1. Securities Act – Registration Exemptions
Kyle Healy
Sarah Mackenzie
Alston & Bird LLP
Corporate Transactions and Securities
February 14, 2018

2. Today’s Presentation:
Exemptions
Issuer
Reseller
New Developments under the JOBS Act
General Solicitation
“Bad Actor” Disqualification
Crowdfunding
Reg. A+
Additional Considerations:
State Securities Laws
Integration

3. Securities Registration at 30,000 ft.
Basic Rule:
Absent an exemption from registration, every securities transaction* must be registered with the SEC. Otherwise, such offer/sale violates Section 5 of the Securities Act of 1933.
The Primary Exemptions:
Issuer:
4(a)(2) (exempts transactions by the issuer not involving any public offering)
Safe Harbors:
Reg. D (504, 506(b), 506(c))
Rule 701
Issuer and Reseller
Reg. S
144A
Reseller:
4(a)(1) (exempts transactions by persons other than issuers, affiliates, underwriters or dealers)
4(1 ½)
4(a)(7)
Rule 144
*that touches interstate commerce.

4. 4(a)(2) - “4(2)” Private Offering Exemption
The Exemption:
4(a)(2) exempts from registration “transactions by an issuer not involving any public offering.”
The Securities Act does not define the scope of a “private offering.”
It is important to read 4(a)(2) with 4(a)(1):
4(a)(1) exempts from registration “transactions by any person other than an issuer, underwriter or dealer.”
“Underwriter” is defined as “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any securities.”
SEC: investors may be “underwriters” if “they act as links in a chain of transactions through which securities move from an issuer to the public.”
4(a)(1) limits the scope of 4(a)(2) to prevent indirect public offerings by issuers and “control persons” (to be discussed later) through third parties.

5. 4(a)(2) Private Offering Exemption – Safe Harbors
Uncertainty in the use of 4(a)(2) led to the establishment of non-exclusive* safe harbors for private offerings (e.g., Reg. D)
Deviate from the safe harbors at your own risk:
Persons who offer to sell…securities without complying with [a safe harbor] are hereby put on notice by the Commission that in view of the broad remedial purposes of the [Securities] Act and of public policy which strongly supports registration, they will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers and other persons who participate in the transactions do so at their risk.”
* meaning more than one safe harbor can be claimed for an offering

6. Interpreting “Private Offering”
Ralston Purina (1953):
Leading case interpreting 4(a)(2)
Main takeaways:
The availability of the exemption “should turn on whether the particular class of persons affected needs the protection of the [Securities] Act.”
An offering to those who are shown to be able to fend for themselves is a transaction “not involving any public offering.”
Consider whether the persons “have access to the same kind of information that the [Securities] Act would make available in the form of a registration statement.”
Facts and circumstances analysis

7. Ok, so how do I know if I have a valid 4(a)(2) Offering?
“Able to fend for themselves” and “access to information” are at the core of the inquiry, but how does one satisfy these requirements?
Practitioners generally turn to an analysis of these 8 factors:
Number of offerees
Number of units
Size of offering
Manner of offering
Relationship of offerees to issuer and each other
Eligibility of offerees/purchasers
Communication of, or access to, information that registration statement would provide
Investment intent or resale of securities

8. Number of Offerees and Units; Size and Manner of Offering
Not determinative (safe harbors allow for an unlimited number of offerees)
Some courts have held that the more offerees there are, the more likely it is a public offering (and vice versa)
(2) Number of units
Not reflected in the 4(a)(2) safe harbor rules
A minimum denomination or purchase price could be a relevant factor
(3) Size of offering
(4) Manner of offering
An offering to a diverse and unrelated group is more likely to be a public offering

9. (5) Relationship of offerees to issuer and to each other
Pre-existing relationships are not to be regarded as an independent requirement
An issuer may approach unknown institutional investors and execute a legitimate private placement
Pre-existing relationship can also be a proxy for access to information
If an offering is made to indeterminate number of previously-unknown offerees, it would trigger potential issues under “manner of offering” (factor 4, above)
(“Manner of offering” factor could be mitigated by an offering made to persons with whom the issuer or its placement agent has a pre-existing relationship)

10. (6) Eligibility of offerees/purchasers
Investors in private placements should have such knowledge and experience in financial and business matters as to be able to evaluate the merits and risks of the prospective investment.
(Knowledge and experience may be satisfied by an offeree’s representative.)
Requirements for classes of investors that do not require protection of the registration:
Accredited Investor (2(a)(15) and Rules 215 and 501(a))
Presumed to have requisite financial sophistication and ability to fend for themselves or to hire someone to help them.
Each investor not deemed accredited is required, either alone or together with his “purchaser representative,” to have such knowledge and experience in financial and business matters as to be able to evaluate the risk of the prospective investment.
Qualified Institutional Buyer (Rule 144A(a)(1))
QIBs are institutional investors or dealers with requisite assets under management ($100M for institutions; $10M for dealers), among other requirements.

11. (7) Communication of, or access to, information that registration statement would provide
Non-purchaser offerees:
“Each” or “every” offeree must receive or have access to the required information.
(Applies whether or not offeree is ultimately a purchaser.)
Content:
Ralston:
“Same kind of information that the [Securities] Act would make available in the form of a registration statement.”
Other Courts:
A “sufficient basis of accurate information upon which the sophisticated investor may exercise his skills.”
Access to the “kind of information that a registration statement would disclose so that an offeree can make an informed investment decision.”
Access:
May be satisfied if there exists a “relationship based on factors such as employment, family or economic bargaining power that enables the offeree effectively to obtain… information.”
SEC eliminated the requirement to deliver information to an accredited investor.
(Assumption: they will demand information they deem necessary to make an investment decision and have the bargaining power to do so.)

12. (8) Investment intent or resale of securities
2(a)(11): Any purchaser that purchases securities from an issuer “with a view to” a “distribution” of the securities is an “underwriter” without the benefit of any other exemption under Section 4.
If a purchaser in a private placement sells the securities acquired in the private placement, it and subsequent purchasers from it that resell may be deemed “underwriters.”
In such event, the sales by the issuer and all sales and resales by purchasers must be examined together to determine whether the 4(2) exemption has been lost.
The focus is on the intent of the purchasers. Are the purchasers purchasing for an “investment and not with a view of distribution?”
To get the benefit of the safe harbor, an issuer is required to “exercise reasonable care to assure that the purchasers… are not underwriters….”
Assuming the issuer takes reasonable care to prevent resales, the benefits of the regulation are not lost if one or more purchasers makes a non-qualifying resale.

13. 4(2) Private Offering Exemption – Best Practices
Generally:
Issuer should afford each purchaser the opportunity to ask questions and receive answers concerning the terms and conditions of the offering.
Disclose in writing the limitations on resale (the securities are not being registered and may not be sold, except in accordance with an effective registration statement, to qualified institutional buyers in accordance with Rule 144A, outside the US in accordance with Reg. S or in accordance with Rule 144).
Current reporting issuer:
If current in reporting requirements, the issuer is not required to furnish any particular information to purchasers that are financially sophisticated.
Summary of offering terms and risk factors.
Non-Reporting Issuer:
Should consider furnishing to these purchasers substantially the same information as contemplated by Rule 502(b)(2)(i), Reg. A or the applicable registration statement.

14. Issuer Exemption Safe Harbors:
Reg. D (504, 506(b) & 506(c)) – Private Placement
Because there is uncertainty over the use of Section 4(2) (e.g., what a “public offering” is), the SEC adopted Reg. D to provide issuers with more certainty as to how to conduct a valid private placement
Rule 701 – Employee Plans
Reg. S – International Sales
Rule 144A – A resale exemption, but usually part of a 2-step process beginning with an issuer private placement

15. Rule 504 Safe Harbor
Rule 504 exempts offerings with an aggregate price of up to $5 million during any 12-month period
It is useful because it does not limit the number of investors or impose sophistication requirements on participating investors, but is of limited utility because of cap
This exemption is used mostly by small businesses

16. Rule 506 Safe Harbor
Rule 506 is the most widely used exemption under Regulation D

17. Rule 506(b) No dollar cap on size of offering
Rule 506(b) can be used by reporting and non-reporting issuers (subject to bad actor disqualification)
Accredited investors and up to 35 non-accredited investors (non-accredited investors must still be sophisticated) can invest. In practice, offerings are limited to accredited investors
Disclosure required for non-accredited investors
No cap on amount any one investor may invest
Is an intermediary required? not technically required; however, given that the issuer cannot use general solicitation or general advertising, issuer in reality can only raise capital from investors with whom it has a pre-existing substantive relationship without an intermediary
The offering cannot involve general solicitation

18. Rule 506(b)
Bad actor disqualification: the issuer will be required to obtain information from all covered persons
State blue sky: securities sold pursuant to Rule 506(b) are “covered securities,” so the Rule 506(b) exemption preempts state registration requirements

19. Rule 506(c)
Rule 506(c) is different from Rule 506(b) in that it permits the use of general solicitation as long as:
All purchasers of securities are accredited investors, either because they come within one of the enumerated categories of persons that qualify as accredited investors or the issuer reasonably believes that they qualify as accredited investors at the time it sells the securities;
The issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors; and
The conditions of Rule 501 and Rules 502(a) and 502(d) are satisfied.

20. Rule 506(c) Reasonable steps to verify investor status
Principles-based guidance includes a list of factors to consider:
The nature of the purchaser.
The nature and amount of information the issuer has about the purchaser. The SEC states that “the more information an issuer has indicating that a prospective purchaser is an accredited investor, the fewer steps it would have to take, and vice versa”
The nature of the offering, including the manner of solicitation and the terms of the offering. The nature of the offering may be relevant in determining the reasonableness of steps taken to verify status, i.e., issuers may be required to take additional verification steps to the extent that solicitations are made broadly, such as through a website accessible to the general public, or through the use of social media or

21. Rule 506(c)
Rule 506(c) sets out a non-exclusive list of methods that may be used to satisfy the verification requirement for natural persons, including:
Net income: a review of IRS forms for the two most recent years and a written representation regarding the individual’s expectation of attaining the necessary income level for the current year;
Net worth: a review of bank statements, brokerage statements, tax assessments, etc. to assess assets, a consumer report or credit report from at least one consumer reporting agency to assess liabilities, and a written representation that all relevant liabilities have been disclosed;
A written confirmation from a registered broker-dealer, RIA, CPA, etc.
For existing investors (pre-506(c) effective date), a certification as to that investor’s current status as an accredited investor

22. Rule 506(c) No dollar cap on size of offering
Rule 506(c) can be used by reporting and non-reporting issuers (subject to bad actor disqualification)
Who can invest? accredited investors only
No cap on amount any one investor may invest
Is an intermediary required? not technically required; easier for an issuer to conduct a Rule 506(c) offering on its own
The offering may use general solicitation
Bad actor disqualification: the issuer will be required to obtain information from all covered persons
State blue sky: securities sold pursuant to Rule 506(b) are “covered securities”

23. Issuer and Investor Requirements
Reg. D Summary Chart:
Type of Offering
Dollar Limit
Manner of Offering
Issuer and Investor Requirements
Restriction on Resale
Blue Sky Exemption
Rule 504
$5 million within prior 12 months.
No general solicitation or general advertising unless registered in a state requiring use of a substantive disclosure document or sold under state exemption for sales to accredited investors with general solicitation.
Available to nonreporting companies only that are not investment companies or blank check companies.
Certain “bad actors” are disqualified from participating in Rule 504 offerings.
No limit on number of investors or sophistication/accreditation thereof.
Restricted unless registered in a state requiring use of a substantive disclosure document or sold under state exemption for sale to accredited investors with general solicitation.
Need to comply with state blue sky laws by registration or state exemption.
Rule 506(b)
None.
No general solicitation or general advertising.
Unlimited accredited investors and 35 non-accredited investors that are sophisticated.
Certain “bad actors” are disqualified from participating in Rule 506(b) offerings.
Restricted securities.
No need to comply with state blue sky laws.
Rule 506(c)
(JOBS Act)
General solicitation permitted, provided that all purchasers are accredited investors.
All purchasers must be accredited investors.
Issuer must take reasonable steps to verify accredited investor status.
Certain “bad actors” are disqualified from participating in Rule 506(c) offerings.

24. Rule 701:
Allows companies ability to offer their own securities as part of written compensation agreements to employees, directors, general partners, trustees, officers, or certain consultants without having to register.
Total sales (not offerings) of stock during 12-month period cannot exceed the greater of:
$1M;
15% of issuer’s total assets, or
15% of all the outstanding securities of that class.
Offerings must be discrete (not provided with any other offer).
All offerees must be provided with a copy of the applicable benefit plan or contract.
For total sales over $5M during 12-month period, additional information must be disclosed.
Securities are “restricted securities.”

25. Reg. S: Non-statutory exemption for securities sold outside US.
Provides non-exclusive safe harbors for:
Offers and sales by issuers, distributors and their respective affiliates, and
Resales by others.
Requirements:
There must be an “offshore transaction” (i.e., offer cannot be made to a person in the US and the buyer must be outside the US or the seller must reasonably believe the buyer is outside the US*), and
Neither issuer nor any distributor (or any affiliate of either) may engage in any “directed selling efforts” (i.e., activities that may condition the US market for securities).
Often used concurrently with Section 4(a)(2) or Rule 144A
* though investor may itself by a US person or entity

26. Rule 144A Applies to resales of securities to QIBs.
QIBs are generally large institutional investors that own at least $100M in investable assets.
QIBs cannot be individuals.
Sales to applicable QIBs are not deemed “distributions” and sellers are not deemed “underwriters” if all conditions are met.
Rule 144A is a resale safe harbor, but is often used in conjunction with Section 4(2) or Reg. D.
First there is an issuer private placement to investment banks or broker-dealers under Section 4(2) or Reg. D
Then those initial purchasers resell to QIBs under Rule 144A
Securities cannot be substantially identical to/fungible with/of the same class or series as a security already listed on a US exchange.
Mandates that adequate information regarding the issuer be publicly available or holder has right to get the information from the issuer.
Seller must take reasonable steps to ensure that the buyer is aware that the seller may rely on 144A
144A has increased the liquidity of these securities because institutions can trade among themselves.
Shares sold under 144A are “restricted securities”.

27. Resales of Restricted Securities
REMINDER: Section 4(a)(1) of the Securities Act exempts transactions by persons other than issuers, affiliates, underwriters or dealers and Section 4(a)(3) generally exempts transactions by dealers not acting as underwriters
REMINDER: “Underwriter” is defined as “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any securities.”
SEC: investors may be “underwriters” if “they act as links in a chain of transactions through which securities move from an issuer to the public”
You will also be an “underwriter” if you purchase from an “affiliate” of the issuer and meet the above definitions

28. Resales of Restricted Securities (cont’d)
Restricted Securities: securities acquired in unregistered, private sales from the issuer or from an affiliate of the issuer
Control Securities: securities held by an “affiliate” of the issuer (i.e., somebody in a control relationship with the issuer) – this generally includes directors, officers, and significant shareholders (20% shareholder or 10% shareholder with designated rights)
Sections 4(a)(1) and 4(a)(3) are not available for resales of restricted securities or control securities or for resales by underwriters
Section 4(a)(2) and Reg. D. are not available because they are available for offerings only by the issuer
SO, a holder of restricted securities or control securities must resell using other available exemptions or must register the securities that are the subject of such resale

29. Resales of Restricted Securities (cont’d):
Available resale exemptions for restricted securities and control securities:
Resell the securities to the public in a transaction not involving a “distribution” as defined by Rule 144;
Resell the securities in a 4(1 ½) transaction;
Resell the securities pursuant to Section 4(a)(7);
Resell the securities through an offshore transaction pursuant to the resale provision of Reg. S (discussed previously); or
Resell the securities to a Qualified Institutional Buyer (QIB) pursuant to 144A (discussed previously).

30. Rule 144 Allows resale of restricted securities by:
An affiliate of an issuer,
Any person selling for his/her account the securities purchased from an issuer, or
Any person selling for the account of an affiliate of an issuer.
Sales using Rule 144 are not deemed a “distribution” and sellers are not deemed “underwriters” if all conditions are met.
Securities sold pursuant to Rule 144 are no longer “restricted securities” and can be resold freely
Holding Periods:
6 month for reporting companies
1 year for non-reporting companies
Mandates that adequate information regarding the issuer be publicly available.
In addition to the above requirements which apply to both affiliates and non-affiliates of the issuer, the below requirements apply to affiliates:
Limits on amount sold (greater of 1% of the class outstanding or, if traded on an exchange, the average weekly volume on all such exchanges during the 4 weeks preceding the sale transaction)
Limits on manner of sale
Requirements for notice of sale

31. If issuer does file Exchange Act Reports
Rule 144
If issuer does file Exchange Act Reports
If the holder is an affiliate of the issuer
If the holder is not an affiliate of the issuer and has not been affiliate for at least three months
Restricted securities must be held for at least six months
After holding period, holder may resell restricted securities subject to:
Issuer continuing to file Exchange Act reports
Volume restrictions (which have been relaxed for debt securities)
Manner of sale restrictions (revised from current rule, with a modified manner of sale restriction for equity securities and no manner of sale restriction for debt securities)
Form 144 required to be filed if sales exceed 5,000 shares or $50,000 in a three- month period
After holding period, but before expiration of one year, holder may have unlimited resales of restricted securities, subject to:
No filing requirement
After one year:
Unlimited public resales of securities
If the holder is not an affiliate of the issuer and has not been affiliate for at least three months
One-year holding period
After holding period, holder may make resales of restricted securities subject to (as described above):
Current reporting
Volume restrictions
Manner of sale restrictions
Form 144 required to be filed
After holding period, holder may have unlimited resales of restricted securities

32. 4(1½) Resale Exemption:
If holder does not want to (or cannot) comply with conditions of 144, there are additional resale exemptions to use – Section 4(1½) and Rule 144A
4(1½): Developed by attorneys before Rule 144A was enacted and now used less frequently (when Rule 144A is unavailable (e.g., securities are fungible or purchasers are not QIBs))
The Solution:
A “hybrid” exemption.
Allows affiliates to make private sales of securities held by them so long as some of the established criteria for sales under both Section 4(1) and 4(a)(2) are satisfied.
4(1): Exemption for sales “by a person other than an issuer, underwriter, or dealer.”
Essentially, the structure is a 4(a)(2) private placement by a reseller rather than an issuer.
Section 4(a)(7) was codified in 2015 (FAST Act) as a statutory alternative to 4(1½)
Each purchaser must be an accredited investor
No general solicitation
Certain non-reporting issuers must provide certain information to investors
Bad actors disqualified
Exempt from blue sky laws

33. New Developments under the JOBS Act:
JOBS Act (2012) and FAST Act (2015):
Changes to restrictions on General Solicitation
“Bad Actor” Disqualification
Crowdfunding
Reg. A+

34. JOBS Act: General Solicitation
A fundamental premise of the private placement had been the prohibition of general solicitation and advertising.
Applies to both issuers and anyone acting on behalf of the issuer.
Creation of 506(c) exemption.
Removes prohibition on general solicitation or public advertising, however:
Issuer must take reasonable steps to verify accredited investor status (objective principle-based approach and non-exclusive 4-factor test)

35. JOBS Act: “Bad Actor” Disqualification
Dodd-Frank makes Rule 506(b) and 506(c) unavailable for “bad actors.”
“Bad Actors” are “Covered Persons” who are subject to “Disqualifying Events.”
Examples of “Covered Persons”:
Issuer and any predecessor or affiliate issuer
Director or executive officer
Any placement agent or compensated solicitor
Examples of “Disqualifying Events”:
Criminal convictions related to sale of security of false filing with SEC in last 10 years
SEC disciplinary orders related to SEC regulated persons
Suspension by FINRA or an exchange
“Reasonable Care” exception:
Applicable if issuer can prove that it did not know, and could not have reasonably known, of “Bad Actor” status
Also incorporated into Rule 504

36. JOBS Act: Crowdfunding (Section 4(a)(6))
Adopted in 2015
Permits “crowdfunding” offerings in which an issuer may accept relatively small amounts in small offers from non-accredited investors
Much less attractive than Rule 506(c):
Issuer may not be a public company, certain kind of investment company or foreign private issuer.
Aggregate amount cannot exceed $1.07M in any 12-month period.
Stringent limits on the amount sold to any one investor in all offerings (not just crowdfunding offerings).
Transaction must be conducted through an intermediary (broker-dealer or portal).
Issuer and intermediary must comply with certain disclosure and financial reporting requirements.
Preempts state securities laws
Bad actor disqualification similar to Rule 506

37. JOBS Act: Reg. A+
Adopted in 2015 by SEC to expand Reg. A (rarely used “small offerings exemption”)
Reg. A+:
Increases limits of such offerings from $5M to $50M in 12-month period.
Tier 1:
Offerings up to $20M in 12-month period; no more than $6M sold by affiliates.
Subject to state and federal registration requirements.
Tier 2:
Offerings up to $50M in 12-month period; no more than $15M sold by affiliates.
Offerings sold to “qualified purchasers” preempt state securities laws.
Issuers raising > $5M subject to annual reporting requirements.
Public companies excluded; exemption limited to US and Canadian companies.
For accredited and non-accredited investors, but non-accredited are subject to investment limit

38. Summary Chart of Exempt Offering Alternatives
Type of Offering
Dollar Limit
Manner of Offering
Issuer and Investor Requirements
Restriction on Resale
Blue Sky Exemption
Rule 506(c)
None
General solicitation permitted, provided that all purchasers are accredited investors
Under Rule 506(c), all purchasers must be accredited investors. Issuer must take reasonable steps to verify accredited investor status.
Certain bad actors are disqualified from participating in Rule 506(c) offerings.
Restricted securities.
No need to comply with state blue sky laws.
Tier 1 Regulation A
$20 million within prior 12 months, but no more than $6 million by selling security holders.
Testing the waters permitted before and after filing Form 1-A. Sales permitted after Form 1-A qualified.
Issuer must be eligible issuer. No investor requirement.
Not restricted securities.
Subject to state blue sky laws regarding pre offering review, filing, and anti-fraud.
Tier 2 Regulation A
$50 million within the prior 12 months, but no more than $15 million by selling security holders.
Issuer must be eligible issuer No investor requirement; however, investors who are natural persons and are not accredited investors are subject to an investment limit.
Not subject to state blue sky laws regarding pre offering review; however, subject to state blue sky filing and anti-fraud requirements.
Regulation Crowdfunding
Up to $1 million in a 12-month period.
Offering must be made solely through a platform.
Issuers that are not reporting companies, not funds, and not subject to disqualification.
Securities sold in an offering are subject to certain transfer restrictions for one year.
No need to comply with state blue sky laws.

39. State Securities Laws Issues: NSMIA
National Securities Markets Improvement Act of 1996 (“NSMIA”):
The federal rules preempt state registration and state review of transactions involving 7 classes of “Covered Securities,” which include:
Exchange listed securities
Securities issued by a listed company and equal or senior in rank to its listed securities (e.g., bonds issued by a company with listed stock
Sales to “qualified purchasers”;
Securities sold in Rule 506 offerings; and
Securities sold in secondary market transactions (i.e., transactions under Sections 4(a)(1) or 4(a)(3) of the Securities Act) involving securities of SEC registrants;
States remain authorized under NSMIA to impose “notice filings” for all offerings of covered securities with the exception of those “listed securities” described in the first and second bullet points above.
Offerings effectuated pursuant to 4(a)(2) do not preempt state laws.

40. Integration: Doctrine:
Intended to prevent issuers from circumventing registration requirements and is used to determine whether:
2 or more purportedly discrete exempt offerings are really 1 offering that is not exempt, or
If an exempt offering is really part of a registered offering.
5 factors to consider when determining whether offers and sales should be integrated for purposes of the exemptions under Reg. D:
Whether the sales are part of a single plan of financing (important);
Whether the sales involve the issuance of the same class of securities;
Whether the sales have been made at or about the same time;
Whether the same type of consideration is received; and
Whether the sales are made for the same general purpose (important).
Sometimes 6th factor: are the offerees in each offering of the same class or character?
6-month safe harbor:
502(a) - Multiple private offerings that are conducted at least 6 months apart will not be integrated

41. Questions?
Thank you for your time. Kyle Healy Sarah Mackenzie