Chapter 7.3 Flashcards
Regulation Limits and Offering Circular
Permits securities offerings using an abbreviated statement called the offering circular, rather than a full registration statement, when the value of securities issued by a corporation does not exceed $50,000,000 in any 12-month period.
When must the offering circular be filed?
The offering circular must be filed electronically with the SEC’s Regional Office and will be “qualified” 20 business days after filing if there are no delays from the SEC. The SEC can shorten the 20 business day period upon written request for such authorization.
When can a preliminary offering circular be distributed before the effective date?
If it does not contain:
- Final offering price
- Underwriter’s discount
- Selling Concession
**All documents filed with the SEC must also be filed with FINRA no later than 1 business day after they are filed with the SEC, and are subject to FINRA’s communication with the public rules.
Sales by Selling Securityholders
Issuers may elect to conduct a Regulation A offering using either Tier 1 or Tier 2.
- Tier 1 is available for offerings of up to $20 million in a 12-month period, including no more than $6 million on behalf of selling security holders that are affiliates of the issuer.
- Tier 2 is available for offerings of up to $50 million in a 12-month period, including no more than $15 million of behalf of selling security holders that are affiliates of the issuer.
- Additionally, sales by all selling security holders in a Reg. A offering are limited to no more than 30% of the aggregate offering price in an issuer’s first Reg. A offering and any subsequent Reg. A offerings in the following 12-month period.
Selling Reg A offerings
Before the effective date of a Regulation A offering, member firms:
- Can send out a preliminary offering circular
- Can publish Tombstone ads regarding the offering in local newspapers
- Can send simple announcements of the offering to customers
- Can publish generic ads
- Can sell to an unlimited number of persons once the offering becomes “effective”
- Cannot send out research reports or magazine articles regarding the issue or issuer
- Cannot take subscription payments from investors
- Must send the offering circular to persons at least 48 hours prior to receiving their confirmation
**The regulation A offering exemption is not available to Registered investment companies or Oil and Gas RIghts
Private Investment in public equities(PIPES)
PIPES are used by small and mid-size publicly traded companies to raise additional capital by issuing shares of common and/or preferred stock at a set price which is generally at a discount to the current market price of the stock. These shares are normally purchased by private investors and hedge funds.
**The SEC has determined that it is a violation for hedge funds to establish short positions in the stock in the secondary market prior to a PIPE distribution and then purchasing the PIPE to cover the short position
Regulation S
Provides an exemption from registration under the 33 Act for offerings and sales of securities occurring outside the United States(off-shore transactions). The exemption was intended to help U.S. and foreign companies raise capital overseas quickly and inexpensively without having to comply with the full-blown registration process mandated under the 33 Act.
- If a U.S. company issues securities under Reg S, the securities do NOT have to be registered under the Securities act of 1933.
- The transactions must be “offshore transactions” and must NOT be made to a U.S. person. Transactions may be executed on a foreign securities exchange to a non-US person.
Securities sold under Reg S may not be resold in the U.S. for:
- Equity securities placed offshore by domestic issuers, reentering the U.S. markets, are classified as “restricted” under Rule 144 and must satisfy most of the requirements of Rule 144 and satisfy a “Distribution Compliance Period” of 1 year.
- 40 days for non-convertible debt securities
- The one year and 40 day holding periods are called the “Distribution Compliance Period”.
U.S. Person definition under Reg S
- Any natural person resident in the US
- Any partnership or corporation organized or incorporated under the laws of the US
- Any estate of which any executor or administrator is a US person
- Any trust of which any trustee is a US person
- Any non-discretionary account for the benefit of a US person
- *A discretionary account held for the benefit of a NON-U.S. person by a dealer in the U.S. would NOT be considered a U.S. person.
- Buyers of Reg S securities do NOT have to be accredited investors.
Regulation M-A: Mergers and Acquisitions
Specifies the filing requirements that must be made with the SEC and security holders in association with a merger or acquisition. Information that must be provided to securities holders and the SEC includes:
- Summary term sheet: A plain English description of the key items of the proposed merger or acquisition
- Subject company information such as name, address, type of securities to be bought or sold, and price
- Identity and background of the person handling the filing
- Terms of the transaction
- Past transactions
- Purpose of the transaction
- Amount and source of funds
- Audited financial statements for the past 2 years
- Solicitation or recommendation to securities holders
SEC Rule 147 - Intrastate Securities Offerings
Provides for an exemption from SEC registration for a security issue sold by a resident corporation only to purchasers located within one particular state. Rule 147 offerings are subject to the following requirements:
- The corporation must be chartered under the laws of the state and have its principal office in the state and demonstrate the in-state nature of the issuer’s business.
- The corporation must be “principally doing business within the state”, which is defined as and must satisfy at least one of the following 4 requirements:
- 80% of its gross revenues are from sales in the state
- 80% of its assets are within the state
- 80% of the offering proceeds must be used in the state
- 100% of the purchasers must be full-time residents of the state - A corporation, partnership or trust which is organized for the specific purpose of purchasing part of the issue will not be considered a resident unless all beneficial owners of the organization are residents of the state
Selling Rule 147 Securities
The issuer must adhere to the following in order to sell or offer the security to the public:
- Place a legend on the certificate stating that the securities are unregistered
- Issue stop transfer instructions to the issuer’s transfer agent
- Obtain a written statement from each purchaser as to his residence
- Obtain a written statement from the purchaser that no resales will be made outside the state for a period of 6 months.
When can resales to out-of-state residents occur?
After 6 months from the date of the last sale by the issuer of the securities. If any original sales or resales during the initial 6-month period are made to non-residents of the state, the entire issue loses its exemption.
SEC Rule 147-A
Is identical to SEC rule 147 but allows issuers:
- To be incorporated or organized outside of the state in which the offer takes place
- No restrictions on offers provided sales are only made to residents of the state
- May use the internet and social media to reach investors
SEC Rule 145 - Covers Exchanges of Shares
Investors whose shares of a company are to be exchanged or reclassified must be given the opportunity to vote or consent to such activity if the change is a result of:
- Reclassification of the stock
- Merger
- Consolidation
**The opportunity to vote or consent does not apply to changes in par or stock splits
