Series 79 Chapter 4

Exempted securities

Certain securities are exempt from the registration and prospectus requirements of 1933 Act -- government securities; municipal securities; securities issued by non-profit organizations; commercial paper; domestic bank and trust company; small business investment company (SBIC) issues.

Rule 147A

can get out of registration and only raise money from in-state residents without federal registration if either ≥80% of gross revenues from the state, ≥80% of assets in-state, ≥80% of net proceeds used in-state, or a majority of employees based in-state. Resales are restricted to in-state residents for 6 months from the sale.

Permits general solicitation to in-state investors, and advertising across state lines

Regulation A (reg A+)

can get out registering securities using crowdfunding for small issues; selling shareholders are limited to no more than 30% of the aggregate offering.

Tier 1 (Reg A)

max $20mm of sales within 12 months, of which max $6mm can come from existing shareholders

Tier 2 (Reg A)

max $75mm within 12 months of which max $22.5mm can come from existing shareholders

Offering circular

The disclosure document used in a Regulation A offering in place of a prospectus. A preliminary offering circular may be used to make written offers after filing but before SEC qualification, and must contain substantially the same information as the final circular (excluding pricing). A preliminary or final offering circular must be provided to a prospective buyer at least 48 hours before the confirmation of sale is mailed; if a preliminary circular is used, a final circular must accompany the confirmation.

Test the waters

Reg A provision letting issuers solicit indications of interest before filing an offering statement. Materials are limited to factual information — a description of the business, the CEO's background, and a statement that no money should be sent by interested investors. No money/consideration may be accepted. There must be at least 20 days separating the use of a solicitation statement and the first sale of securities.

Regulation crowdfunding

under JOBS Act, issuers may sell securities to small investors if all transactions run through a single SEC-registered intermediary (broker-dealer or funding portal) and no more than $5 million is raised in a 12-month period.

Non-accredited investor limits (regulation crowdfunding)

if annual income or net worth is less than $124,000, the max is the greater of $2,500 or 5% of the greater of income/net worth; if income and net worth are ≥$124,000, the max is 10% of the greater of income/net worth, capped at $124,000 total. Issuers file Form C with the SEC.

Placement agent

a firm (usually a broker-dealer) that agrees to find institutional investors for an issuer's private placement; acts as agent for a fee and doesn't commit its own capital

Engagement letter

applies to private placements

signed by issuer and banker to formally establish the engagement to market the securities (specific terms are in the placement agreement); no road show since general solicitation is prohibited

NDA

applies to private placements aka confidentiality agreement

signed before receiving a PPM; recipient agrees to keep the info confidential (may share only with their financial adviser) and return the documents if they don't invest

Subscription agreement

the private placement sales contract; investor represents sufficient knowledge/experience (alone or with a purchaser rep) to evaluate risk, states income/net worth, accredited status, shares purchased/price, acknowledges receipt of a numbered disclosure document, understands the investment is illiquid/speculative and unregistered (can't resell absent registration/exemption), and states residency

Section 4(2) Exemption

the statutory “private offering exemption” for transactions by an issuer not involving a public offering; no public solicitation, purchasers must be sophisticated with access to registration-statement-level information, and must agree not to resell/distribute to the public

Section 4(5) Exemption

formerly 4(6); exempts offerings ≤$5,000,000 with no advertising/solicitation, sold solely to accredited investors (unlike Reg D, no non-accrediteds permitted)

Rule 504

covers offerings ≤$10mm in a 12-month period to an unlimited number of investors regardless of sophistication; no disclosure document required; ineligible issuers include reporting companies, investment companies, and blank-check/development-stage companies with no specific business plan

Rule 506

lets an issuer raise an unlimited amount of capital; split into 506(b) and 506(c)

Number and type of investors for Rule 506

506(b): unlimited number of accredited and up to 35 non-accredited investors

506©: only accredited

Restricted securities (rule 506)

unregistered Reg D securities that can't be resold absent subsequent registration or an exemption; issuer places a restrictive legend on certificates, obtains a signed investment letter, and issues stop-transfer instructions to the transfer agent

Resale restrictions on unregistered securities

investors sign an investment letter acknowledging the securities are unregistered and can't be resold unless registered under the '33 Act or sold under an exemption (e.g. Rule 144 or 144A)

Solicitation/advertising for 506(b) vs 506 (c)

506(b): general solicitation and advertising are strictly prohibited, so you must have a pre-existing substantive relationship

506©: you can use general solicitation/advertising since all purchaers are accredited

Offering memorandum

required to go to all purchasers if any non-accredited investor participates in a 506(b) offering

General solicitation

using public communication channels to market an offering — newspaper/magazine ads, radio/TV, publicly accessible websites, or seminars where attendees were invited by general advertising; generally prohibited under Reg D except under 506(c)

Bad actors

prohibited from receiving any offerings under Rule 506

Includes criminal convictions, suspension from SRO, SEC disciplinary orders, etc. and applies to any insiders and investment managers

FINRA Rule 5122 (member private offering)

when a firm issues securities on its own behalf; must provide investors with private placement memorandum or disclosure doc due to COI and file with FINRA unless the investors are only institutional or QIBs or if they’re offering exempt securities (exemptions)

FINRA Rule 5123

BDs must file PPM with FINRA (or other relevant docs) within 15 calendar days of the first sale (or just notify them if no offering doc was used)

Same exemptions as rule 5122

Rule 144A

permits sale of restricted securities (except sales by the issuer) to QIBs without SEC registration; mainly used for corporate debt (sometimes equity)

permits general solicitation (since only selling to QIBs)

Regulation S

a US company may issue an unlimited amount of securities outside the US without SEC registration/filing, with no restrictions on the type of non-US investor

Must be an offshort transaction: no offer to a US person, no directed selling effort in the US

Distribution compliance periods before US resale

Rule 144

permits resale of restricted stock (from a private placement) and control stock (bought in the open market by an affiliate, e.g. an officer or director)

Restricted stock is s.t. holding period (6 months for reporting issuer and 12 months for non-reporting issuer)

Control stock is not s.t. a holding period

Notice of sale (rule 144)

If you want to sell either control or restricted stock under Rule 144, you have to file Form 144 which gives you 90 days to sell the securities

This is only required for sales of more than 5,000 shares / $50,000

Limitation on amount (rule 144)

in any 3-month period, if you’re selling under Rule 144, you’re capped at the greater of 1% of the outstanding shares or the average weekly trading volume over the 4 calendar weeks