Says that Section 5 does not apply to transactions by anyone other than issuer, underwriter, or dealer.

The central transaction exemption 

- Decreased borrowing costs (raising $$ through debt = a fixed obligation to pay to people)

- Opportunity for insiders to realize value created (sell your shares)

- Easier to design compensation packages (can offer stock options to attract people)

Purpose: to reduce costs of being a public company

- exempts EGC's from some requirements that apply to public companies

* ECG = more than $1Billion in annual revenues and public float of $700 million or less

Basically all fall into this - so not realy a protection for smaller co's.  

- Pre-2000 figures are artificially inflated bc of 1990s boom in IPOs

- IPOs come in waves; we're in a trough

- Smaller, stand alone co's less viable than the used to be

- Now, value-maximizing growth strategy is to sell to a larger company (which can integrate new tech into related products)

- Private placements are better subtitutes

- It's not the cost of being a public co, but the UNDERWRITING costs in an IPO that matter

Main thing: for any offer or sale of securities, you must register with the SEC or find an exemption

Based on a theory of disclosure

5(a): Can't sell or deliver securities during the waiting period 

5(b)(1): any "prospectus" [written doc "offer"ing sale] must satisfy Section 10 reqs 

5(c): pre-filing period

Registration statement must include Schedule A items, except as SEC says

1) About the REGISTRANT (our business, our revenues, exec comp, litigation, property)

2) About the TRANSACTION (how much we're selling, common/debt/etc, underwriters)

any purchaser has the right to obtain recision of the securities.  (12(a)(1) - strict liability provision

basically, the issuer becomes the guarantor against market losses for a year after the offering.

8(a) says that reg statements automatically become effective 20 days after filing - restarted if an amendment is filed.

Rule 473 uses the amendment language to require a provision in every reg statement that automatically amends 

Permits registration statement to go effective without price and size info

Info must be made available in a prospectus supplement within 15 days of effective date 

Acceleration: Rule 461 

(+ Sec 8(a) as stat. basis) 

and 

Bases for Denying Acceleration

(strings attached to this powerful SEC tool)

Avoids having to wait 20 days after making any changes to the reg statement (at SEC discretion)

Bases for Denying - 461(b):

- Insufficient circulation of prospectus

- Failure to comply w/ plain English rules

- Insufficient correction of misleading prelim prospectus

- SEC investigation of issuer, controlling persons, UW

Section 5(c)

and

Three issues with Pre-filing

5(c) prohibits all offers and sales (oral/written) before registration is filed with the SEC.

When is a company "in registration?"

What constitutes an "offer or sale"?

What kind of issuer is involved? 

What's an "OFFER"?

(Gun-jumping)

Section 2(a)(3): "every attempt or offer to dispose of, or solicitation of an offer to buy"

Gun-jumping is when you try to prep/condition the market ("whet the appetite" of investors)

Rule 169, SAFE HARBOR from 5(c) "Regularly Released Business Info"

- Available to non-reporting issuers

- Info released by or on behalf of issuer

- Info looks like past releases, intended for customers/suppliers/etc, not just investors -169(d)

- NO INFO about registered offering itself

Forward-looking info NOT covered by 169

- Reporting Issuers

- NOT available if part of a "scheme" to evade 5(c) requirements

- Info released by or on behalf of issuer

- Info must be regularly released 

- NO info about registered offering itself

Any communication (oral/written) more than 30 days before FILING the registration statement is excluded from definition of "OFFER"

3 Conditions:

- Must not reference offering

- Made by or on behalf of issuers

- Issuer must take reasonable steps to prevent futher publication/distr of communication during 30 day period 

Available for reporting and non-reporting

When are you "in registration"?

At minimum: when you reach an understanding with an underwriter - but could be earlier

Fuzzy analysis

Reporting AND non-reporting issuers

Main thing: communication must NOT reference the offering

- Must include a legend saying notice does not constitute an offer or sale

- May only disclose issuer name, basic info about securities (not price), anticipated timing, brief statement

- May NOT name underwriters

basically, issuer can give some bare bones info to let market know the offering is coming

Emerging Growth Companies may confidentially submit draft reg statements to SEC for review

Initial confidential submission + amendments must be filed 21 days before road show (or expected offering date if no road show) --> Prof: so I don't know what purpose this serves/what its effect will be

- can file confidential reg statements with SEC

- can communicate with potential investor QIBs and AIs in the pre-filing period - Sec. 5(d)

Section 2(a)(10): basically any written doc (or radio/tv) offering the sale of securities

Unless it's carved out in 2(a)(10)(b) - if it states how to obtain a prospectus, and does not more than identify the security, state the price, issuer (tombstone ad), or whatever else the SEC wants to carve out.

Do any safe harbors apply?

- Was it 30 days before filing the registration statement? (Issuer only; not avail to prospective UWs) See 163A

- Is it a pre-filing public notice of the offering? See 135

- Is it a reporting company making a factual business communication consistent with past releases? See 168 or 169

- Is it a tombstone ad, press release announcing the offering, or a return card to indicate interest? See 134

Not a prospectus => exempt from restrictions applicable to written offers

- Available only after reg statement and prelim prospectus has been filed (during waiting period, post-filing period)

- 

- Examples: tombstone-like ad; indicator card (with a restrictive legend saying there is no commitment to buy if returned); could be a website posting/email

5(b)(2): delivery requirement - when you deliver the securities, it has to be accompanied by a final prospectus

1) Is it a registered offering?

2) What stage of the process are we in?

3) What kind of issuer are we talking about?

4) Who is taking the action?

- The Issuer, UW/Dealer selling original allotment:  never has an exemption and always has to deliver a final prospectus

- After public distribution, Dealers see 174(f) and 4(3)C:

- 90 DAYS if it's the issuer's first registered offering

- 40 DAYS if it's not

- 0 days if issuer was a reporting company 

- Theoretically no limit on size/$$

Residency : ALL offers must be to residents; residency = state of principal office/state of principal residence

Resale: Must "COME TO REST" before resale

Non-integration window of 6 months before/ after offering

- Be incorporated/organized in that state

- Have its principal office there

- 80% of its revenues from biz in the state

- 80% of its assets in the state

- intent to use 80% of proceeds for biz in the state

3(b)(1) permits SEC to exempt any offering of less than $5mil ==> Rules 504 ($1mil) and 505 ($5mil)

4(a)(2) exempts private placements ==> Rule 506 (unlimited) 

Huge advantage: NO DISCLOSURE doc to investors

Can offer to anyone - investor sophistication is irrelevant!

Offering size: $1M

(crowdfunding exemption coming up will make this less used)

REG D: 505

No disclosure - if all investors are accredited

No sophistication standard for investors (but disclosure required if not all accredited)

No more than 35 unaccredited

Statutory premise for 504/505: 3b1 is NOT a private placement exemption, just "we want to carve out these small offerings to reduce capital for small co's"

So why can't you have general solicitation in a 504/505 offering?

You can do general solicitations in 506 offerings, as long as all purchasers are accredited investors (permits offers to unaccredited as long as actual purchasers are accredited)

Issuer must take reasonable steps to verify accreditedness

No general solicitation in 505/506 (and most 504s)

Examples: mass mailings, internet postings, etc.

Allowed: Notice that's like a notice of a registered offering

Allowed: Communications pursuant to a pre-existing R bt issuer/broker and purchaser (a pre-existing R theoretically lets broker/issuer evaluate whether investment is suitable for P)

Basically: Does the amount to be financed in a 12 month period exceed the 504 or 505 dollar limit?

Cap is calculated by aggregating the offering price of all securities sold relying on any 3(b) exemption - 504, 505, Reg A + anything in violation of Section 5 requirements (like if you have a failed 506 offering)

6 month window for Reg D - 502(a)

Five factor test; then treat the two transactions as if they were ONE

Consequence? --> everyone who bought in BOTH transactions has right of recision.

If you structured all your transactions under 506 and ONLY sold to AIs, integration would not be an issue.