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Presenting a live 90-minute webinar with interactive Q&A
Securities Law Challenges in Mergers and
Acquisitions: Overview of Exemptions from
Registration under the Securities Act of 1933 Navigating Reg D Private Placement Exemption Requirements,
Integration, Disclosures, and Solicitation of Target Shareholders
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
WEDNESDAY, FEBRUARY 15, 2017
Anthony G. Mauriello, Special Counsel, Sheppard, Mullin, Richter & Hampton LLP, San Diego
Robert L. Wernli, Jr., Special Counsel, Sheppard, Mullin, Richter & Hampton LLP, San Diego
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© Sheppard Mullin Richter & Hampton LLP 2012
Securities Law Challenges in M&A:
Overview of Exemptions From
Registration Under the Securities Act
for M&A Transactions
Securities Act of 1933 - Section 5
Overview
– All offers and sales of securities must be registered
under Section 5 of the Securities Act, unless such
offer or sale is exempt from registration.
6
Consequences for a Section 5 Violation
Consequences for violating Section 5 include:
– Purchaser has right of rescission under Section
12(a)(1) of the Securities Act
– Accounting consequences
– Potential liability for “control persons” (officers and
directors) under Section 15 of the Securities Act
7
Common Exemptions under Section 5
Section 4(a)(2) – Transaction not involving any
public offering
– Rule 506 of Regulation D
Section 3(b)(1) – SEC authority to exempt up to
$5,000,000
– Rule 504 of Regulation D
Section 3(a)(11) – Offerings limited to a state
– Rule 147 and Rule 147A
Section 3(a)(10) – Fairness Hearing
Regulation S
8
Regulation S
Regulation S – Provides that offers and sales of securities sold outside of the
United States are not subject to Section 5 of the Securities Act
– Potentially useful if securities are to be issued to shareholders of
a target company that are located outside of the United States
9
Section 4(a)(2)
Transactions by an issuer not involving any
public offering, aka the “private placement
exemption”
Note – securities issued under 4(a)(2) are
considered “restricted securities” which means
they may not be resold absent registration or
exemption from registration
See SEC v. Ralston Purina Co., 346 U.S. 119
(1953)
10
Section 4(a)(2) continued…
REMEMBER Section 4(a)(2) exempts transactions by an issuer
that does not involve a public offering.
Leading case – Ralston Purina Corp. (1953) still stands as judicial
framework for interpreting private placements today.
Availability of a Section 4(a) exemption turns on: • The status of the person seeking the exemption.
• The type of securities offering.
Exemptions Available to Issuers Making Initial Sale of unregistered
securities:
• Section 4(a)(5) – aggregate offering price can’t exceed $5M.
• Section 4(a)(6) – exempts crowdfunding
11
Overview of Regulation D
General Rule: Section 5 of the Securities Act of 1933, as amended
(Securities Act) requires all offers and sales of securities to be registered
with the Securities and Exchange Commission (SEC) unless there is an
available registration exemption.
The two main statutory exemptions from Securities Act registration are:
• Section 3 of the Securities Act, which generally exempts certain
securities from being registered with the SEC (e.g., exempt securities
– gov’t securities, non-profits, exempt transactions – intrastate
offerings).
• Section 4 of the Securities Act, which exempts specific transactions
in securities from registration.
12
Overview of Regulation D (cont’d)
Section 4(a) (formerly Section 4) provides that Section 5 does not apply to seven
types of securities transactions (an exemption for a sixth type of securities transaction
was eliminated by Section 944 of the Dodd-Frank Act, but a new type of securities
transaction was added by the Jumpstart Our Business Startups Act of 2012 (JOBS
Act) and a seventh type of securities transaction was added by the Fixing America’s
Surface Transportation Act (FAST Act)).
Availability of a Section 4(a) exemption principally turns on:
• The status of the person seeking the registration exemption Is the person
seeking the exemption the issuer of the unregistered securities or is it a holder of
the unregistered securities looking to resell the securities?
• The type of securities offering.
13
Overview of Regulation D (cont’d)
The SEC has established a variety of registration exemptions, but
the two most commonly used private placement exemptions by
issuers are: • Section 4(a)(2) of the Securities Act (formerly Section 4(2)).
• Rule 506 of Regulation D, which supplements Section 4(a)(2)
by telling issuers how to conduct private placements.
Regulation D currently contains two regulatory safe harbor rules,
each with its own offeree qualifications, limitations and information
requirements.
14
Rule 501 - Definitions
Accredited Investor – bank, private business development company, trust
with assets > $5M, a director/officer of issuer, individual worth > $1M,
income > $200K last two years, any equity with only accredited investors.
Business combination / Rule 145(a) - any transaction of the type specified
in paragraph (a) of Rule 145 and any transaction involving the acquisition by
one issuer, in exchange for all or a part of its own or its parent's stock, of
stock of another issuer if, immediately after the acquisition, the acquiring
issuer has control of the other issuer (whether or not it had control before
the acquisition).
Calculation of Number of Purchasers – don’t include accredited
investors.
Purchaser Representative – representative of purchaser who is
sophisticated on business/financial matters and is not affiliated with the
issuer.
15
Rule 502(a) – General Conditions to be Met
Integration. Issuers cannot make a series of private placements to avoid Section 5’s registration requirements.
– Six month look back and six month look forward.
– Look back and look forward determines whether a Reg. D offering will be considered integrated with another offering.
– During the six month period, cannot have sold same/similar type of class of security.
– Exception – sales of securities pursuant to an employee benefit plan.
– What happens if integrated? SEC looks at entire sale to determine exemption from Section 5.
16
Regulation D - Exemptions
17
RULE 504:
Rule 504 (as amended effective January 20, 2017)
exempts offerings with an aggregate price of up to $5
million during any 12-month period.
Rule 504 does not limit the number of investors or
impose any sophistication requirements on the
investors participating in the offering.
If safe harbors are not available, issuers may still rely on
Section 4(a)(2), so long as there was not a public
offering. General solicitation is a problem
Regulation D – Exemptions (con’td)
18
RULE 505: • Rule 505 previously exempted offerings with an aggregate
price of up to $5 million during any 12-month period.
NOW?........R.I.P.
• Rule 505 previously permitted an unlimited number of
“accredited investors” (which included most institutions, high
net worth individuals and entities with at least $5 million in
assets – see below) and up to 35 non-accredited investors to
participate in the offering.
Regulation D – Exemptions (cont’d)
19
RULE 506: • Rule 506, like Section 4(a)(2), does not limit the amount of
capital an issuer can raise in a private placement.
• Also, it permits an unlimited number of accredited investors and
up to 35 non-accredited investors to participate in the offering.
• The absence of a cap and generous accredited investor base
makes Rule 506 an important safe harbor.
• Any issuer, whether it is a reporting or non-reporting company,
can use this safe harbor to issue any type of debt or equity
security. This is the most commonly-used method of ensuring that
a private placement has a valid Section 4(a)(2) exemption.
Overview - Rule 506(b)
Exemption for limited offers and sales without regard to dollar
amount of offering
(a) Exemption. Offers and sales of securities by an issuer that
satisfy the conditions in paragraph (b) or (c) of this Rule 506 shall be
deemed to be transactions not involving any public offering within
the meaning of section 4(a)(2) of the Act.
(b) Conditions to be met in offerings subject to limitation on manner
of offering:
o (1) General conditions. To qualify for an exemption under this section, offers and
sales must satisfy all the terms and conditions of Rules 501 and 502.
o (2) Specific conditions –
o (i) Limitation on number of purchasers. There are no more than or the issuer reasonably
believes that there are no more than 35 purchasers of securities from the issuer in any
offering under this section.
o (ii) Nature of purchasers. Each purchaser who is not an accredited investor either alone
or with his purchaser representative(s) has such knowledge and experience in financial
and business matters that he is capable of evaluating the merits and risks of the
prospective investment, or the issuer reasonably believes immediately prior to making
any sale that such purchaser comes within this description.
20
Overview - Rule 506(b)
Additionally
Rule 506(b) is a non-exclusive safe harbor.
If an issuer fails to comply with the requirements for a technical
reason, the issuer may still be able to claim its offering was
exempt under Section 4(a)(2).
In other words, Section 4(a)(2) may be a fall-back option for Rule
506(b) offerings.
Clarification – General solicitation is still incompatible with
Section 4(a)(2).
Effect Issuers still rely on 506(b) over 506(c).
21
Overview - Rule 506(c)
The Rule 506(c) amendments were required to remove Regulation
D’s prohibition on general solicitation and general advertising in
offers and sales made under Rule 506.
These amendments are not particularly helpful in the M&A context.
So, in the context of a private offering, general solicitation is allowed,
provided that: • Each purchaser in the offering is an accredited investor (b/c it falls into
a 501(c) category or the issuer reasonably believes the purchaser falls
into these categories).
• Issuers take reasonable steps to verify that all purchasers are
accredited investors (no specific procedures; non-specific safe-
harbor).
• All other terms and conditions of Rule 501, 502(a) and 502(d) are
satisfied.
22
Overview - Rule 506(c)
Important note – the JOBS Act amendments preserve intact the
Rule 506(b) safe harbor.
Thus, issuers can choose to comply with the new Rule 506(c)
amendments or conduct offerings without general solicitation in
compliance with Rule 506(b).
A few facts because I was curious:
• In 2014, there were 33,429 Regulation D offerings reported on Form D filings, accounting for
more than $1.3 trillion raised.
• Rule 506 accounts for 99% of the amounts reported sold through Regulation D, including 97% of
capital raised below the Rule 504 or Rule 505 offering limit thresholds, suggesting that issuers
continue to value the preemption of state securities law s provided for offerings conducted
pursuant to Rule 506.
• Since the effectiveness of Rule 506(c) on September 23, 2013 that eliminated the ban on general
solicitation , only a small proportion (2%; $33 billion) of the capital raised in Regulation D
offerings was raised in offerings conducted pursuant to Rule 506(c).
.
23
Overview - Rule 506(c)
Reasonable Steps to Verify
Issuers relying on Rule 506(c) must take “reasonable steps” to
verify each purchaser is an accredited investor.
Failure to do so disqualifies issuer from relying on Rule 506(c) even
if all investors in the offering are accredited.
There are no specific requirements, but adopting release identified
three factors that issuers should consider (e.g., nature of purchaser,
amount of information issuer has about the purchaser, nature of the
offering).
Verification Safe-Harbors set forth in Rule 506(c)(2)(ii).
24
Overview - General Solicitation
The What: April 5, 2012 - The Jumpstart Our Business Startups Act of 2012
(JOBS Act) was signed. The Act went into effect in 2013.
The Purpose: Expand and ease methods of capital raising by, and relax the
regulatory burden on, smaller companies.
The Reason: Perception in the business community had been that the
historical prohibition on general solicitation in private offerings had:
• Imposed unwarranted costs that acted as a deterrent
• Placed unjustified/unwarranted restrictions on communications related
to resales of securities under Rule 144A.
The How: Section 201(a)(1) of the JOBS Act directed the SEC to revise
Regulation D.
25
Rule 502(c) – Limitation on Manner of Offering
Prohibition on general solicitation and general advertising. Exception = Rule 506(c).
SEC does not define “general solicitation” or “general advertising”
Fact-based test.
SEC has provided guidance but stresses existence and substance of “pre-existing relationship” with potential investors.
26
Rule 502(d) – Limitations on Resale
Limitations on resale. Investors must buy the unregistered securities for their own account, without a view to resell or distribute them to others immediately. Investment intent is relevant to show that the sale does not involve a public offering or a distribution of securities.
In practice, purchase document includes reps/warranties of the investors stating that they are: purchasing securities for themselves, warning them of resale restriction, including legend on certificate stating that the securities have not been registered.
27
Rule 506(d) – Bad Actor Disqualification
Rule 506(d) – The Rule 506 safe harbor is not available for an
offering of securities if any covered person has had a disqualifying
event in the past, unless a bad actor disqualification was obtained.
Parties that have experienced these disqualifying events are
referred to as “bad actors,” and Rule 506(d) is referred to as the
bad actor disqualification provision.
What is a covered person?
What is a disqualifying event?
28
Rule 506(e)
Disclosure of Bad Actor Disqualifying Events
– For disqualifying events that occurred prior to
September 23, 2013, issuers may still rely on Rule
506, but will have to comply with the disclosure
provisions of Rule 506(e)
– Under Rule 506(e), an issuer must furnish to each
purchaser, a reasonable time prior to sale, a
description in writing of any matters that would have
triggered disqualification under 506(d), but occurred
before September 23, 2013.
29
30
Rule 502(b) – Information Requirements
31
Rule 502(b) – Information Requirements
What type of information is required?
The type of information that needs to be provided
depends upon whether:
– 1) It is a U.S. issuer, not subject to Exchange Act
reporting requirements under Section 13 or 15(d); or
– 2) It is a U.S. issuer subject to Exchange Act reporting
requirements under Section 13 or 15(d)
Information must be provided to the extent material to an
understanding of the issuer, its business and the
securities being offered
32
Rule 502(b)(2)(i) – Non-Reporting Company
– Financial Statement Information • Offerings up to $2.0 million the information required in
Article 8 of Regulation S-X (except that only issuer’s balance
sheet, which shall be dated within 120 days of the start of the
offering, must be audited)
• Offerings greater than $2.0 million but less than $7.5 million
the financial statement information required in Form S-1 for
smaller reporting companies
• Offerings over $7.5 million the financial statement as would
be required in a registration statement filed under the Act on the
same form that the issuer is entitled to use.
33
Rule 502(b)(2)(i) – Non-Reporting Company
Non-Financial Statement Information
“Same Type of Information” required by Part II of Form 1-A,
if Issuer can use Reg A
34
• The Company
• Risk Factors
• Business and Properties
• Offering Price Factors
• Use of Proceeds
• Capitalization
• Description of Securities
• Plan of Distribution
• Dividends, Distributions and
Redemptions
• Officers and Key Personnel of
the Company
• Directors of the Company
• Principal Stockholders
• Management Relationships,
Transactions and
Remuneration
• Litigation
• Federal Tax Aspects
• Miscellaneous Factors
• Financial Statements
• Management’s Discussion and
Analysis of Certain Relevant
Factors
Rule 502(b)(2)(i) – Non-Reporting Company
Which Issuers may use Reg. A?
Per Rule 251(b):
35
• Entity organized under laws of
the U.S. or Canada or any
State, Province or Territory or
possession thereof, or District of
Columbia.
• Entity with principal place of
business in the U.S. or Canada
• Not a development stage with
no specific business plan or
whose business plan is to
merge with another unspecified
company
• Not an investment company
• Not issuing fractional undivided
interests in oil or gas rights
• Not subject to SEC order within
last 5 years
• Filed all required reports under
Rule 257
• Not an Exchange Act reporting
company
• Not disqualified under Rule 252
Rule 502(b)(2)(i) – Non-Reporting Company
Issuers not eligible to use Reg A must provide the same
kind of non-financial statement information as required
by Part I of Form S-1.
36
• Description of Securities
• Business
• Properties
• Legal Proceedings
• Market Price and Dividend
Information
• Management’s Discussion and
Analysis of Financial Condition
and Results of Operations
• Changes in Accountants
• Quantitative and Qualitative
Disclosures About Market Risk
• Directors and Executive
Officers
• Executive Compensation
• Corporate Governance
• Security Ownership of Certain
Beneficial Owners and
Management
• Related Party Transactions
Rule 502(b)(2)(ii) – Reporting Issuer
Information that must be provided by a reporting
issuer includes:
– The annual report to shareholders for the most recent
fiscal year, definitive proxy statement, and if
requested by purchaser, most recent Form 10-K
– Information contained in Form 10-K or Form S-1,
whichever filing is most recent
– Information required in other Exchange Act reports,
plus (i) a description of the securities being offered,
(ii) the use of proceeds, and (iii) material changes in
issuer’s affairs not disclosed in furnished documents
37
502(b)(2)(iii)- Exhibits
– Exhibits required to be filed with the SEC as part of a registration
statement or report must be made available to a purchaser, upon
request, a reasonable period of time prior to purchase.
– Issuer may conclude that particular exhibits are not material to
an understanding of the issuer, its business or the securities
being offered, but needs to be careful here.
38
502(b)(2)(iii) - Exhibits
Question: Under Rule 502(b)(2)(iii), an issuer that must provide a
disclosure document, whether it is a reporting or non-reporting issuer, is
required to identify and make available those exhibits that would
accompany the registration form or report upon which the disclosure
document is modeled. Does a Regulation D issuer have to make available
an opinion of counsel as to the legality of the securities being issued and, if
there are representations made as to material tax consequences, a
supporting opinion of counsel regarding such tax consequences?
Answer: YES (Jan. 26, 2009)
39
502(b)(2)(vi) -- Business Combinations
For business combinations or exchange offers, an issuer
shall also provide:
– Information required by Form S-4
– Written information about any terms or arrangements of the
proposed transactions that are materially different from those of
other security holders
40
502(b)(2)(vi) -- Business Combinations
Information Required by Form S-4
– Terms of the Transaction
– Reasons for the Transaction
– Explanation of Material Differences Between Rights of Security
Holders of Acquiror and Target
– Statement as to Accounting Treatment of Transaction
– Federal Income Tax Consequences of Transaction
– Fairness Opinion Information
– Copy of the Acquisition Agreement
– Pro Forma Financial Information
– Description of Past, Present or Proposed Material Contracts,
Arrangements, Understandings, Relationships, Negotiations or
Transactions
41
502(b)(2)– Other Information
Other Information – Description of any material information provided to accredited
investors but not to non-accredited investors
– Ability to Ask Questions and Receive Answers re Offering Terms
– Limitations on Resale
42
502(b)(2)– When Does Information Need to
Be Provided?
Rule 502(b) information needs to be provided a reasonable period of
time prior to sale.
When does a sale take place?
– For a stock purchase agreement, when the purchase agreement
is signed.
– For a merger agreement, when the agreement is submitted to a
vote of security holders. (Rule 145)
43
502(b) – Purchaser Representative
But having a purchaser representative means
that Rule 502(b) disclosures don’t need to be
provided to non-accredited investors, right?
44
502(b) – Purchaser Representative
But having a purchaser representative means
that Rule 502(b) disclosures don’t need to be
provided to non-accredited investors, right?
TERRIBLE LIE!
45
Strategies for Non-Accredited
Investors
46
Strategies for Non-Accredited
Investors
Does the target have Non-Accredited Investors?
Here are some options…
Don’t offer them securities:
47
• Buyer pays cash
• Target shareholder that is an
accredited investor buys the
non-accredited investor out
prior to the transaction (such
that securities are offered to the
accredited investor)
• BUT – keep in mind Rule
10b-5 (no asymmetry of
information)
48
Section 3(a)(11)
Intrastate Offering Exemption:
– Any security which is part of an issuance offered and
sold only to persons resident within a single State or
Territory, where the issuer of such security is a
person resident and doing business within or, if a
corporation, incorporated by and doing business
within, such State or Territory
– Does not limit the size of the offering or number of
purchasers.
– However, if any of the securities are offered or sold to
even one out-of-state person, the exemption may be
lost.
49
Rule 147 – The Intra-State Offering
Exemption
On October 26, 2016, the SEC adopted final rule amendments to Rule
147 under the Securities Act and Rule 504 of Regulation D to
modernize the exemptions for intrastate and regional securities
offerings. These new rules take effect April 20, 2017.
The final rule amendments:
• Expand the existing Rule 147 safe harbor under Section 3(a)(11) of
the Securities Act (see Amendments to Rule 147).
• Establish Rule 147A under the Securities Act, a new intrastate
offering exemption (see New Rule 147A).
• Changes: Relaxed threshold requirements for issuers, eased resale
limitations, reasonable belief standard.
50
Rule 147A – The Intra-State Offering
Exemption
Rule 147A – The new intrastate offering exemption.
• Requirements of the Rule 147A safe harbor are identical to Rule
147 except:
• Issuers may conduct an offering in a state where they are not
incorporated as long as their principal place of business is in that
state.
• Issuers may make offers to out-of-state residents (i.e., Internet
offers/solicitations) as long as all sales of securities are made
only to in-state residents. (Note: contrast to Rule 147).
51
Section 3(a)(10)
Fairness Hearing
– In certain exchange transactions, securities may be
exempt from registration if a court or authorized
governmental entity has determined, after holding a
fairness hearing, that the terms and conditions of the
offering are fair to those whom the securities will be
issued.
52
Fairness Hearing - California
Section 3(a)(10) of the Securities Act
• Registration exemption for offers and sales of securities in exchange
transactions. California is one of six states to offer this hearing.
Conditions: • Securities must be exchanged (i.e., no cash);
• Court/government body must approve the fairness of the terms and conditions;
• Reviewing body must:
• Find, before approving the transaction, that the terms and conditions of the
exchange are fair to those to whom securities will be issued; and
• Be advised the issuer will rely on Section 3(a)(10).
• Hearing must be open to everyone to whom securities would be issued.
• Appropriate notice provided.
Exemption used by public issuers who wish to acquire a closely held
companies in exchange for securities.
For example, in August 2012, Department of Corporations in California
approved the acquisition of Instagram by Facebook following a fairness
hearing.
53
Fairness Hearing - California
For example, in August 2012, Department of Corporations in California
approved the acquisition of Instagram by Facebook following a fairness
hearing.
54
Rule 10b-5
Rule 10b-5 is the general anti-fraud provision of the federal
securities laws.
Negative assurance letters (10b-5 letters) – delivered by issuer’s
counsel to underwriters to help build defenses to potential liability – The primary purpose of the 10b-5 letter is to help ensure that the underwriters
have conducted appropriate due diligence on the issuer and that the offering
document that investors base their investment decision on is not misleading.
55
Rule 10b-5 it is unlawful to issue
materially misleading statements or
omissions, or use manipulative and
deceptive devices, in connection with the
sale or purchase of any security.
Rule 10b-5 (continued)
10b-5 letters are delivered in registered offerings where the offering
documents that is substantially equivalent to a statutory prospectus is
delivered to investors.
In unregistered offerings under Rule 144A and Regulation S, 10b-5 letters
are also delivered.
The key language provides negative assurance of the offering document:
Does not state that information is accurate and complete.
Instead, stating that nothing has arisen that would lead counsel to
believe the offering document contains a materially misleading
statement or omits to make a statement without with the offering
document would be materially misleading.
This is not an opinion.
56
Rule 10b-5 (continued)
Defenses – “Due diligence” defense / Affirmative defense to Section 11
liability.
– Burden of proof for an underwriter to establish a due diligence
defense under Section 11 for specific disclosure varies:
• Non-expertised disclosure
• Expertised disclosure
– 10b-5 letters serve to document underwriters’ reasonable
investigation in the context of non-expertized disclosure.
– Expertised disclosure carved-out = statistical data, actuarial
firms, financial statements (see: comfort letter, audit report).
57
Rule 504
Rule 504 is an exemption under Regulation D,
promulgated under Section 3(b)(1) of the Securities Act.
Available if:
– No more than $5,000,000 of securities sold in any 12-month
period;
– No general solicitation
– No bad actors
– Limitations on resale
– No underwriter participation
– Not integrated with another offering in a way that would
jeopardize the exemption
Not available for public companies
58
Rule 504
No required information for non-accredited investors?
Check!
59
Federal Preemption
60
Federal Preemption
Section 18(b) of the Securities Act:
– 18(b)(4)(E) Securities are exempt under rules and
regulations issued under Section 4(a)(2) (e.g., Rule
506)
– 18(b)(4)(D) Securities issued under Sections
3(a)(10), 3(a)(11), and 3(b) are not covered
securities, so you have to worry about state blue sky
laws, unless otherwise covered.
– 18(b)(1) Listed Securities
61
Blue Sky Law Example - California
Section 25110 (Qualification Required) of the California Corporations
Code is similar to Section 5 of the Securities Act.
It is unlawful for any person to offer or sell in this state any security in an issuer
transaction…, whether or not by or through underwriters, unless such sale has
been qualified…or unless such security or transaction is exempted or not
subject to qualification under Chapter 1 (commencing with Section 25100) of
this part.
Section 25503 of the California Corporations
Code provides that purchasers of securities
sold in violation of the qualification
requirements may bring an action against the
violator to recover the consideration paid for
the security, including interest thereon at the
legal rate, less the amount of any income
received from the security.
62
Blue Sky Law Example - California
Section 25102(f) of the California Corporations Code is a commonly used,
reasonably flexible exemption for private placements
An offer or sale of a security is exempt if:
Sales are made to not more than 35 persons (including CA investors), excluding certain
types of purchaser (including accredited investors, per Commissioner Rule
260.102.13(g));
Each purchaser has:
– Preexisting personal or business relationship with issuer or affiliates OR
– By reason of their business or financial experience or the business or financial experience of
their (uncompensated by issuer) professional advisors could reasonably be assumed to have the
capacity to protect their own interests
• Each purchaser represents as to purchasing for own account / not with a view to
redistribute (not an underwriter)
• Offer and sale are not accomplished by publication of advertisement.
− Does not include PPM, offering circular or similar disclosure documents, as long as not
disseminated to the public, per Commissioner Rule 260.102.12(j).
63
Rule 503 – Form D
Required for Rule 504 and Rule 506 Offerings
Due 15 Days After Sale (Most Use Closing Date)
Filed Electronically
Sometimes Issuers Choose to Rely on Section 4(a)(2)
to Avoid Filing a Form D
– Disney / Lucasfilm
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Rule 508 – Insignificant Deviations from
Reg D Requirements
Failure to Comply with Rule 504 or Rule 506
Requirement Will Not Result in Loss of Exemption if:
– Failure Did Not Pertain to Requirement to Protect Individual or
Entity
– Failure Was Insignificant to Offering as a Whole
• Some Failures Specified as “Significant”
– Good Faith Attempt Made to Comply
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Speed Round
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Speed Round (1/2)
Assumption of Options
– Rule 701
– New Compliance & Disclosure Interpretations (June
2016)
Earnout as Security
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Speed Round (2/2)
Public Company Concerns
– Shareholder Approval (e.g., 20% Rule)
– Target Financial Statements / Pro Forma Financials
• Item 9.01(a) and (b) of Form 8-K
• Rule 3-05(b) / Rule 8-04(b) of Regulation S-X
• Article 11 of Regulation S-X
• Due 71 Days from Due Date for Form 8-K
Tender Offer
– Wellman Test
– Regulation 14E
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No Exemptions? You can Always
Register on Form S-4
If no exemptions are available, that doesn’t necessarily
mean an M&A deal cannot be done.
Registration under Form S-4 is always an option, but it
will require a lot of work!
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Fact Pattern 1
Offering of $10.0 million in securities to all
accredited investors, located in several states.
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Fact Pattern 1
ANSWER
– Issuer can rely on Rule 506 of Regulation D for an
exemption under the Securities Act.
– No specified information must be supplied to
investors, though be mindful of Rule 10b-5.
– State blue sky laws preempted, but there may still be
a requirement to file a notice of offering.
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Fact Pattern 2
Offering of $10.0 million in securities to some
accredited investors and non-accredited
investors (less than 35), all located in more than
one state.
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Fact Pattern 2
ANSWER
– Issuer can rely on Rule 506 of Regulation D for an
exemption under the Securities Act.
– No specified information must be supplied to
accredited investors, though be mindful of Rule 10b-
5.
– Information meeting the requirements of Rule 502
must be supplied to non-accredited investors a
reasonable period of time prior to sale (good idea to
provide some information to accredited investors
since already prepared).
– State blue sky laws preempted, but there may still be
a requirement to file a notice of offering.
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Fact Pattern 3
Offering of $4.0 million in securities to some
accredited investors and less than 35 non-
accredited investors, all located in more than
one state.
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Fact Pattern 3
ANSWER
– Issuer can rely on Rule 506 of Regulation D for an
exemption under the Securities Act (same as for the
$10 million offering).
– Issuer can also rely on Rule 504 of Regulation D for
an exemption under the Securities Act (less than $5
million)
• No specified information must be supplied to accredited
investors, though be mindful of Rule 10b-5.
• State blue sky laws not preempted, so you’ll need a
separate state law exemption (e.g., Section 25102(f) of
California Corporations Code).
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Fact Pattern 4
Offering of $10.0 million in securities to some
accredited investors and non-accredited
investors (less than 35). All investors and the
issuer are located in the same state.
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Fact Pattern 4
ANSWER
– Issuer can rely on Rule 506 of Regulation D for an
exemption under the Securities Act (same as for the
$10 million offering).
– Issuer may also be able to rely on Section
3(a)(11)/Rule 147/ Rule 147A for an exemption under
the Securities Act
• State blue sky laws not preempted, so you’ll need a
separate state law exemption (e.g., Section 25102(f) of
California Corporations Code).
• General solicitation permitted under Rule 147A, but not
under Section 3(a)(11) or Rule 147, and likely not
under applicable state blue sky laws.
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