SECURITIES ACT OF 1933 REGISTRATION EXEMPTIONS

EXEMPTIONS Section 5 of the Securities Act of 1933 provides that all securities must be registered unless there exists an exemption for the securities issued. Section 5 of the 1933 Act contains basic prohibitions on applies to all offers and all sales of any security. The 1933 Act exempts certain classes of securities, transactions by certain individhuals not involved in the distribution process, and transactions not involving any public offering. However, the 1933 Act exemptions provide only exemptions from the Act`s registration requirements and thus do not affect the 1933 Act`s antifraud provisions. Exemptions from registration generally come in two forms -- either the securities themselves are exempt or the transaction is exempt.

Three statutory bases for exemption from the Securities Act`s registration provisions. Section 3 of the 1933 Act lists various categories of securities that are exempt from registration. Because these exemptive provisions apply to securities not to transactions, they provide a permanent exemption from registration requirements of the Act. Section 4 of the 1933 Act describes a variety of transactions that qualify for an exemption for registration. Section 28 of the Act gives the SEC broad exemptive rulemaking power beyond that granted by the statutory exemptions that are found in sections 3 and 4 of the 1933 Act. A new section 28 of the 1933 Act provided that the Commission may exempt transactions, securities, and persons if in the public interest and consistent with investor protection.

Exempt Securities They are not subject to the registration requirements of the 1933 Act. Securities of governments, banks, insurance companies, and qualified pension plans- Section 3(a)(2) Certain Short term commercial paper- Section 3(a)(3) Securities issued by nonprofit, religious, educational, charitable organizations- Section 3(a)(4) Securities of Building and Loan Associations, Farmers` Cooperatives and Like- Section 3(a)(5) Certain Securities Issued by Federally Regulated Common Carriers – Section 3(a)(6) Certificates Issued Under the Bankruptcy Act by Receivers and Trustees- Section 3(a)(7) Insurance Policies and Annuity Contracts- Section 3(a)(8)

Transaction Exemptions Section 4 of the Act contains number of exemptions that apply to specific transactions. In working with transaction exemptions, it must be remembered that the exemption extends to the transaction, not to individuals. Section 3(b) authorizes the SEC, by means of rules and regulations, to add any class of securities to the securities exempted as provided in the 33 Act if the SEC finds that the enforcement of the 33 Act is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering, subject to the limitation that the aggregate amount at which the issue is offered to the public can not exceed $5,000,000. Exemption relates only to the requirement to register under the 33 Act. Such transactions are not exempt from the anti-fraud, civil liability or other provisions of the federal securities laws.

INTEGRATION: If a series of transactions are similar and look like they are really part of one public offering, the SEC will integrate the offerings so that even if the transactions were exempt from registration individually, they will violate the Act unless there is an exemption that covers the AGGREGATE.

Preliminary notes to rule 147 has the five factors of integration 1. Are the offerings part of a single plan of financing? 2. Do the offerings involve issuance of the same class of securities? 3. Are the offerings made at or about the same time? 4. Are the same types of consideration involved? 5. Are the offerings made for the same general purpose? Most important factors are 1(single plan of financing) and 5 (same general purpose).

Section 4(2) of the 33 Act - Private Placements Section 4(2) of the Securities Act of 1933 exempts from the registration requirements “transaction by an issuer not involving any public offering.” Determination that a transaction is a private placement must be made under releases issued by the SEC and court cases. The statute and regulations do not define "transactions by an issuer not involving a public offering." The SEC has adopted Regulation D which, if followed, creates a "safe harbor" for private placement transactions; however, an issue can rely directly upon Section 4(2) if, in doing so, the issuer engages in a genuine "private placement" as recognized by the SEC and the courts.

Section 4(6) of the 33 Act - Accredited Investor Exemption Provides an exemption for offers or sales by an issuer solely to one or more accredited investors which does not exceed $5,000,000 no advertising or public solicitation is permitted in connection with the transaction. Issuers required to file notice-of-sales form with SEC. Form D serves as the notice-of-sales form under Section 4(6).

Section 3(a)(11) of the 33 Act - Intrastate Offering Exemption Rule 147 promulgated under the 33 Act, was adopted to provide clearer guidelines for the exemption provided by Section 3(a)(11). To qualify for this exemption: the issuer must, at the time of any offers and sales, be a person resident and doing business within the state. the offerees and purchasers be residents of the state of the offering. No resales may be made outside the state for a period of 9 months.

No filing with the SEC is required. While intrastate offerings are exempt from federal regulation, such offerings are still subject to regulation by the state in which the offering occurs. The federal intrastate offering exemption is primarily relied upon by issuers in large states in which the populations are not particularly mobile. Great care must be exercised in utilizing this federal exemption as one improper offer or sale can taint the entire offering, thereby destroying the exemption.

Small Offering Exemptions Section 3(b) authorizes the SEC, by means of rules and regulations, to add any class of securities to the securities exempted as provided in the 33 Act if the SEC finds that the enforcement of the 33 Act is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering, subject to the limitation that the aggregate amount at which the issue is offered to the public can not exceed $5,000,000. Acting pursuant to its authority under Section 3(b), the SEC has adopted Rules 504 and 505 under Regulation D and Regulation A.

REGULATION D Rule 501 Definitions Rule 502 Conditions Rule 503 Filing Notices Of Sales (Form D) Rule 504 & 505 Small Issue Exemptıons Rule 506 Nonexclusive Safe Harbor §4(2) Rule 507 Disqualification Provisions Rule 508 Insignificant Deviations

Rule 504: Rule 504 permits any issuer, other than an investment company or Exchange Act reporting company, to offer and sell maximum of $1 million of its securities to an unlimited number of persons during a 12-month period. The rule does not prescribe specific disclosure requirements and does not impose limitations on the manner of sales or on resales. Rule 504 requires a notice of sale to be filed with the SEC.

Rule 505 Rule 505 provides a registration exemption for any noninvestment company issuer, whether or not it is a reporting company under the Exchange Act. It allows an eligible issuer to offer and sell up to $5 million during a 12-month period without general advertising and solitication. An offering under Rule 505 can be made to an unlimited number of accredited investors and to a maximum of 35 nonaccredited investors. Purchasers of securities in a Rule 505 offering acquire restricted securities. The issuer must file a notice of sales with the SEC.

Rule 506 Rule 506 does not contain any limitation on the dollar amount of securities offered. It is avaliable to any issuer, whether or not it is a reporting company. A Rule 506 can be made to an unlimited number of accredited investors and to a maximum of 35 nonaccredited investors. Each nonaccredited investor, either alone or with the purchaser representative, must understand the merits and risks of the offering or the issuer must reasonably belive, prior to the sale, that each such investor is sophisticated. Specified information must be disclosed to nonaccredited investors. All purchasers, regardless of their status, acquire restricted securities. The issuer must file a notice of sales with the SEC.

Regulation A -Small Public Offering Exemption Limits offerings under this exemption to $5 million in a 12 month period, To utilize this exemption, a company must be: a. Organized under the laws of the U.S. or Canada, with its principal place of business in the U.S. or Canada. b. Not be a reporting company under the 34 Act. c. Not be an investment company, not a development stage company Issuers are required to file a offering statement with the SEC

Regulation A offerings are unique in that they allow a prospective issuer to "test the waters" of the market to determine if there is sufficient interest in the company's securities before the prospective issuer commits the time and resources to filing an offering statement with the Commission. There are virtually no restrictions on resale of securities and no special qualifications for initial investors to meet with respects to number or sophistication.

CASE: LUMION COMPANY Lumion took advantage of the federal exemption (Rule 504), as well as the exemptions offered by Florida and New York, to raise $750,000 by selling common stock at $1 per share to investors in those states only. (Lumion also sold stock to foreign investors - sales that are also exempt from federal securities laws- Regulation S.) Advantages they state; They decreased the costs of raising money. Overall their audit and legal expenses were $60,000 compare to the $500,000 they might have spent on a full-blown IPO The due diligence conducted by his earlier venture capital investors was very time onsumung and difficult compared to the due diligence associated with exempt stock offerings Investors are essentially passive and rely on management to build value. On the other hand, venture capital investors want to control the company's financial management. One of the greatest challenges of raising capital has to do with liquidity. Some form of resale mechanism can increase the likelihood of successfully raising money. Exempt public offerings can accommodate this need by trading on Nasdaq's Bulletin Board stock market.

REGISTRATION EXEMPTIONS IN TURKEY According to the Article 4 of the Turkish Capital Markets Law; Capital market instruments to be issued or to be offered to public are required to be registered with the Board. Article 11 clearly states that there is no exemption for registration of capital market instruments (exception government bonds).

According to the Article 11 of the Turkish Capital Markets Law; The shares of joint stock corporations having more than 250 stockholders shall be considered to have been offered to the public and such companies shall be subject to the provisions applicable to publicly held joint stock corporations. Issuers are required to inform the Capital Market Board within thirty days Issuers, that are not joint stock companies, or that have not offered capital market instruments to the public, or whose total assets, gross sales revenues, or public offering totals are less than amounts specified by the Board, or who are issuing or offering to the public other capital market instruments may be partially or completely exempted by the Board from the requirements of this Law. The conditions of this exemption, the principles of issuers withdrawing from the Board registry or being withdrawn and the conditions of partial exemption from public offering regulations shall be determined by communiqués .

As it is clearly stated in the Law, joint stock corporations can not be exempted from public offering regulations. But, it is not possible to offer shares for any forms of business organizations other than joint stock corporations according to Turkish Commercial Code and Capital Markets Law. Therefore, capital raising registration exemptions don’t exist for corporations. Only issuing debt instruments by using exemptions is possible according to the existing regulations in Turkey.

Additionally, Communique Serial:IV, No:9 which is promulgated under Article 11 of the Turkish Capital Markets Law does not contain any exemption for registration of public offering and sales of equity shares.

Private placement regulation Private placement regulation (the allotment sales) takes place in Article 11 of Communique Serial:I, No:26 “Communique On Principles Regarding Registration With The Capital Markets Board And Sale Of Shares”. Registration with the Capital Market Board is required but there is no obligation to prepare prospectus for the issuer.

Cost of IPO in US For a typical IPO in US, total cost is estimated between $400.000 and $500.000 for the necessary services of attorneys, investment bankers, accountants, and printers. professional institutions. The costs associated with operating as a publicly traded company can run between $20,000 and $100,000 per year for a newly public company.

Economies of scale make Securities Act registration disproportionately burdensome for smaller offerings and cost-effective only for larger public companies . The economic rationale for the small offering exemptions is based on economies of scale in registration. Because of relatively large fixed costs, the cost to register a small offering exceeds the benefits associated with registration.

We especially need exemptions from the registration process for many small offerings in Turkey. Small companies can’t raise additional capital they needed by using capital markets. Rule 504 is the least restrictive small offering exemption while Regulation A is the most burdensome. Regulation A and Rule 504 exemptions can be models for registration exemptions of small offerings for Turkey.

Regulation A model can cut cost of offering to nearly half Regulation A model can cut cost of offering to nearly half . This model may not be enough depending on TL limits will be determined for isues. Furthermore, CMB of Turkey will have to review offering circular which is like a short form of prospectus if we use similar model of Regulation A. This may not be an effective solution to shorten registration process. In Turkey, we don`t know the total cost of going public. When we determine the TL upper limits for the exemptions, this average should be carefully examined. We should make a carefull cost-benefit analysis and then determine reasonable limits for exemptions.