Additional exemption rules

Rule 144 - Persons deemed not to be engaged in a distribution and therefore not underwriters

An affiliate of an issuer is a person who, directly or indirectly, has a control relationship with the issuer (for example, an officer, director, or large shareholder).

Restricted securities are securities purchased in a private, unregistered offering.

Rule 144 allows a holder of restricted securities - or an affiliate selling any securities of the issuer - to resell them without being treated as an underwriter, as long as the sale meets the following conditions.

Current public information. Adequate current public information about the issuer must be available before an affiliate sells, and before a non-affiliate sells in the first year after acquiring the securities. After that year, a non-affiliate can sell without it.

Holding period. If the issuer is subject to SEC reporting requirements and has met them for at least 90 days, the securities must be held for a minimum of 6 months before resale. If the issuer is not subject to reporting requirements, or has been reporting for less than 90 days, the securities must be held for a minimum of 1 year.

Volume limits (affiliates only). In any 3-month period, an affiliate may sell no more than the greater of:

• 1% of the outstanding shares (or other units) of that class of security, as shown by the issuer’s most recent financial report or statement, or
• The average weekly reported trading volume in the security during the 4 calendar weeks preceding the filing of the notice of sale.

In summary: a non-affiliate selling restricted securities must satisfy the holding period, and, when the issuer is an SEC reporting company, the current-public-information requirement until a full year has passed since the securities were acquired. An affiliate must satisfy those same requirements when selling restricted securities, and is also subject to the volume limit whenever selling any securities of the issuer - restricted or not.

Rule 144A - Private resales of securities to institutions

A qualified institutional buyer (QIB) is an entity that, acting for its own account or the accounts of other QIBs, owns and invests on a discretionary basis at least $100m in securities of issuers not affiliated with it. A registered broker-dealer qualifies at a lower threshold, at least $10m of such securities.

To qualify for the Rule 144A exemption, an offer or sale must meet the following conditions;

• The securities are sold only to QIBs, or to buyers the seller reasonably believes to be QIBs. A seller can verify QIB status using the prospective purchaser’s most recent publicly available financial statements (no older than 16 months), its most recent filings with the SEC or another federal, state, or local government agency or SRO, or similar publicly available information.
• The seller must notify the buyer that the sale is being made in reliance on this exemption for sales to QIBs.
• When issued, the securities must not be of the same class as any securities listed on a national exchange or quoted on an automated inter-dealer quotation system (the non-fungibility requirement). The securities also cannot be those of an investment company that would have to register under the Investment Company Act of 1940.

Rule 145

Rule 145 covers reclassifications, mergers, consolidations, and transfers of assets that a company’s security holders vote on. When the holders are asked to vote on (or consent to) one of these plans, and they will receive new securities as a result, Rule 145 treats the transaction as an “offer” or “sale” of those securities to them, so the securities must be registered unless an exemption applies. The transactions covered are:

• Reclassifications that substitute one security for another, other than a stock split, reverse split, or change in par value.
• Mergers or consolidations in which the holders’ securities are exchanged for securities of another company.
• Transfers of assets to another person in exchange for that person’s securities, such as when the selling company will dissolve or distribute those securities to its holders.

Intrastate securities exemptions

The purpose of these exemptions is for intrastate offerings, offerings within 1 state. These offerings are regulated primarily by individual state Administrators rather than the SEC.

Section 3(a)(11) of The Securities Act of 1933 is what is generally known as the “intrastate offering exemption”. To qualify for the intrastate exemption, a company:

• Must be organized in the state where it is offering the securities,

• Must be doing business in the state (the statute doesn’t define how much; the 80% tests in Rule 147 below are the SEC’s safe harbor for it), and

• Make offers and sales only to residents of the state.

There have been numerous rules and “safe harbor” additions, making much of the original rule moot. 147 is the first, and 147A is the second we discuss of these “safe harbor” expansions.

Rule 147, as amended, has the following requirements;

• The company must be organized in the state where it offers and sells securities

• The company must have its “principal place of business” in-state and satisfy at least one “doing business” requirement demonstrating the in-state nature of the business

• Offers and sales of securities can only be made to in-state residents or persons the company reasonably believes are in-state residents, and

• The company obtains written representation from each purchaser, attesting to their residency

Resales are limited to in-state residents only for 6 months from the date of sale.

The “doing business” requirements

• The company derives at least 80% of its consolidated gross revenues from operations in the state, retail in the state, or rendering services in the state.

• The company has at least 80% of its consolidated assets located in-state.

• The company is going to use at least 80% of the net proceeds from the offering towards operations in-state, purchasing property in-state, or rendering services in-state.

• A majority of the company’s employees are in-state.

Rule 147A

The updated, new intrastate exemption was adopted in October 2016 and took effect on April 20, 2017. It is substantially identical to the old Rule 147, except for 147A;

• Allows offers to be accessible to out-of-state residents, but 100% of all sales are still to in-state residents, and

• Allows companies to be incorporated out-of-state, so long as its “principal place of business” is in-state

This was principally done to allow online marketing, or a similar type of modern advertising. In these places, people not living in the state of issuance might see the offering, which would have been a violation of previous interpretations. All sales still have to be done with in-state residents, but simply seeing it by out-of-state residents won’t disqualify the offering anymore.

Make sure to remember, 100% of all purchasers, must be in the state, under any interpretation.