchased with a view to distribution’ within the
statutory definition of underwriters
iii. Notes
1. Guidance on ‘changed circumstances’ that will allow an investor to make the
claim that she did not purchase securities with a view to the resale of such
securities
a. A change in circumstances of the issuer isn’t going to cut it
b. Court looks at reselling investor’s changed circumstances
c. Passage of time
i. Courts use a two-year holding period rule of thumb to determine if
securities have ‘come to rest’
ii. After 3 years, presumption of investment intent is conclusive
2. If distribution = public offering, can a reselling investor sell to investors able to
‘fend for themselves’ without becoming an underwriter?
a. Aka ‘secondary private placement’
c. SEC v. Chinese Consolidated Benevolent Ass’n
i. Facts
1. Defendant set up a committee which has had no official or contractual relation
with the chinese government for the purpose of Soliciting and receiving funds
from members of Chinese communities for transmission to China for general
relief
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Securities Regulation
2. Neither the committee nor any of its members has ever made a charge for their
activities or received any compensation from any source.
ii. Reasoning
1. Because it engaged in selling unregistered securities hen it solicited offers to buy
the securities ‘for value’ it violated § 5
2. The solicitation was equally for the benefit of the Chinese government and
broadly speaking was for the issuer in connection with the distribution of the
bonds
3. It does not matter that there was no contractual arrangement with the Chinese
government
a. The aim of the Act is to protect investors
b. It can make no difference whether an issuer has solicited orders through an
agent, or has merely taken advantage of the services of a person interested
for patriotic reasons in securing offers to buy.
4. 4(1) doesn’t require you to be an issuer—if you participated you’re in violation
d. in a registered public offering, ‘distribution’ is sale of securities from issuer to underwriter to
investors purchasing from underwriters and brokers.
i. This is an ‘initial distribution’
ii. Resale transactions after initial investors take ownership are separate from public offering
and can use 4(1) exemption
e. While it is true that 4(1) exempts transactions, not individuals, just b/c a broker is involved
doesn’t delete the exemption. Were its involvement enough to deny the 4(1) exemption to
persons not issuers, underwriters or dealers, few secondary transactions involving the resale of
restricted securities would be exempt under 4(1)
f. CLASS HYPOTHETICALS
i. Hypo #1
1. Chinese consolidated case.
2. What did the association do wrong?
3. It was facilitating the sale of an unregistered security—doesn’t matter that it
wasn’t compensated for that facilitation. It was acting for an issuer—the Chinese
govt. doesn’t matter that the chinese govt. didn’t hire them or encourage them to
facilitate these sales.
4. Civil injunction—stop the sale.
5. Association’s argument was that they couldn’t’ be acting on behalf of the chinese
govt. if the chinese govt. didn’t even know they were doing this.
6. A systematic continual offering is going to have to be regulated by the SEC and
registered with the SEC
7. This is dangerous because—the chinese americans are about to lose their money
and haven’t been told the chinese govt. is not going to be able to pay this. Had
there been disclosure, they would’ve known 5% doesn’t cover the risk.
8. Also dangerous because the second circuit has said speaking to someone about a
financial matter could make you an underwriter subject to a civil injunction. What
about the first amendment? The court doesn’t even touch that subject.
9. This holding is really broad—participation is enough to close you down.
ii. Hypo #2
1. NY Times runs story on chinese govt. raising money in US by selling bonds. Are
they an underwriter?
2. In chinese consolidated, they helped send the funds to china and they collected the
funds
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Securities Regulation
3. This is entirely informational—there’s no actual assistance.
4. This is one story—not continuous and systematic
iii. Hypo #3
1. Sells the securities b/c not a good investment. Is he an underwriter?
2. Is he acting for the issuer? Not really, he’s acting for himself. But what about the
first definition? View to distribute.
3. To decide that, it’s factual, but you have to look at what he was thinking at the
time he purchased it—if he purchased with a ‘view’ to distribute he’s an
underwriter
4. Look at why he decided to sell—pursuant to his original plan to resell or was
there a change in circumstances
5. According to the court he is an underwriter
a. He has information public investors don’t have that he’s re-selling to
b. By definition, if he purchased unregistered securities pursuant to a private
placement exemption, he can fend for himself. He had same information
as issuer. He became informationally part of the issuer. Now, he has that
special information, and when he sells, he still has that information and is
taking advantage of his special informational position.
c. Does it matter that he held for ten months?
i. If he held for 36 months, that’s different. There’s a safe harbor that
3 years is fine, objectively. That’s not intent to sell. You’ve joined
the trading market at that time and the securities have come to rest.
1. Why? Whatever information advantages you have, the
public should know by 3 years ahead of time
ii. SEC now says 1 year and you’re clear. What the SEC says is
relevant to interpreting ‘view to distribute’ language but not
definitive. Under statute, we have court guidance, somewhat
influenced by SEC.
iii. Holding period matters b/c it goes to whether he has informational
assymetries.
d. What about change in circumstances?
i. if you can show an event that changed your circumstances as an
investor [needing money] then you aren’t an underwriter
ii. a change in companys circumstances [them losing money] is not
enough
iii. SEC does not recognize change in circumstances as a factor.
iv. Hypo #4
1. Gilligan borrows money from bank. Pledges securities as collateral for his loan.
He defaults.
2. Can bank sell the securities?
a. Is the bank a statutory underwriter?
b. When it took the pledge, did it take it ‘with a view to distribute’
c. There’s no expectation here that Gilligan defaulted and the bank could
even sell these securities
3. Can bank sell the securities if he expected Gilligan to default?
a. Here, the bank expected default and selling the securities
b. In this case, they are an underwriter. Bank serves as an intermediary.
c. Gilligan purchases w/ view to distribute and so does the bank, taking a
pledge w/ view to distribute.
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Securities Regulation
III.
d. If credit looks bad and it looks like there’s no way this guy is repaying the
loan, the bank is likely going to fail and be an underwriter
4. It all depends on intent.
Control Persons’ [Insider] Resales
a. Control persons face greater regulation and can be liable for actions of persons under their
control
b. Control persons must register sales
i. Control person might be underwriter with view to distribute
ii. Resale transaction may involve an underwriter
c. Underwriters for Control Persons
i. § 2(a)(11) says that ‘issuer’ includes control persons, only for the definition of an
underwriter under this statute alone.
1. Replace ‘issuer’ with ‘control person’ throughout the definition of an underwriter.
2. This will allow brokers to become underwriters, and treats insiders/control
persons as issuers.
ii. to determine if someone is an underwriter, you have to determine whether the person is
selling or offering securities for a control person.
iii. Control persons are NOT issuers under § 4(1)
iv. United States v. Wolfson
1. Facts
a. Wolfson owned majority of shares of corporation and controlled
corporation
b. Wolfson sold stock through brokers
2. Reasoning
a. Argument 1--control persons argue they can claim a 4(1) exemption b/c
they are not issuers, underwriters, or dealers.
i. 4(1) exempts transactions, not classes of persons
ii. 4(1) ignores § 2(a)(11) which defines ‘underwriter’
1. the brokers provided outlets for stock of issuers and were
therefore underwriters because they were selling for a
control person
iii. therefore, sold stocks in ‘transactions by underwriters’ and no 4(1)
exemption
b. argument 2—since brokers are within 4(4) exemption and aren’t
underwriters, the same should go for the control persons.
i. this exempts the brokers, but not the control persons
ii. control persons don’t get to take brokers’ exemptions when they
don’t tell the brokers they are not exempt from securities
regulations.
c. As to the brokers’ transactions, they’re exempt b/c their offers are exempt,
but for the very same sales, the control person is not exempt due to the
definition of ‘underwriter’
d. The holding is that these are transactions by an underwriter by virtue of
broker acting for a control person, even though the brokers get their own
exemption. Wolfson goes to jail.
3. Holding
a. 2(a)(11) with 4(1) and 5 places a registration obligation on control persons
seeking to resell their securities
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Securities Regulation
v. Class Hypotheticals
1. #1
a. what if wolfson sold his stock over 16 months, always at market price? are
these transactions in a ‘distribution’?
b. safe harbor—Rule 144. Only way control persons can sell without being
nervous
2. #2
a. what if wolfson sells directly to dilbert using no broker?—purchaser
cannot ‘fend for himself
b. this is exempt! He’s not an underwriter, issuer, or dealer.
c. Assume we agree this should be regulated—how? If there’s anybody
who’s identifying the investor in this sale, that person becomes a statutory
underwriter and the transaction is now not exempt under 4(1) and we sell
wolfson to jail for this sail.
d. If it’s completely clean, non-intermediated, there’s a hole for the control
person.
3. #3
a. wolfson’s VP who owns 3% stock and has parted ways with Wilson—who
are the insiders/control persons?
b. If the VP sells stock through brokers, are his transactions exempt? Is he a
control person?
c. SEC takes the view that this person has access to inside information. Some
courts have taken the view that it has to be someone who can compel the
issuer to file a registration statement.
i. Slight conflict here
ii. In practice, look at no-action letters
d. If there’s a clear ability to demand registration, he’s a control person.
4. #4
a. Johnson has inside information—largest shareholder, etc. clearly control
persons
b. Problem—ackerberg is sophisticated—he can fend for himself.
c. 4 1½ exemption is used in this situation.
d. So it’s not a public offering, and ‘not a distribution’. If it’s not a
distribution, there’s no underwriter.
e. If there is not a distribution, there can be no underwriter
f. If you purchase w/ view to resell in non-distribution, you can’t be an
underwriter. If you act for a control person in connection w/ nondistribution, you can’t be an underwriter.
d. Section 4 (1½) Exemption
i. Whenever a control person resells shares, two separate analyses must occur
1. ask whether control person is acting as an underwriter for the issuer
a. 4(1) is never available if the initial purchaser is acting as an underwriter
for the issuer
b. control persons must avoid acting as an underwriter purchasing with a
view to distribution for their resales
2. is a third party acting as an underwriter for the control person
a. an intermediary may assist the control person in the resale
b. an investor may purchase from the control person, then resell the securities
to another investor
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Securities Regulation
IV.
ii. how to avoid the registration requirement for control persons
1. status of the intermediary facilitating the control person’s sales cannot be
characterized as an underwriter, nor can any other underwriter for the control
person be present.
a. Then 4(1) will apply and can be used
2. 4(2) rationale applies to control persons—private placements to investors who are
able to ‘fend for themselves’
a. this applies to control person resales to sophisticated investors
iii. the 4 (1½) exemption
1. 4(1) exemption informed by 4(2)’s distinction between public and private
offerings
2. if control person sells to ‘fend for himself’ investor, no ‘distribution’ under
2(a)(11) and no ‘underwriter’ in control person’s transaction. 4(1) becomes
available to control person.
a. Section 4(2) says we exempt everything that’s not a public offering. So we
go there to determine public vs. private
i. Sliding scale—sophistication + access
3. We put brokers on the hook and make them statutory underwriters working for a
control person in connection w/ a distribution. But you can sell to that qualified
investor, b/c that broker isn’t acting in connection w/ a distribution. Loophole!
iv. Ackerberg v. Johnson
1. You don’t start w/ looking at the ‘view to distribution’ before you figure out if it’s
even a distribution at all.
2. The amount of time he held the stocks makes 0 difference to the analysis because
he’s still a control person.
3. So long as he’s engaged in a distribution, we’re nervous. If not, we’re fine.
4. Foot note 4—‘absent a distribution, no party to the transaction can be an
underwriter’ that’s what they should’ve focused on, but they didn’t.
5. Holding period has 0 to do with an exemption analysis—the only thing that
counts is whether there’s been a distribution.
6. Distribution analysis depends on 4(2)—so whether there’s a section 4(1)
exemption b/c there’s no distribution depends on whether 4(2) answers the
question of a public offering.
v. Rule 144A
1. Says if you buy restricted securities and sell them in this big market of
institutional investors that are qualified—they are all 4 1½ transactions and part of
a private market. So you’re good there.
Rule 144
a. Introduction
i. SEC argues that the permissibility of resales should focus more on the amount of
information on the issuer available in the secondary market
ii. In determining whether the seller is an underwriter, courts equate ‘distribution’ with
‘public offering’ and look to Ralston Purina in determining whether the purchasers of the
securities are able to ‘fend for themselves’
iii. Rule 144 is a safe harbor for resales from § 5’s registration requirements
iv. The SEC stated the ‘change in circumstances’ concept should no longer be considered as
one of the factors in determining whether a person is an underwriter
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Securities Regulation
v. Complying with Rule 144 exempts the party in question from being deemed an
underwriter, and by excluding certain parties from underwriter status, Rule 144 makes §
4(1) potentially available.
vi. Rule 144 definitions
1. ‘affiliate’
a. a person that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, such issuer
b. a non-affiliate is basically a non-insider.
2. ‘restricted’ security
a. a security acquired directly or indirectly from the issuer, or from an
affiliate of the issuer, in a transaction or chain of transactions not
involving any public offering
b. those who own restricted securities are those purchasers of restricted
securities who get securities through a 506 offering, 505, 4(2), somehow
they have restricted securities they can’t sell into a public trading market.
vii. Rule 144 may provide relief for:
1. A non-affiliate selling restricted securities
2. An affiliate selling either restricted or unrestricted securities
viii. Basic requirements of Rule 144 fall into two categories
1. Current public information
2. Holding period for restricted securities
b. Class notes
i. 144 says we won’t consider this to be a ‘distribution’
ii. non-affiliate restricted = publicly available information and holding period of six months.
1. If company has publicly available information [reporting company up to date in
filings; non-reporting companies that make available information into the market]
then all you have to do is hold for six months, then you can resell as much as you
want to. There are no limits. You do not have to go through any gatekeeper, you
don’t even have to notify the SEC of your sale.
iii. Non-affiliate restricted = holding period of a year
1. Someone who does not make information publicly available has to hold for a
year. Same thing goes, though. No limits on distribution, no broker, no notice of
sale.
2. After a year, even if company is going under and no one’s filing the right filings,
all you have to do is wait one year.
iv. affiliate restricted = publicly available information, six month holding period, ‘trickle’
into market, broker sales, notice of sale
1. these insiders [broadly defined] are holding restricted stock, they are going to be
required to jump through more hoops to resell their stocks.
2. Trickle requirement depends on what the security is.
a. See ‘limitation on amount of securities sold’ heading below to explain all
three
b. You look at how much interest there is in this stock and if the resale is
going to put too much into the market.
c. You have to trickle securities out into the market in 3 month windows.
v. affiliate non-restricted = publicly available information, no holding period, ‘trickle’ into
market, broker sales, notice of sale
1. you have to jump through hoops, except there is no holding period at all since no
one else is subject to a holding
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2. we treat you like you’re in the market, but we’re still nervous, so subject to all the
other conditions.
c. Holding Period for Restricted Securities
i. Holding period runs from later of the acquisition of securities from either the issuer or an
affiliate of the issuer
ii. The holding period assures persons who buy under exemption have assumed economic
risks of investment and are not acting as conduits for sale
iii. No time limit on person’s status as an underwriter
iv. ONE YEAR for non-exchange act reporting issuer
v. SIX MONTHS for exchange act reporting issuers
vi. Holding period applies only to restricted securities
1. Unrestricted securities do not need to satisfy a holding period requirement to use
Rule 144
vii. Subsequent non-affiliate holders can ‘tack’ on the holding period of the initial acquirer
from the issuer or affiliate
viii. 144(d) contemplates holding period for securities acquired through a gift.
d. Current Public Information
i. Applicability
1. Turns on whether affiliate or non-affiliate seeks exemption
2. Affiliates must always satisfy information requirement
3. non-affiliates, information requirement only for exchange act reporting issuers
a. Information requirement terminates after 1 year holding period
b. No information requirement for non-affiliates reselling securities of nonexchange act reporting issuers
4. Why no information requirement for non-reporting issuers?
a. Market knows little about such issuers
b. One-year holding period is sufficient
ii. Information Required
1. Exchange act reporting issuers satisfy if—
a. Issuer has been an exchange act reporting company for at least 90 days
immediately preceding the sale of the securities; and
b. The issuer has been current in its exchange act periodic disclosure filings
for the last twelve months
2. Non-exchange act reporting issuers
a. Must make available information specified in Rule 15c2-11 of exchange
act
b. Refers to information broker-dealers keep on hand
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3. CHART
Less than 6
months
Non-Aff & No resales
Reporting
6 Months to
1 year
Resales but
information
requirement
applies
1 year or
more
Can resale all
you want
Non-Aff & No resales
NonReporting
No resales of
Aff. &
Reporting restricted
securities.
Unrestricted
securities can be
resold but must
comply with all
144 requirements
No resales of
Aff. &
restricted.
NonReporting Unrestricted
allowed but must
comply with all
144 requirements
No resales
Can resale all
you want
Resales
allowed—
must comply
with all 144
requirement
Resales
allowed, but
must comply
with all 144
requirements
No resales of
restricted.
Unrestricted
allowed but
must comply
with all 144
requirements
Resales
allowed but
must comply
with all 144
requirements
e. Additional Requirements for Affiliate Resales
i. Limitation on Amount of Securities Sold
1. Restricts amount of resales that can occur in 3 month period. It’s the greater of—
a. 1% of outstanding shares or units of same class of securities; or
b. avg. weekly reported trading volume of same class of securities during the
four calendar weeks preceding the filing of notice of the sale with the
SEC, or
c. for debt securities, 10% of the principal amount of the debt tranche.
2. Rationale
a. 4(1) resales shouldn’t disrupt trading market
b. sales of large amounts of securities increase likelihood that reselling
investors may use tactics associated with public offerings
ii. Manner of Sale
1. Affiliates must sell equity through—
a. Unsolicited brokers’ transactions
i. Broker may—
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1. Do no more than execute the order or orders to sell the
securities as agent for the preson for whose account the
securities are sold; and
2. Receive no more than the usual and customary broker’s
commission
ii. Exceptions to general prohibition on solicitation
1. Brokers can inquire of customers who have indicated an
unsolicited bona fide interest in the securities within
preceding 10 business days
2. May post bid and ask quotations in inter-dealer quotation
system
iii. Requires brokers to make reasonable inquiry into the
circumstances of the sale transaction
1. Includes looking at form 144 filing
2. Broker needs to determine length of time affiliate held
securities, how affiliate acquired them, whether affiliate
intends to sell, and if affiliate has made solicitations
b. Directly with a market maker; or
c. A riskless principal transaction
iii. Notice of Proposed Sale
1. Affiliates must file Form 144 with SEC
2. Must be filed before trade is actually executed
3. Affiliates must have bona fide intention to sell securities within a reasonable time
after filing the form
iv. Other Considerations
1. No exemption from antifraud liability. Rule 10b-5 applies
v. Implications
1. With Rule 144 and Rule 506, private placements are going to be more prevalent
in the future.
V.
Rule 144A
a. Introduction/class discussion
i. Another way for investors to resell securities to restricted set of investors
ii. Exempts resales by two types of sellers
1. Offers and sales by a person other than an issuer or dealer—if conditions are met,
no ‘distribution’
2. Securities dealers—if conditions are met, dealers are not ‘participants in a
distribution of securities’
a. Dealers are also not underwriters
b. Securities are not ‘offered to the public’
iii. Practical use
1. Issuer sells securities under 4(2) or Rule 506 of Regulation D to investment bank
2. Investment bank, using 144A, resells securities to institutional investors, known
as ‘qualified institutional buyers’ or QIBs
iv. Rule 144A has four basic requirements
1. Offers and sales must be to a qualified institutional buyer
2. Purchasers must be notified of the exemption
3. Non-fungibility
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b.
c.
d.
e.
f.
4. Disclosure
v. Allows qualified investors to sell to other qualified investors (QIBs)
vi. No such thing as a 144A offering—it’s 4(2) or 506 offering followed by 144A trading.
We just call these 144A offerings because the person you’re selling to is planning on
reselling into a market.
vii. 144A is the safe harbor for 4(1½)
viii. no one can be a statutory underwriter. It’s defining what a non-distribution is for
purposes of creating a trading market.
ix. These are some of the biggest trading markets in US securities—types of securities is
almost all debt. Can’t issue things to these people that is already being traded on the
trading market—there cannot be public market for this stock.
x. You have to give a little bit of information for the safe harbor to apply—statutorily (4) is
not required of 144A, but for safe harbor it is. Only for non-reporting issuers.
Offers and Sales to a Qualified Institutional Buyer
i. Include an entity that in the aggregate owns and invests on a discretionary basis $100
million or more in securities of companies unaffiliated with the QIB
ii. Insurance companies, investment companies, corporations, partnerships, etc.
iii. Banks have additional requirements
1. Must have audited net worth of $25 million
iv. Securities dealers have less requirements
1. Only need to own or invest on discretionary basis $10 million in aggregate of
securities
2. Those acting in a ‘riskless’ principal transaction for a QIB also qualify for QIB
status
a. Broker-dealer is simultaneously acquiring a security from one entity and
selling the same security to another entity
Purchaser Awareness of Exemption
i. Seller must take reasonable steps to ensure purchaser knows sale relies on 144A
ii. Place legend in securities indicating their restricted status and that sales can only take
place through exemption or registration from § 5
iii. CUSIP identifier must be obtained
1. Assigned to financial instruments, providing unique identifier for any particular
stock
iv. Statement in private placement memorandum used in Regulation D offering
Fungibility
i. Excludes convertible securities that allow investors to covert into securities listed on
national securities exchange, unless effective conversion premium is at least 10%
Disclosure
i. Information specified under Rule 144A must be reasonably current and include a very
brief statement satisfying all the requirements under (d)(4)
ii. Issuer must provide information for trades well into the resale market
iii. If the issuer refuses to provide such information in resale market, he can’t use 144A to
subsequently resell
iv. Most issuers will voluntarily disclose all this information in an offering circular—the
market demands information.
Resales
i. Securities resold through 144A continue to be classified as restricted securities
ii. Best way to resell is to more QIBs through 144A
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g. Rule 144A and Registration under the Securities Act
i. QIBs demand registration rights from issuers, which force issuer to register 144A shares
for immediate resale to general public through secondary public offering
ii. Allows QIVs to invest more in Regulation D/144A offerings.
iii. One method for issuers to register securities initially sold through 144A is through shelf
registration
iv. More common is public exchange offer
1. Identical registered securities are exchanged for the restricted 144A securities
2. SEC confines this use to non-convertible debt securities
and investment grade preferred stocks
v. Why not do public offering if you’re granting registration rights?
1. Registration rights are limited
2. Courts hold Rule 144A offering and subsequent public exchange offerings are
separate, non-integrated transactions