EXEMPT TRANSACTIONS

Financing stages of startups [skipped in class]

Intrastate exemption

1. Types of exemptions

   1. Transaction exemptions provide an exemption only from the registration provisions of §5 of the ’33 Act

      1. Securities placed under one of these exemptions cannot be resold unless either they are registered or another exemption is available

   2. Securities exemptions: if it is exempt, it is exempt all the way every time it is sold or resold. Need not be registered, but also may be resold free of registration burdens

2. 3(a)(11): Any security which is a part of an issue 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

   1. Issuers, purchasers must be residents of the State

   2. Substantial proceeds has to be in the State

   3. It follows that if during the course of distribution any underwriter, any distributing dealer, or any dealer or other person purchasing securities from a distributing dealer for resale were to offer or sell such securities to a nonresident, the exemption would be defeated (as to all securities)

      1. The SEC has maintained consistently that a single offer or sale to a nonresident destroys the availability of the exemption regardless of whether the mistake was in good faith

      2. You can resale if the offers come to rest (holding it for period of time)

   4. It is possible to advertise in a newspaper that also has circulation in other states. You must include a legend (i.e. Only for Texas residents)

3. Rule 147: provides a safe harbor under 3(a)(11)

   1. a 9-month holding period before securities may be sold to nonresidents.

   2. Only issuer protected; not available to a control person

   3. (c)(2)(iii): 80% of net proceeds must be used in the state

   4. If you can’t fit within 147 does not mean that you’re not in intrastate exemption. You will fall into common law and limited SEC guidelines.

4. 5-1 Boston global: ok, must have legend saying offer only available in MA

5. 5-2 not sure, 80% proceeds must be in state. But businesses frequently buy things out of state and sell them in state. The managerial efforts are in state.

Private offering exemption

6. 4(a)(2) exempts “transactions by an issuer not involving any public offering”

   1. Only exempts the issuer

   2. Access: offeree must have access to information that a registration would have made available

      1. Senior managers

      2. Outside sophisticated investors

      3. Market power: warren buffet

      4. Family members

   3. Sophisticated: offeree must be sophisticated enough to be able to evaluate the risks of the offering

   4. The burden is on the issuer to control who the offeree is.

7. 5-11: they are sophisticated, can evaluate risks. Negotiated for three months (they learn in the negotiating process).

   1. But they know nothing about oil and gas.

8. 5-12: if lawyers know about oil and gas more sophisticated

Regulation D

Introductory Concepts

1. Regulation D provides 3 exemptions (504, 505, and 506) that, taken together, cover the vast majority of offerings exempt from registration

   1. 504: maximum aggregate offering price of $1 million; not available for reporting companies or investment companies; no limitations on the number of purchasers; no affirmative disclosure obligations; resale of securities is restricted except under limited circumstances

   2. 505: maximum aggregate offering price of $5 million (any amount raised in the preceding 12 months pursuant to an exemption authorized by 3(b) will reduce the amount); no more than 35 non-accredited purchasers and unlimited number of accredited purchasers; affirmative disclosure obligations applicable when there are non-accredited investors; resale of securities is restricted

   3. 506: no limitation on the maximum aggregate offering price (no aggregation rule); no more than 35 non-accredited purchasers and unlimited number of accredited purchasers; affirmative disclosure obligations applicable when there are nonaccredited investors; non-accredited investors or their representatives must be sophisticated; resale of securities is restricted

2. 501(a): accredited investor

   1. Financial institutions,

   2. pension plans,

   3. venture capital firms (including angel investors and small business investment companies),

   4. corporations and other organizations exceeding a certain size (assets exceeding $5 million),

   5. insiders of the issuer

      1. directors

      2. executive officers

      3. general partners

         1. not just title, but also their duty and whether they manage the firm

   6. natural persons with wealth or income exceeding threshold standards (net worth over $1 million, and/or annual income over $200k single or $300k as a couple for each of the last two years),

      1. 501: primary residences are now excluded from the net worth calculation

      2. Primary residence: the home where a person lives most of the time

      3. Gaming possibilities: you can take out mortgage on PR

   7. entity owned by accredited investors

   1. 5-14: yes, director of the issuer is accredited

   2. 5-15: no, net worth<1M (PR doesn’t count)

3. Some issuers limit their 505 and 506 offerings to accredited investors in order to avoid inquiries into sophistication (in the case of 506) and affirmative disclosure obligations under 502(b)

4. 506 is the exemption under which most hedge funds raise capital, and by limiting their offerings to accredited investors and otherwise complying with the requirements of Regulation D the funds are able to limit disclosures and operate in an environment that critics contend lacks necessary transparency

Solicitation

5. 502(c): limits general solicitation or general advertising

   1. Apply to all three of the Regulation D exemptions

   2. You may only approach individuals with whom you have a pre-existing relationship

      1. Pre-existing relationship between offeree and broker (rather than issuer) is OK.

   3. What is surprising is the extent to which 502(c) reaches more targeted communications not commonly thought to be “general solicitations”

6. The nature of the...

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