Securities Act
Registration Exemptions
Section 4(2)
• Nine big words
• “qualified investors”
– “sophistication” plus
– “access to information”
(last updated 22 Feb 11)
How can an issuer avoid registration?
By the way, what are the “costs” of registration?
§ 4 Exempted transactions
The provisions of section 5 shall not apply
to–
(1) transactions by any person other
than an issuer, underwriter, or dealer.
(2) transactions by an issuer not
involving any public offering.
Securities Act
of 1933
Universe (Capital Formation)
Securities offerings
Registration
• Section 5 (filing,
disclosure, SEC
review, liability)
No registration
• Section 3 (govt,
bank, comm paper, nonprofit, intrastate, small)
•
Section 4 (public
trading -- not involving I,
UW, D; not public
offering)
Non-securities
financing
SEC v. Ralston Purina (US 1953)
Artist, bakeshop foreman, chow loading foreman,
clerical assistant, copywriter, electrician, stock clerk, mill
office clerk, production trainee, production trainee,
stenographer, veterinarian
SEC v. Ralston Purina (US 1953)
Company’s argument: “Key employee
is special … and sympathetic to
management.”
1935 SEC general counsel:
• # offerees
• Relationship offeree-issuer
• # of units
• $ size of offering
• Manner of offering
SEC v. Ralston Purina (US 1953)
“The natural way to interpret the
private offering exemption is in
light of the statutory purpose. …
An offering to those who are
shown to be able to fend for
themselves is a transaction “not
involving any public offering”
Rejection: quantity limits based on $
size, # of offerees
Justice Tom Clark
(JD – Texas,
son Ramsey)
Let’s explore the statutory private
placement exemption …
Hypothetical #1
Petroleum Management Ltd. drills for oil in
Wyoming and looks to sell limited partnership
interests.
Doran wants to invest. He’s a graduated
petroleum engineer worth more than $1
million. He has bought oil/gas properties
worth $850,000. He reviews PML’s drilling
logs and has access to other business info.
Besides Doran, Marty (a mystery investor)
also invests. Can Doran rescind?
Hypothetical #2
Madeline, about whom we know little, is
also approached about investing in
PML.
She signs a document. Madeline
invests and then wants out.
If she can rescind, can't PML
counterclaim on her rep and warranty,
and recover any rescission
damages? After all, she induced the
issuer into believing she was qualified.
Gentlemen:
_________________(the "Purchaser") intends to purchase the Securities from the Happy
Drilling Limited Partnership (the "Seller").
For good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Purchaser certifies, represents and warrants to, and covenants with, the
Seller that:
1. The Purchaser understand that (a) the Securities have not been registered or qualified
under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of
any state, (b) the Seller is not required, and does not intend, to so register or qualify the
Securities and (c) the Securities cannot be resold unless (i) they are registered and qualified
under the Securities Act and applicable state securities laws or (ii) an exemption from
registration and qualification is available.
2. The Purchaser (a) is a substantial, sophisticated investor having such knowledge and
experience in financial and business matters, and in particular in such matters related to
securities similar to the Securities, that it is capable of evaluating the merits and risks of
investment in such business and the Securities, and (b) is able to bear the economic risks of
such an investment.
3. The Purchaser has been furnished with, and has had an opportunity to review, all financial
data and other information relating to Happy Drilling Ltd. and the Securities requested by the
Purchaser. The Purchaser has had any questions arising from or relating to such review
answered to the satisfaction of the Purchaser.
4. The Purchaser is acquiring the Securities for her own account and not with a view to or for
sale in connection with a distribution within the meaning of Section 5 of the Securities Act.
5. If the Purchaser sells or otherwise transfers any of the Securities, the Purchaser will obtain
from any subsequent purchaser the same certifications, representations, warranties and
covenants contained in the foregoing paragraphs and in this paragraph.
Very truly yours,
Madeline
§ 14 Contrary Stipulations Void
Any condition, stipulation, or provision
binding any person acquiring any
security to waive compliance with any
provision of this title or of the rules and
regulations of the Commission shall be
void.
Hypothetical #3
Mark, who has just won the state lottery
$20 million jackpot (Lottery – dfn: “tax
on the math challenged”).
PML sends Mark an offering circular
that looks like a prospectus.
Mark invests and then wants his money
back.
Hypothetical #3
Mark, who has just won the state lottery
$20 million jackpot (Lottery – dfn: “tax
on the math challenged”).
PML sends Mark an offering circular
that looks like a prospectus.
Mark invests and then wants his money
back.
Warren Buffett
Hypothetical #4
Martha manages Oil&Gas Partners III, a
$200 million venture capital fund. She
has her VC fund invest in PML – along
with 25 other institutional investors.
But Martha never receives drilling logs,
though she had requested them. Now
she wants out.
Hypothetical #5
OGF sells its investment to mystery
Marty. Anything to keep OGF from
getting out this way?
Not “qualified”
investor
Issuer
“Qualified”
investor
Hypothetical #6
Petroleum Management (not a public
company) wants to sell shares to its
employees. It offers a "Employee Stock
Ownership Plan" for any employee who
takes the initiative to ask. Many
employees participate including riggers,
loading foremen, stenographers, office
clerks, production trainees, and
electricians. Is registration required?
What if PML goes public and becomes a
reporting company.
ESOPs today!
Non-public companies
See Rule 701
Public companies
See Form S-8
• Pursuant to written plan
• Purchasers: Ds, Os, Eees,
consultants/advisors (family
members)
• Up to each 12 months
(greater of)
• Pursuant to written plan
• Purchasers: Eees, (family
members)
• No limits on amount
• Disclosure: plan, refer to
SEC filings
• Describe any restrictions
– $1,000,000
– 15% of net assets
– 15% of outstanding shares
• Disclosure: plan, Reg A
financials, how pay/withdraw
• Becomes “restricted stock”
Compare §4(2) exemption to Reg D …
§4(2)
Issuer
$$ limits
Marketing
# of investors
Any issuer
None
No offers to
“unqualified”
No limits
Type of investor
Only “qualified
investors”
Disclosure
“access”
(sliding scale)
Resales
SEC filing
Only to “qualified
investors”
None
(until file RS)
Rule 504
Rule 505
Rule 506
The end