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No ICOs Registered with the SEC

Posted on May 4, 2018 at 10:35 PM Comments comments (0)

The SEC says no ICOs have been “registered” -- but the SEC is not really keeping score.

The SEC says no ICOs have been “registered” but that doesn’t count the growing number of exempt offerings under Rule 506(c.

Is there a path from a pre-ICO fund raise using Reg CF to a Form D Rule 506(c offering and then to a Reg A+ offering? And then even to a full registration?

Securities and Exchange Commission Chairman Jay Clayton has repeatedly reassured the public that no initial coin offerings have been “registered” with the SEC, but plenty of them are coming onto the market through the back door. Eventually, these ICOs could get distributed beyond just accredited investors and into the hands of retail consumers.

There’s been significant growth in ICOs using Rule 506(c since the beginning of 2017.

Period Number of ICO-Related Form Ds

1Q 2017 0

2Q 2017 1

3Q 2017 11

4Q 2017 32

1Q 2018 (Through Feb. 20) 39

With tokens or coins issued to accredited investors under Rule 506(c of Regulation D, one year would be the minimum timeframe for transfers under Rule 144. Most of the ICOs filed using Form D since mid-2017 have used Simple Agreement for Future Tokens, or SAFT, as their legal framework.

Telegram used the SAFT structure to raise money from accredited investors. As for the transition form accredited investors to retail investors, “There is still significant uncertainty about how to go beyond the SAFT accredited investors to the retail investor under the current regulatory environment.” 

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Join the State Securities Regulation LinkedIn discussion group and go down the crypto rabbit hole with us to learn 1) what will constitute securities in the eyes of state regulators and the SEC, and 2) what will constitute best practices for exempt offerings of ICO offerings. 

Members of the discussion group are entitled to any of 21 audio handbooks on exempt [email protected] https://www.audible.com/search/ref=a_hp_tseft?advsearchKeywords=Douglas%20Slain&filterby=field-keywords

Will Regulation A+ be a more popular choice for smaller companies than Regulation D?

Posted on April 8, 2018 at 9:45 PM Comments comments (0)

 Rule 506 of Regulation D is the most widely used capital raising exemptions under the US securities laws, largely due to its flexibility. Regulation A+ provides a new way for smaller companies to raise capital and get some liquidity in their securities. However, if a company is confident that it can raise money through the traditional Rule 506 private placement, it may still want to avoid the SEC review process, the hassle of Blue Sky compliance under Tier 1, and the ongoing reporting obligations of Tier 2.

There are two tiers for Regulation A+: Tier 1, for offerings up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Although Rule 506 does not provide an opportunity for selling security holders to participate in the offering, it does not have any caps on the amounts that can be raised, and, while any company, public or private, US or foreign, can raise capital under Rule 506, under Regulation A+ only a US or Canadian issuer that is: a) not a reporting company under the Securities Exchange Act of 1934, b) not an investment company, and c) not a blank check company is considered an “eligible issuer.” Still, in some instances, Regulation A+ appears to be more accommodating than Rule 506.

For example, while Rule 506(b allows an unlimited number of accredited investors, it allows only 35 non-accredited investors. However, Tier 1 of Regulation A+ does not have any limitation on the number or type of investors, but Tier 2 imposes a per-investor cap for non-accredited investors of the aggregate purchase price to be paid by the purchaser for the securities to be no more than 10% of the greater of annual income or net worth for individual investors or revenue or net assets most recently completed fiscal year for entities. In addition, Regulation A+ allows issuers to “test-the-waters” by trying to determine whether there is any interest in a contemplated securities offering (assuming such practice is allowed under applicable Blue Sky laws for Tier 1 offerings), Rule 506(b does not allow for general solicitation and advertising, though of course Rule 506(c does.

The biggest downside of Regulation A+ is that Blue Sky registration requirements are not preempted for Tier 1 offerings, which significantly limits offerings in multiple states, while such preemption does exist for Rule 506 offerings (as well as Tier 2 of Regulation A+ offerings.) But note that the welcomed flexibility of doing nationwide offerings under Tier 2 comes with a heavy price tag of ongoing reporting. After a Tier 2 offering, an issuer must file with the SEC annual reports on Form 1-K, semi-annual reports on Form 1-SA and current reports on Form 1-U (within 4 business days of the event). Interestingly, the SEC has observed that companies may “voluntarily” file quarterly financial statements on Form 1-U, but the practical effect of desired compliance with Rules 15c2-11 and Rule 144 to maintain placement of quotes by market makers and re-sales of securities, will lead to “voluntary” quarterly reporting becoming essentially mandatory. Rule 506 offerings are accompanied by private placement memoranda or PPMs, (even when offerings are solely to accredited investors) to protect issuers from Rule 10b-5 liability under the Exchange Act.. Still, there is no prescribed format for such PPMs and they are not reviewed by the SEC.

With Regulation A+ offerings, an issuer must file Form 1-A (a “mini” registration statement) through EDGAR with the SEC. First-time issuers are eligible to initially do a non-public submission of a draft of Form 1-A. Such Forms 1-A are subject to the SEC review and comment process, which increases the cost of the transaction and extends the time from the beginning of the transaction and the closing. Finally, the “bad actor” disqualification applies to both Rule 506 and Regulation A+ offerings. However, a company that had its registration revoked under Section 12(j) of the Exchange Act within five years before the filing of the offering statement or that has been delinquent in filing required reports under Regulation A+ during the two years before the filing of the offering statement (or for such shorter period that the issuer is required to file such reports) is not eligible to do an offering under this Regulation.

The ICO market should work on a framework to build a clearly defined scheme for ICOs, recognizing that they are securities.

Posted on March 27, 2018 at 11:15 PM Comments comments (0)

The ICO market should work on a framework to build a clearly defined scheme for ICOs, recognizing that they are securities.

The ICO process should be designed in collaboration with regulators to comply with U.S. securities law. Existing financial institutions and regulators will not scuttle existing methods of raising capital or attempt to squeeze ICOs under traditional securities law.

Should we paint all ICOs with the same brush by claiming each one of them offers securities subject to SEC scrutiny? On Ripple's XRP "digital asset" door, even though there was no formal ICO to launch that token, it now trades on 18 exchanges.

Now, after raising nearly $94 million of venture capital, Ripple probably does not need an ICO.

One ICO was recently "gate-keeped" by Perkins Coie LLC. It involves the sale of a utility token that raised $35 million in less than a minute. These tokens created a digital advertising ecosystem tied to consumer attention which is why it is styled the “Basic Attention Token.” This ecosystem is an upgrade from the digital advertising scheme ecosystem of 1990s.

The plaintiff's bar has been alert when the SEC has not yet moved. See Davy v. Paragon Coin, Inc., et al., Case No. 18-cv-00671 (N.D. Cal.January 30, 2018) and Paige v. Bitconnect Intern. PLC, et al., Case No. 3:18-CV-58-JHM (W.D. Ky. January 29, 2018).

On February 6, SEC chairman Jay Clayton acknowledged that the potential derived from blockchain was "very significant." Still, Chairman Clayton said the SEC would continue to "crack down hard" on fraud and manipulation involving ICOs offering an unregistered security. Chairman Clayton said the SEC was "working the beat hard" to crack down on ICOs, but chose not to answer a question, namely whether the SEC will "go back" and scrutinize earlier ICOs. I

n other words, there may be some ICOs that the SEC will not attack, Notwithstanding Clayton's comment that "every ICO I've seen is a security, some 2017 ICOs raising hundreds of millions of dollars will not be addressed by the SEC! This provides a clear "nudge wink" that not all ICOs come under SEC regulatory control. As with XRP and BAT, there will likely be many more tokens built on disruptive blockchain initiatives that escape SEC scrutiny given they are not perceived as securities.

The fact that the SEC has not done anything, despite moving against Munchee, Inc., signals the SEC will temper its enforcement activities when faced with a disruptive blockchain initiative that begets true intrinsic value. In other words, utility tokens may be a good idea after all.



Why a business plan is not enough

Posted on March 21, 2018 at 1:10 AM Comments comments (0)

Many companies rely on a business plan or executive summary to serve as the basis for their investment. This does not provide the basis for compliance with state and Federal rules and any capital raised may be in violation of state or Federal rules.

Regulation D is an exemption that allows companies to raise capital though the sale of equity or debt securities without registering with the SEC. Start-ups typically choose the Rule 506(c program because it allows general advertising and solicitation. Companies can now execute a “public offering” of their private placements with straightforward compliance benefits of a traditional Regulation D offering.

The 506(c program allows a client to execute a public offering of securities while retaining the benefits of a Regulation D exempt private placement.

The 506(c exemption allows an issuer to engage in general advertising and solicitation of accredited investors for the securities offering. It is important to note that the current 506(b program is still available for issuers that do not need the capability to engage in general solicitation. The 506(c program allows a client to execute a public offering of securities while retaining the benefits of a Regulation D exempt private placement.

CRYTOCURRENCY COMPANIES LOOK FORWARD TO A 50% INCREASE IN REG A+ CAP

Posted on March 19, 2018 at 3:50 PM Comments comments (0)

The U.S. House of Representatives just passed the “Regulation A+ Improvement Act” which will permit a 50% increase in the cap. Reg A+ is more streamlined than traditional IPOs and it allows non-accredited investors to invest , and it allows for retail investor participation, a hallmark of cryptocurrencies. StartEngine advertises ability to “Launch an ICO” and its founder says that Reg A+ is “the future of ICOs.” Reg A+ has been used for raising over $600 million since October 2017, and the pace of Reg A+ securities offerings will increase with the 50% increase in cap.

ICOs that have already used Reg A+ for their offerings include: • Gab ICO: Social network for those who believe in free speech and the free flow of information online • RideCoin ICO: Decentralized ride-sharing marketplace built on the blockchain. • WeDemand ICO: Allows bids on concerts with smart contracts and tools SEC-approved exchanges must be used and there must be anti-money laundering checks, increasing overhead. Also increasing the overhead is the requirement that Reg A+ requires “Offering Circulars,” which are more detailed than the traditional PPM.

There are also two types of Reg A+ offerings, Tier 1 and Tier 2. In a Tier 2 offering companies must undergo an audit upfront and annually and post financial performance information bi-annually. The alternative is a Tier 1 Reg A+, which is limited to $20 million but dramatically reduces regulation.

Here is a summary of Tier 1 and Tier 2

Tier 1 • Raise up to $20M in a 12 month period • No more than $6M can be offered for sale from affiliate security holders • Affiliates are also precluded from selling more than 30% of internal shares in the Reg A+ offering • Requires Form 1-A registration statement with the SEC • Non-affiliates can sell their shares after one year under SEC Rule 144 • Company must engage in the services of an SEC registered Transfer Agent • Available to C-corps, S-corps and Limited Liability Companies (including REITs) with organized businesses in the United States and Canada • Requires PCAOB or GAAP audited financial statements for the previous two years • Requires adherence to state Blue Sky laws • Allows solicitation to and investment from both accredited and non-accredited investors

Tier 2 • Raise up to $50M in a 12 month period • No more than $12M can be offered for sale from affiliate security holders • Affiliates are also precluded from selling more than 30% of internal shares in the Reg A+ offering • Requires Form 1-A registration statement with the SEC • Non-affiliates can sell their shares after one year under SEC Rule 144 • Company must engage in the services of an SEC registered Transfer Agent • Available to C-corps, S-corps and Limited Liability Companies (including REITs) with organized businesses in the United States and Canada • Subject to Tier 2 on-going annual and semi-annual reporting requirements • Requires PCAOB or GAAP audited financial statements for the previous two years • Preempts necessity of adhering to state Blue Sky laws • Allows solicitation to both accredited and non-accredited investors

Who is excluded from participating? • Any companies subject to the order of the SEC within the last five years (under Section 12(j) of the Exchange Act) • No asset backed securities or undivided interests in oil, gas and/or mineral rights •Certain “bad actors” • Certain types of reporting companies • Investment firms and funds • Companies with no business plan or whose sole purpose is to engage in M&A activity • Companies that have failed to file according to the Regulation A+ rules over the past two years • Companies with annual revenue greater than $50 million or a public float greater than $75 million

Exempt Offerings Questions

Posted on May 19, 2017 at 2:35 PM Comments comments (0)

Questions we hear

Can I do multiple offerings on the same raise at the same time?

How do Blue Sky laws work?

What does “testing the waters” mean for a Reg A+ offering and why are some Reg A+ issuers declining to test the waters?

Do I have to be a broker dealer?

Do I have to use a broker dealer?

Do I need FINRA’s approval for a Regulation D offering?

Is there a limit on how many investors I can have?

What documentation is required for my type of offering?

What is a Reg CF offering?

For answers, see  

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Blog: http://www.privateplacementadvisors.com/apps/blog

Web site: http://privateplacementadvisors.com

Reg A+ versus Reg D

Posted on April 22, 2017 at 12:45 AM Comments comments (0)

Will Regulation A+ be a more popular choice for smaller companies than Regulation D?

Rule 506 of Regulation D is the most widely used capital raising exemptions under the US securities laws, largely due to its flexibility. Regulation A+ provides a new way for smaller companies to raise capital and get some liquidity in their securities. However, if a company is confident that it can raise money through the traditional Rule 506 private placement, it may still want to avoid the SEC review process, the hassle of Blue Sky compliance under Tier 1, and the ongoing reporting obligations of Tier 2.

There are two tiers for Regulation A+: Tier 1, for offerings up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Although Rule 506 does not provide an opportunity for selling security holders to participate in the offering, it does not have any caps on the amounts that can be raised, and, while any company, public or private, US or foreign, can raise capital under Rule 506, under Regulation A+ only a US or Canadian issuer that is: a) not a reporting company under the Securities Exchange Act of 1934, b) not an investment company, and c) not a blank check company is considered an “eligible issuer.”

Still, in some instances, Regulation A+ appears to be more accommodating than Rule 506. For example, while Rule 506(b allows an unlimited number of accredited investors, it allows only 35 non-accredited investors. However, Tier 1 of Regulation A+ does not have any limitation on the number or type of investors, but Tier 2 imposes a per-investor cap for non-accredited investors of the aggregate purchase price to be paid by the purchaser for the securities to be no more than 10% of the greater of annual income or net worth for individual investors or revenue or net assets most recently completed fiscal year for entities.

Reg A versus Reg D

Posted on February 25, 2017 at 7:05 PM Comments comments (0)

Will Regulation A+ be a more popular choice for smaller companies than Regulation D?

Rule 506 of Regulation D is the most widely used capital raising exemptions under the US securities laws, largely due to its flexibility. Regulation A+ provides a new way for smaller companies to raise capital and get some liquidity in their securities. However, if a company is confident that it can raise money through the traditional Rule 506 private placement, it may still want to avoid the SEC review process, the hassle of Blue Sky compliance under Tier 1, and the ongoing reporting obligations of Tier 2. The new Regulation A, commonly referred to as Regulation A+, is a significant improvement over the old Regulation A, which was rarely used in any event.

The old Regulation A permitted exempt offerings up to $5 million in any 12-month period, including up to $1.5 million of securities offered by security holders of the company, while the thresholds of Regulation A+ are much higher. There are two tiers for Regulation A+: Tier 1, for offerings up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.

Although Rule 506 does not provide an opportunity for selling security holders to participate in the offering, it does not have any caps on the amounts that can be raised, and, while any company, public or private, US or foreign, can raise capital under Rule 506, under Regulation A+ only a US or Canadian issuer that is: a) not a reporting company under the Securities Exchange Act of 1934, b) not an investment company, and c) not a blank check company is considered an “eligible issuer.” Still, in some instances, Regulation A+ appears to be more accommodating than Rule 506.

For example, while Rule 506(b allows an unlimited number of accredited investors, it allows only 35 non-accredited investors. However, Tier 1 of Regulation A+ does not have any limitation on the number or type of investors, but Tier 2 imposes a per-investor cap for non-accredited investors of the aggregate purchase price to be paid by the purchaser for the securities to be no more than 10% of the greater of annual income or net worth for individual investors or revenue or net assets most recently completed fiscal year for entities.

In addition, Regulation A+ allows issuers to “test-the-waters” by trying to determine whether there is any interest in a contemplated securities offering (assuming such practice is allowed under applicable Blue Sky laws for Tier 1 offerings), Rule 506(b does not allow for general solicitation and advertising, though of course Rule 506(c does.

The biggest downside of Regulation A+ is that Blue Sky registration requirements are not preempted for Tier 1 offerings, which significantly limits offerings in multiple states, while such preemption does exist for Rule 506 offerings (as well as Tier 2 of Regulation A+ offerings.) But note that the welcomed flexibility of doing nationwide offerings under Tier 2 comes with a heavy price tag of ongoing reporting. After a Tier 2 offering, an issuer must file with the SEC annual reports on Form 1-K, semi-annual reports on Form 1-SA and current reports on Form 1-U (within 4 business days of the event). Interestingly, the SEC has observed that companies may “voluntarily” file quarterly financial statements on Form 1-U, but the practical effect of desired compliance with Rules 15c2-11 and Rule 144 to maintain placement of quotes by market makers and re-sales of securities, will lead to “voluntary” quarterly reporting becoming essentially mandatory.

Rule 506 offerings are accompanied by private placement memoranda or PPMs, (even when offerings are solely to accredited investors) to protect issuers from Rule 10b-5 liability under the Exchange Act.. Still, there is no prescribed format for such PPMs and they are not reviewed by the SEC. With Regulation A+ offerings, an issuer must file Form 1-A (a “mini” registration statement) through EDGAR with the SEC. First-time issuers are eligible to initially do a non-public submission of a draft of Form 1-A. Such Forms 1-A are subject to the SEC review and comment process, which increases the cost of the transaction and extends the time from the beginning of the transaction and the closing.

Private Placement Advisors LLC

http://www.audible.com/search/ref=a_search_c4_1_1_1_srAuth?searchAuthor=Douglas+Slain&qid=1487524144&sr=1-1

Trump v. Dodd-Frank, new news

Posted on February 7, 2017 at 5:25 PM Comments comments (0)

State Regulators and Trump State attorneys general and state securities commissioners have responded to President Trump’s threats to reduce federal regulation and enforcement efforts in the financial services industry. Both New York Attorney General Schneiderman and Maria Vullo, the superintendent of New York's Department of Financial Services ("DFS"), have made it clear that they will exercise broad authority to stand in the way of any Federal effort to dismantle the Dodd-Frank Act, as Trump has promised to do.

Schneiderman said, "Any attempt to gut these consumer and investor protections would . . . embolden those who seek to defraud and exploit everyday Americans. The States are the back stop, the states are the next line of defense after the federal government," and, "[i]t is embedded in our system of jurisprudence that state laws must be respected.” Each of the 50 states has some form of "Blue Sky" law that regulates the offer and sale of securities. In addition, multiple federal statutes grant state attorneys parallel enforcement authority, and this includes the Truth in Lending Act, the Fair Credit Reporting Act, and the Dodd-Frank Act.

Under Dodd-Frank, a state attorney general or state securities regulator is authorized to bring a civil action to enforce provisions of the Act. State attorneys general and state securities regulators will challenge the Trump administration with an expansion of state-level activity to monitor industries benefiting from a decrease in federal regulation. As Schneiderman put it, "The states are the next line of defense."

Secondary Market

Posted on December 9, 2016 at 5:20 PM Comments comments (0)

Secondary Market in Exempt Offerings

The exempt offering secondary market, largely governed by Rule 144A, is growing rapidly.

What is Rule 144A?

The following transactions are conducted under Rule 144A: a) offerings of debt or preferred securities by public companies; b) offerings by foreign issuers that do not want to become subject to U.S. reporting requirements; and c) offerings of common securities by non-reporting issuers (i.e., “backdoor IPOs”). An issuer who intends to engage in multiple offerings often has a “Rule 144A program.” Rule 144A programs are established to offer debt securities on an ongoing basis. They are similar to “medium-term note programs,” but they are unregistered and can be designed for sales to QIBs.

Among the advantages of using Rule 144A programs are (1) no public disclosure of innovative structures or otherwise sensitive information; (2) fewer FINRA filing requirements; and (3) reduced liability exposure under the Securities Act. Rule 144A is a non-exclusive safe harbor. A reseller may rely upon any applicable exemption from the registration requirements of the Securities Act in connection with the re-sale of restricted securities. In addition, Rule 144A offerings often are made side-by-side with a Regulation S offering (targeted at foreign investors). This permits an issuer to do a multinational offering with a QIB tranche and a Regulation S tranche, and to sell to an initial purchaser outside the United States in reliance on Regulation S, even though the purchaser anticipates and intends immediate resale to QIBs, in reliance on Rule 144A. Rule 144A provides that re-offers and re-sales of exempt offerings or private placements in compliance with the rule are not “distributions” and that the re-seller is therefore not an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act.

A re-seller who is not the issuer, an underwriter, or a dealer can rely on the exemption provided by Section 4(1) of the Securities Act. Re-sellers that are dealers can rely on the exemption provided by Section 4(3) of the Securities Act of 1933. Issuers must find another exemption for the offer and sale of unregistered securities. Typically they rely on Section 4(2), in reliance on Regulation, or on Regulation S. Affiliates of the issuer may rely on Rule 144A. Re-sellers not eligible for the safe harbor under Rule 144A need to rely on the Section 4(1½) exemption. What is a Section 4(1/2) exemption? If an accredited investor cannot qualify as a “QIB” under Rule 144A, it will seek to use the Section 4(1½) exemption for secondary sales. A Section 4(1½) exemption is a case law-derived exemption that allows private placement re-sales of private placement offerings. Re-sellers rely on Section 4(1), which provides an exemption for non-issuers, underwriters, and dealers, to avoid underwriter status by implementing restrictions that would be required in the case of a Section 4(2) offering by the issuer itself. The Section 4(1½) exemption typically applies to the resale of restricted securities to accredited investors who make appropriate representations. Section 4(1½) also is sometimes used to extend a Rule 144A offering to institutional accredited investors.

The Second Circuit has opined that a person purchasing restricted securities from an issuer is not an underwriter for purposes of Section 4(1) if the purchaser resells the restricted securities to persons who qualify as purchasers under Section 4(2) as described by the U.S. Supreme Court in SEC v. Ralston Purina Co., 346 U.S. 119 (1953), and who acquire the restricted securities in a private offering of the type contemplated by Section 4(2). Securities acquired in a Rule 144A transaction are deemed to be “restricted securities” within the meaning of Rule 144(a)(3) and remain restricted until the applicable holding period expires, and may only be publicly resold under Rule 144 pursuant to an effective registration statement or in reliance on another exemption. After a one- year holding period, re-sales of these securities by non- affiliates are not subject to any other conditions under Rule 144. For a reporting issuer, compliance with the adequate current public information condition requires the issuer to have filed all required reports under Section 13 or Section 15(d) of the Exchange Act.

For a non-reporting issuer, compliance with the adequate current public information condition requires the public availability of basic information about the issuer, including certain disclosure documents and financial statements. For affiliate holders of restricted securities, Rule 144 provides a safe harbor permitting re-sales of restricted securities, subject to the same six-month and one-year holding periods for non-affiliates and to other resale conditions of amended Rule 144. Other resale conditions include: (a) adequate current public information about the issuer, (b) volume limitations, (c) manner of sale requirements for equity securities, and (d) notice filings on Form 144.

What is a “QIB”?

A QIB is any entity included within one of the categories of “accredited investor” defined in Rule 501 of Regulation D, acting for its own account or the accounts of other QIBs, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers not affiliated with the entity ($10 million for a broker-dealer). In addition to the qualifications above, banks and savings and loan associations must have a net worth of at least $25 million to be deemed QIBs. QIBs can be foreign or domestic entities, but must be institutions. Individuals cannot be QIBs, no matter how wealthy or sophisticated.

A broker-dealer acting as a risk-less principal for an identified QIB will itself be deemed a QIB. Eligible purchasers under Rule 144A can be entities formed solely for the purpose of acquiring restricted securities if they satisfy the qualifying QIB tests. A reseller of restricted securities can rely on information other than that enumerated in Rule 144A for its belief that the prospective purchaser is a QIB. The bases for reliance enumerated in Rule 144A are non-exclusive; resellers may have reasonable belief of eligibility based on any number of factors.

A reseller cannot rely on certifications that it knows, or is reckless in not knowing, are false. However, a seller has no duty of verification. In other words, unless the circumstances give a re-seller reason to question the veracity of the information relied on, the reseller does not have a duty to verify the information. The seller must make the purchaser aware that it is acquiring restricted securities and that he securities may only be re-sold pursuant to an exemption from or registration under the Securities Act.

The investor is entitled to know that the securities may be subject to reduced liquidity. Usually the warning is given by placing a legend on the security itself. For example, the note or stock certificate representing securities re-sold under Rule 144A must include a legend (or a notation if using electronic record keeping) stating that the securities have not been registered and, therefore, they may not be re-sold or otherwise disposed of in the absence of such registration or unless such transaction is exempt from, or not subject to, registration.

In addition, the PPM or other offering memorandum used in connection with the Rule 144A offering must include an appropriate notice to investors, such as the following: “Each purchaser of the securities will be deemed to have represented and agreed that it is acquiring the securities for its own account or for an account with respect to which it exercises sole investment discretion, and that it or such account is a QIB and is aware that the sale is being made to it in reliance on Rule 144A.” The offering documents must inform the purchaser that the securities to be acquired can only be re-offered and re-sold pursuant to an exemption from, or registration under, the Securities Act, and that the resold securities have a restricted CUSIP number.

Securities offered under Rule 144A must not be “fungible” with, or substantially identical to, a class of securities listed on a national securities exchange or quoted in an automated inter-dealer quotation system (“listed securities”). Common stock is deemed to be of the “same class” if it is of substantially similar character and the holders enjoy substantially similar rights and privileges. American Depository Receipts (“ADRs”) are considered to be of the same class as the underlying equity security. Preferred stock is deemed to be of the same class if its terms relating to dividend rate, liquidation preference, voting rights, convertibility, call, redemption, and other similar material matters are substantially identical. Debt securities are deemed to be of the same class if the terms relating to interest rate, maturity, subordination, convertibility, call, redemption, and other material terms are substantially the same. Information must be “reasonably current” in relation to the date of re-sale under Rule 144A. This delivery obligation can continue for some time.

To be reasonably current the information must be as of a date within 12 months prior to the re-sale; the most recent balance sheet must be as of a date within 16 months prior to the re-sale; and the most recent profit and loss and retained earnings statements must be for the 12 months preceding the date of the balance sheet. The issuer will prepare an offering memorandum with disclosures normally exceeding the disclosures required to be made available under Rule 144A -- because the offering memorandum often is used as a marketing document. Also, in general, robust disclosure of the issuer’s business and finances reduces liabilities of the issuer and the initial purchasers. Broker-dealers re-offer and re-sell the securities using the exemption provided by Rule 144A. Rule 144A permits the broker-dealer to immediately re-offer and re-sell the restricted securities, even though it has purchased the securities with a view to their distribution.

The availability of Rule 144A does not depend on how much time has expired since the securities were issued or on whether the reseller had investment intent when it purchased the securities. Re-sales under Rule 144A are completely separated from the issuer’s original offering—no matter how quickly thereafter they occur. The documentation used in a Rule 144A transaction is similar to that used in registered offerings, including an offering memorandum and a purchase agreement between the issuer and the initial purchasers (i.e., broker-dealers).

The offering memorandum will contain a detailed description of the issuer, including its financial statements, and the securities to be offered. The form, organization, and content of a purchase agreement for a Rule 144A offering often resembles an underwriting agreement for a public offering but is modified to reflect the manner of offering. In the case of a Rule 144A offering that is combined with a Regulation S offering, the Regulation S offering may be conducted using documents that are based on the country-specific practices of the relevant non-U.S. jurisdiction or jurisdictions. However, the disclosure documents in such a case generally will contain the same substantive information so that investors have the same “disclosure package.”

In connection with offers of debt securities, it is very common to have a Rule 144A tranche offered to QIBs, and a Regulation S tranche offered to non-U.S. persons. However, while Rule 144A securities generally have a restricted period of six months to one year, Regulation S debt securities have a restricted period of only 40 days. Therefore, these tranches are represented by separate certificates to ensure their lawful transfer in the secondary market. The Rule 144A global certificate with a Rule 144A restrictive legend is deposited with DTC, while the Regulation S global certificate with a Regulation S restrictive legend is deposited with a European clearing system. These two securities have different CUSIP numbers and other security identification numbers.

The Rule 144A securities can be re-sold to non-U.S. persons if the buyer certifies that it is not a U.S. person, and the sale otherwise complies with Regulation S. The Regulation S securities can be re-sold in the United States to QIBs if the re-sale complies with Rule 144A. A registration rights agreement would only be applicable to Rule 144A transactions in which the issuer has agreed to register under the Securities Act the securities re-sold in the Rule 144A transaction. The Rule 144A offering process is often similar to the public offering process. The features of this process typically include: solicitation of orders using a “red herring” or preliminary offering memorandum; preparation and delivery of a working term sheet; confirmation of terms with a final offering memorandum; execution of the purchase agreement at pricing; delivery of a comfort letter (if any) from the issuer’s auditing firm at pricing; and closing three to five days after pricing.

Rule 144A offerings do not subject the issuer and the initial purchasers to liability under Section 11 of the Securities Act. Accordingly, the initial purchasers are not entitled to the “due diligence” defense that may be established under Section 11. Liquidity is the primary benefit that comes from holding freely tradable securities rather than restricted securities. Plus some states prohibit some mutual funds and insurance companies from investing more than a certain percentage of their assets in restricted securities. Some investment partnerships and similar entities are subject to comparable restrictions under their organizational documents. Absent an issuer’s agreement to register Rule 144A securities, these entities are limited in their ability to purchase securities in Rule 144A transactions.

Exxon Capital versus Shelf Registrations

The two principal methods to register Rule 144A securities under the Securities Act are “Exxon Capital” exchange offers and Shelf registrations under Rule 415 of the Securities Act. An Exxon Capital exchange offering is a procedure under which securities are privately placed pursuant to Rule 144A and then promptly exchanged for similar securities that have been registered under the Securities Act. This is the preferred means for providing holders of Rule 144A securities with freely tradable securities. It eliminates the need to continuously update a shelf registration statement over its lifetime if any of the investors in the Rule 144A offering are affiliates of the issuer. However, affiliates of the issuer may not participate in an Exxon Capital exchange offer, and broker-dealers also may not participate in these exchange offers.

In addition, all exchanging holders will be required to represent that they acquired the securities in the ordinary course of their business and have no arrangements or understandings with respect to the distribution of the security that is the subject of the exchange offer. Under Rule 415(a)(1)(i), issuers of Rule 144A securities may register the resale of the restricted securities that were sold in the Rule 144A transaction. Registered offerings under Rule 415 are known as shelf registrations. Rule 415(a)(1)(i) permits either a delayed or continuous offering of securities “which are to be offered or sold solely by or on behalf of a person or persons other than the registrant . . . .” The persons covered by this rule include re-sellers holding Rule 144A securities.

Although shelf registrations offer potential liquidity to buyers of Rule 144A securities, the securities remain restricted until they are re-sold under the shelf registration statement. In shelf registrations, the issuer must covenant to keep the shelf registration statement continuously effective for no less than one year in order to ensure the holder liquidity until the resale exemption under Rule 144 becomes available without any limitations on non-affiliates. “Exxon Capital” exchange offers are the preferred means for providing holders of Rule 144A securities with freely tradable securities.

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