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 that either directly or indirectly, through intermediaries or not, has a control relationship with the issuer.
Restricted securities are securities that were purchased in a private, unregistered offering.
For transactions involving restricted securities, for them to avoid being deemed an underwriter and have to go through that process, there are several requirements Rule 144 requires.
Current public information. For restricted securities to be sold, adequate current public information with respect to the issuer must be available.
Holding period rules are followed. For issuers of the restricted shares being sold, those issuers subject to reporting requirements and fulfilling them for at least 90 days, the securities must be held for a minimum of 6 months. For issuers non subject to the reporting requirements, or not fulfilling them for at least 90 days, the securities must be held for a minimum of 1 year.
For affiliates, there are volume limits for any securities they sell. Those volume limits can get a little complicated;
- 1% of the shares or other units of the class of security, as shown by the most recent financial report or statement by the issuer, or
- The average weekly trading volume in the securities on all national exchanges and/or through the automated quotation system during the 4 calendar weeks preceding the filing of notice, or
- The average weekly volume of trading in the security reported pursuant to an effective transaction reporting plan, or effective national market system plan, during the 4-week period preceding period.
In summary, restricted securities have holding periods, associates have volume limits, and associates dealing with restricted securities have both holding periods, and volume limits.
Rule 144A - Private resales of securities to institutions
Qualified Institutional Buyer (QIB) is any entity acting for its own accounts or accounts of QIBs that in aggregate owns and invests on a discretionary basis at least $100m in securities of issuers that are not affiliated with entity.
To quality for exemption, an offer or sale must meet the following conditions;
- The securities are sold only to QIBs or to someone that any reasonable person would believe in a QIB. There are multiple ways to verify; prospective purchasers’ most recent publicly available financial statement provided information is no older than 16 months, most recent statements filed with the SEC, or any other federal, state, or local government agency, SRO, or similar type of publicly available information.
- The seller must let the person know they are relying on this exemption for selling to QIBs
- The securities are “different” than publicly listed securities. The securities are not of the same class of security as any listed on national exchange or automated inter-dealer quotation system. The securities also cannot be of any investment company that would have to register under the Investment Company Act of 1940.
Rule 145
The reclassification rule is used when companies are merging, consolidating, or acquiring other assets. Most of the time these would not be considered sales, offers, or anything, as they are specifically excluded, but there are certain situations where these mergers, consolidations, or similars would not be exempt offerings. Including;
- Reclassifications which would involve the substitution of a security for another security.
- Mergers or consolidations in which securities of the corporation or other person held will be exchanged for other securities.
- Transfers of assets, where the transfer of assets of the corporation from one to another.
Intrastate securities exemptions
The purpose of these exemptions is for intrastate offerings, offerings within 1 state. These are going to be monitored and protected by the individual state Administrators, not the SEC and FINRA, at least not primarily.
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;
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Must be organized in the state where it is offering the securities,
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Carries out a significant amount of its business in the state (defined as at least 80%), and
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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;
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The company must be organized in the state where it offers and sells securities
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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
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Offers and sales of securities can only be made to in-state residents or persons the company reasonably believes are in-state residents, and
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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.
Rule 147A
The updated, new intrastate exemption was put into effect in October 2016. It is substantially identical to the old Rule 147, except for 147A;
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Allows offers to be accessible to out-of-state residents, but 100% of all sales are still to in-state residents, and
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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.