SEC – Interpretations of Reg D
Section 254. Regulation D Interpretations of General Applicability
Question: If an issuer relies on one exemption in Regulation D, but later realizes that exemption may not have been available, may it rely on another exemption in Regulation D after the fact?
Answer: Yes, assuming the offering met the conditions of the new exemption. No one exemption in Regulation D is exclusive of another. [Jan. 26, 2009]
Question: May foreign issuers use Regulation D?
Answer: Yes. Disclosure requirements for foreign private issuers are set forth in Rule 502(b)(2)(i)(C). [Jan. 26, 2009]
Question: Is Regulation D available to an underwriter for the sale of securities acquired in a firm commitment offering?
Answer: No. As Preliminary Note 4 indicates, Regulation D is available only to the issuer of the securities and not to any affiliate of that issuer or to any other person for resales of the issuer’s securities. See also Rule 502(d), which limits the resale of Regulation D securities. [Jan. 26, 2009]
Question: A corporation proposes to implement an employee stock option plan for key employees. Can the issuer rely on Regulation D for an exemption from registration for the issuance of securities under the plan?
Answer: The corporation may use Regulation D for the sale of securities under the plan to the extent that such offering complies with Regulation D. The corporation may also want to explore whether the exemption from registration in Securities Act Rule 701 is available. Rule 701 was adopted after Regulation D and was designed specifically for stock option and other compensatory employee benefit plans. In a typical plan, the grant of the options will not be deemed a sale of a security for purposes of the Securities Act. The issuer, therefore, will be seeking an exemption for the issuance of the stock underlying the options. The offering of this stock generally will commence when the options become exercisable and will continue until the options are exercised or otherwise terminated. Where the key employees involved are directors or executive officers, such individuals will be accredited investors under Rule 501(a)(4) if the corporation is relying on Regulation D and they purchase securities through the exercise of their options. Other key employees may be accredited as a result of net worth or income under Rules 501(a)(5) or (a)(6). [Jan. 26, 2009]
Section 255. Rule 501 — Definitions and Terms Used in Regulation D
Question: A director of a corporate issuer purchases securities offered under Rule 505. Two weeks after the purchase, and prior to completion of the offering, the director resigns due to a sudden illness. Is the former director an accredited investor?
Answer: Yes. The preliminary language to Rule 501(a) provides that an investor is accredited if the investor falls into one of the enumerated categories “at the time of the sale of securities to that person.” One such category includes directors of the issuer. See Rule 501(a)(4). The investor in this case had that status at the time of the sale to him. [Jan. 26, 2009]
Question: A national bank purchases $100,000 of securities from a Regulation D issuer and distributes the securities equally among ten trust accounts for which it acts as trustee. Is the bank an accredited investor?
Answer: Yes. Rule 501(a)(1) accredits a bank acting in a fiduciary capacity. [Jan. 26, 2009]
Question: An ERISA employee benefit plan will purchase securities being offered under Regulation D. The plan has less than $5,000,000 in total assets and its investment decisions are made by a plan trustee that is not a bank, insurance company, or registered investment adviser. Does the plan qualify as an accredited investor?
Answer: The plan would not satisfy the requirements of Rule 501(a)(1), which accredits an ERISA plan that has a plan fiduciary that is a bank, insurance company, or registered investment adviser or that has total assets in excess of $5,000,000. Unless it satisfied another provision of Rule 501(a)(1), it would not be an accredited investor. [Jan. 26, 2009]
Question: Would an ERISA plan qualify as an accredited investor under Rule 501(a)(1) if it had less than $5 million in assets but had an arrangement through its trustee with a registered investment adviser to receive investment advice, when the ultimate investment decision is made by the trustee?
Answer: The plan would not qualify as an accredited investor under Rule 501(a)(1) if the ultimate investment decision is made by the trustee. However, if the arrangement gave the registered investment adviser full discretion to make investment decisions for the plan, the plan would then qualify as an accredited investor. It should be noted that the failure of a plan to qualify under Rule 501(a)(1) would not preclude it from attempting to qualify under other provisions of Rule 501(a) as an accredited investor. [Jan. 26, 2009]
Question: Although not specified in the list of organizations in Rule 501(a)(3), may a limited liability company be treated as an “accredited investor” as defined in that rule if it satisfies the other requirements of the definition?
Answer: Yes. See the Wolf, Block, Schorr and Solis-Cohen no-action letter (Dec. 11, 1996) issued by the Division. [Jan. 26, 2009]
Question: Rule 501(a)(8) accredits any entity in which all of the equity owners are accredited investors. In some cases, an equity owner is itself an entity rather than a natural person. If the owner-entity does not qualify on its own merits as an accredited investor, may the issuer look through the owner-entity to its natural person owners to determine whether they are all accredited investors?
Answer: Yes. An issuer can look through various forms of equity ownership to natural persons in judging accreditation under Rule 501(a)(8). [Jan. 26, 2009]
Question: Under Rule 501(a)(8), an entity is an accredited investor if all its equity owners are accredited investors. If one director of a corporate investor holds one qualifying share of the entity’s stock and is not an accredited investor, would the corporate investor be considered accredited under this provision?
Answer: No, the corporate investor would not be considered accredited. Rule 501(a)(8) requires “all of the equity owners” to be accredited investors. The director is an equity owner and is not accredited. Note that the director cannot be accredited under Rule 501(a)(4). That provision extends accreditation to a director of the issuer, not of the investor. [Jan. 26, 2009]
Question: A state run, not-for-profit hospital has total assets in excess of $5,000,000. Because it is a state agency, the hospital is exempt from federal income taxation. Rule 501(a)(3) accredits any organization described in Section 501(c)(3) of the Internal Revenue Code that has total assets in excess of $5,000,000. Is the hospital accredited under Rule 501(a)(3)?
Answer: Yes. This category does not require that the investor have received a ruling on tax status under Section 501(c)(3) of the Internal Revenue Code. Rather, Rule 501(a)(3) accredits an investor that falls within the substantive description in that section. See the Voluntary Hospitals of America, Inc. no-action letter (Nov. 30, 1982) issued by the Division. [Jan. 26, 2009]
Question: A not-for-profit, tax exempt hospital with total assets of $3,000,000 is purchasing securities in a Regulation D offering. The hospital controls a subsidiary with total assets of $3,000,000. Under generally accepted accounting principles, the hospital may combine its financial statements with those of its subsidiary. Is the hospital accredited? Would the result be the same if one hospital were a holding company with financial statements that are combined with those of an affiliated hospital, where the affiliated hospital is not technically a subsidiary?
Answer: Yes to both questions under Rule 501(a)(3). When the financial statements of a subsidiary or affiliate may be combined with those of the investor under generally accepted accounting principles, the assets of the subsidiary or affiliate may be added to those of the investor in computing total assets for purposes of Rule 501(a)(3). [Jan. 26, 2009]
Question: The executive officer of a parent of the corporate general partner of the issuer is investing in the Regulation D offering. Is that individual an accredited investor?
Answer: Rule 501(a)(4) accredits only the directors and executive officers of the general partner itself. Unless the executive officer of the parent can be deemed an executive officer of the subsidiary, that individual is not an accredited investor. See the Prometheus Development Co., Inc. no-action letter (Nov. 6, 1985) issued by the Division. [Jan. 26, 2009]
Question: Must property be held jointly between spouses to be included in the joint net worth calculation in Rule 501(a)(5), and must the securities be purchased jointly by spouses for the investor to be considered “accredited” under the joint net worth standard?
Answer: No. Joint net worth can be the aggregate net worth of an investor and the investor’s spouse; such property need not be held jointly; and the purchase need not be made jointly for an investor to qualify under the joint net worth standard. [Jan. 26, 2009]
Question: A corporation with a net worth of $2,000,000 purchases securities in a Regulation D offering. Is the corporation an accredited investor under Rule 501(a)(5)?
Answer: No. Rule 501(a)(5) is limited to “natural” persons. [Jan. 26, 2009]
Question: In calculating net worth for purposes of Rule 501(a)(5), may the investor include the estimated fair market value of his or her principal residence as an asset?
Answer: Yes. Rule 501(a)(5) does not exclude any of the purchaser’s assets from the net worth needed to qualify as an accredited investor. [Jan. 26, 2009]
Question: May the value of vested employee stock options be included in a person’s net worth under the definition of accredited investor in Rule 501(a)(5)?
Answer: Yes. Net worth is simply the excess of assets over liabilities. The value of vested employee stock options may be included in the net worth calculation under Rule 501(a)(5). [Jan. 26, 2009]
Question: For purposes of the income test in Rule 501(a)(6), may a natural person satisfy the test for the requisite three-year period by satisfying either the individual income test or the joint income test in each of the three years and neither of the tests in all three years?
Answer: If the person has had the same marital status for all three years, then no. A natural person must satisfy Rule 501(a)(6) based on that person’s satisfying the $200,000 individual income test for all three years or the $300,000 joint income test with that person’s spouse for all three years. If a person has been married for some but not all of the three years, however, he or she may satisfy the rule on the basis of the joint income test for the years during which the person was married and on the basis of the individual income test for the other years. [Jan. 26, 2009]
Question: Does the term “income” in Rule 501(a)(6) include amounts contributed on the participant’s behalf to a profit-sharing plan or pension plan to the extent that a participant’s rights to benefits attributable to such contributions are vested?
Answer: Yes. See the Raymond, James & Associates, Inc. no-action letter (Nov. 19, 1984) issued by the Division. [Jan. 26, 2009]
Question: May a purchaser include unrealized capital appreciation in calculating income for purposes of Rule 501(a)(6)?
Answer: Generally, no. See Securities Act Release No. 6455, Question No. 23 (Mar. 3, 1983). [Jan. 26, 2009]
Question: Who are the equity owners of a limited partnership?
Answer: The limited partners. [Jan. 26, 2009]
Question: May a trust qualify as an accredited investor under Rule 501(a)(1)?
Answer: Only indirectly. Although a trust standing alone cannot be accredited under Rule 501(a)(1), if a bank is its trustee and makes the investment on behalf of the trust, the trust will in effect be accredited by virtue of the provision in Rule 501(a)(1) that accredits a bank acting in a fiduciary capacity. Furthermore, a trust having a bank as a co-trustee is an accredited investor as interpreted under Rule 501(a)(1) so long as the bank is “acting” in its fiduciary capacity on behalf of the trust in reference to the investment decision and the trust follows the bank’s direction. See the Nemo Capital Partners L.P. no-action letter (Mar. 11, 1987) issued by the Division. [Jan. 26, 2009]
Question: A trustee of a trust has a net worth of $1,500,000. Is the trustee’s purchase of securities for the trust that of an accredited investor under Rule 501(a)(5)?
Answer: No. Except where a bank is a trustee, the trust is deemed the purchaser, not the trustee. The trust is not a “natural” person. [Jan. 26, 2009]
Question: May a trust be accredited under Rule 501(a)(8) if all of its beneficiaries are accredited investors?
Answer: Generally, no. Rule 501(a)(8) accredits any entity if all of its “equity owners” are accredited investors. This provision does not apply to the beneficiaries of a conventional trust. The result may be different, however, in the case of certain non-conventional trusts where, as a result of powers retained by the grantors, a trust as a legal entity would be deemed not to exist. The result also would be different in the case of a business trust, a real estate investment trust, or other similar entities. Thus, where the grantors of a revocable trust are accredited investors under Rule 501(a)(5) (e.g., the net worth of each exceeds $1,000,000) and the trust may be amended or revoked at any time by the grantors, the trust as a legal entity would be deemed not to exist, and the trust would be deemed accredited, because the grantors would be deemed the equity owners of the trust’s assets. See the Lawrence B. Rabkin, Esq. no-action letter (July 16, 1982) issued by the Division. [Jan. 26, 2009]
Question: If the participant in an Individual Retirement Account is an accredited investor, is the account accredited under Rule 501(a)(8)?
Answer: Yes. [Jan. 26, 2009]
Question: If all participants of an employee benefit or retirement plan are accredited investors under any of the categories of Rule 501 except Rule 501(a)(8), is the plan deemed accredited?
Answer: Yes. See the Thomas Byrne Swartz no-action letter (June 10, 1982) issued by the Division. [Jan. 26, 2009]
Question: Are there circumstances under which the grantor of an irrevocable trust would be considered the equity owner of the trust under Rule 501(a)(8)?
Answer: The grantor of an irrevocable trust with the following characteristics could be considered the equity owner of the trust:
(1) The trust was a grantor trust for federal tax purposes. The grantor was the sole funding source of the trust. The grantor would be taxed on all income of the trust during at least the first 15 years following the investment and would be taxed on any sale of trust assets during that period. During this period, all of the assets of the trust would be includable in the grantor’s estate for federal estate tax purposes.
(2) The grantor was a co-trustee of the trust and had total investment discretion on behalf of the trust at the time the investment decision was made.
(3) The terms of the trust provided that the entire amount of the grantor’s contribution to the trust plus a fixed rate of return on the contribution would be paid to the grantor (or his estate) before any payments could be made to the beneficiaries of the trust.
(4) The trust was established by the grantor for family estate planning purposes to facilitate the distribution of his estate. In order to effectuate the estate planning goals, the trust was irrevocable.
(5) Creditors of the grantor would be able to reach the grantor’s interest in the trust at all times.
See the Herbert S. Wander no-action letter (Nov. 25, 1983) and the Herrick, Feinstein LLP no-action letter (Jan. 5, 2001) issued by the Division. [Jan. 26, 2009]
Question: In computing the various dollar amount ceilings for sales under Regulation D, is a sale that was subsequently rescinded (e.g., because it was found that the investor was not “accredited”) required to be counted?
Answer: No. [Jan. 26, 2009]
Question: In calculating the aggregate offering price under Rule 504 or 505, should an issuer include any additional capital contributions or assessments which investors will be obligated to meet, despite the fact that the issuer may never make such assessments?
Answer: Yes. [Jan. 26, 2009]
Question: In purchasing interests in an oil and gas partnership, investors agree to pay mandatory assessments. The assessments, essentially installment payments, are non-contingent and investors will be personally liable for their payment. Must the issuer include the assessments in the aggregate offering price?
Answer: Yes. See the Kim R. Clark, Esq. no-action letter (Nov. 8, 1982) issued by the Division. [Jan. 26, 2009]
Question: In computing the aggregate offering price of an offering under Rule 504 or 505, is a limited partnership issuer required to aggregate sales by other limited partnerships solely because the other partnerships have the same general partner?
Answer: No. [Jan. 26, 2009]
Question: In computing the aggregate offering price for the ceiling limitations of Rules 504 and 505, is a limited partnership issuer required to include payments by active general partners for limited partnership interests?
Answer: No. Since the general partners are essentially investing in their own efforts, and not those of others, any limited partnership interests so purchased are not deemed securities for purposes of this computation. [Jan. 26, 2009]
Question: Where the investors pay for their securities in installments and these payments include an interest component, must the issuer include interest payments in the “aggregate offering price”?
Answer: No. The interest payments are not deemed to be consideration for the issuance of the securities. [Jan. 26, 2009]
Question: An offering of interests in an oil and gas limited partnership provides for additional voluntary assessments. These assessments, undetermined at the time of the offering, may be called at the general partner’s discretion for developmental drilling activities. Must the assessments be included in the aggregate offering price, and, if so, in what amount?
Answer: Because it is unclear that the assessments will ever be called, and because if they are called, it is unclear at what level, the issuer is not required to include the assessments in the aggregate offering price. In fact, the assessments will be consideration received for the issuance of additional securities in the limited partnership. The issuance will need to be considered along with the original issuance for possible integration, or, if not integrated, must be registered or find its own exemption from registration. [Jan. 26, 2009]
Question: As part of their purchase of securities, investors deliver irrevocable letters of credit. Must the letters of credit be included in the aggregate offering price?
Answer: Yes. If these letters of credit were drawn against, the amounts involved would be considered part of the aggregate offering price. For this reason, in planning the transaction, the issuer should consider the full amount of the letters of credit in calculating the aggregate offering price. [Jan. 26, 2009]
Question: Do foreign investors need to be counted under Rule 501(e) in calculating whether an issuer has exceeded the limit of 35 non-accredited investors in a Rule 505 or 506 offering under Regulation D?
Answer: As explained in Preliminary Note 7 to Regulation D, if the foreign offering meets the safe harbor conditions set forth in Regulation S relating to offerings made outside the United States, then the foreign offering is not required to comply with the conditions of Regulation D, including those limiting the number of investors. But if the issuer elects to rely on Regulation D for offers and sales to foreign investors, the issuer must count the foreign investors in calculating whether it meets the conditions of Regulation D limiting the number of investors. [Jan. 26, 2009]
Question: For purposes of calculating the number of purchasers in an offering under Regulation D, may an individual and the individual’s IRA be regarded as a single purchaser?
Answer: Yes. Furthermore, if an individual purchases stock in an offering both directly and indirectly through a self-directed employee savings plan, the individual will count as only one purchaser if non-accredited. See the Lane Enterprises, Inc. no-action letter (Feb. 9, 1987) issued by the Division. [Jan. 26, 2009]
Question: A group of trusts with no current beneficiaries, separately created for estate tax planning purposes, will have the same set of beneficiaries and the same trustees. May the group be treated as a single purchaser under Regulation D?
Answer: Yes. [Jan. 26, 2009]
Question: Two trusts purchase securities in a Regulation D offering. The beneficiaries of these trusts are related and share the same principal residence. Even though Rule 501(e)(1), which governs the calculation of the number of purchasers, does not specifically exempt either trust from the count, does its policy of exempting related purchasers with the same residence justify counting the trusts as one purchaser?
Answer: Yes. Similarly, where a parent and a trust benefiting a child who shares the parent’s residence purchase securities in a Regulation D offering, the issuer may count these two investors as one purchaser. [Jan. 26, 2009]
Question: Rule 501(e)(2) provides that in determining the number of purchasers in an offering under Regulation D, “each beneficial owner of equity securities or equity interests” in a corporation, partnership or other entity that was organized for the specific purpose of acquiring the securities offered “shall count as a separate purchaser for all provisions of Regulation D”. This means that the rules for counting individual purchasers would apply to each such beneficial owner. Would a beneficial owner who also happens to be an accredited investor, for instance, be excluded from the count?
Answer: Yes. [Jan. 26, 2009]
Question: Would a not-for-profit corporation formed for the specific purpose of an investment be counted as a single purchaser under Regulation D where the members were not equity owners and could not regain any part of their investment or receive any return thereon?
Answer: Yes. [Jan. 26, 2009]
Question: One purchaser in a Rule 506 offering is an accredited investor. Another is a first cousin of that investor sharing the same principal residence. Each purchaser is making his own investment decision. How must the issuer count these purchasers for purposes of meeting the 35 purchaser limitation?
Answer: The issuer is not required to count either investor. The accredited investor may be excluded under Rule 501(e)(1)(iv), and the first cousin may then be excluded under Rule 501(e)(1)(i). The issuer must satisfy all other conditions of Regulation D, however, with respect to purchasers that have been excluded from the count. Thus, for instance, the issuer would have to ensure the sophistication of the first cousin under Rule 506(b)(2)(ii). [Jan. 26, 2009]
Question: An accredited investor in a Rule 506 offering will have the securities she acquires placed in her name and that of her spouse. The spouse will not make an investment decision with respect to the acquisition. How many purchasers will be involved?
Answer: The accredited investor may be excluded from the count under Rule 501(e)(1)(iv) and the spouse may be excluded under Rule 501(e)(1)(i). The issuer may also take the position, however, that the spouse should not be deemed a purchaser at all because he did not make any investment decision, and because the placement of the securities in joint name may simply be a tax or estate planning technique. [Jan. 26, 2009]
Question: An investor in a Rule 506 offering is an investment partnership that is not accredited under Rule 501(a)(8). Although the partnership was organized two years earlier and has made investments in a number of offerings, not all the partners have participated in each investment. With each proposed investment by the partnership, individual partners have received a copy of the disclosure document and have made a decision whether or not to participate. How do the provisions of Regulation D apply to the partnership as an investor?
Answer: The partnership may not be treated as a single purchaser. Rule 501(e)(2) provides that if the partnership is organized for the specific purpose of acquiring the securities offered, then each beneficial owner of equity interests should be counted as a separate purchaser. Because the individual partners elect whether or not to participate in each investment, the partnership is deemed to be organized for the specific purpose of acquiring the securities in each investment. See the Madison Partners Ltd. 1982-1 no-action letter (Jan. 18, 1982) and the Kenai Oil & Gas, Inc. no-action letter (Apr. 27, 1979) issued by the Division. Thus, the issuer must look through the partnership to the partners participating in the investment. The issuer must satisfy the conditions of Rule 506 as to each partner. [Jan. 26, 2009]
Question: For purposes of Regulation D, may an executive officer of the parent of the issuer be deemed an executive officer of the issuer if such officer meets the definition of “executive officer” set forth in Rule 405?
Answer: Yes. [Jan. 26, 2009]
Question: Is a manager of an LLC considered an executive officer under Rule 501(f) and therefore an accredited investor?
Answer: Yes, so long as the manager of the LLC performs a policy making function for the issuer, the manager will be considered an executive officer of the issuer and therefore an accredited investor under Rule 501(a)(4). [Jan. 26, 2009]
Question: May a lawyer in the law firm representing the issuer serve as a purchaser representative for an investor so long as that lawyer is not an affiliate, director, officer, employee, or 10 percent stockholder of the issuer and so long as the lawyer discloses to the purchaser such relationship and any other material relationship with the issuer?
Answer: Yes. [Jan. 26, 2009]
Question: May the officer of a corporate general partner of the issuer qualify as a purchaser representative under Rule 501(h)?
Answer: Not unless the purchaser has a relationship with the officer enumerated in paragraph (i), (ii) or (iii) of Rule 501(h)(1). Rule 501(h) provides that “an affiliate, director, officer or other employee of the issuer” may not be a purchaser representative unless the purchaser has one of those three enumerated relationships with the representative. An officer or director of a corporate general partner comes within the scope of “affiliate, director, officer or other employee of the issuer.” [Jan. 26, 2009]
Question: May the issuer in a Regulation D offering pay the fees of the purchaser representative?
Answer: Yes. Nothing in Regulation D prohibits the payment by the issuer of the purchaser representative’s fees. Rule 501(h)(4), however, requires the disclosure of this fact. Note 3 to Rule 501(h) points out that disclosure of a material relationship between the purchaser representative and the issuer will not relieve the purchaser representative of the obligation to act in the interest of the purchaser. [Jan. 26, 2009]
Section 256. Rule 502 — General Conditions to be Met
Question: An issuer conducts offering A under Rule 504 that concludes in January. Seven months later the issuer commences offering B under Rule 506. During that seven-month period, the issuer’s only offers or sales of securities are made in offering C under an employee benefit plan C. Must the issuer integrate A and B?
Answer: No. Rule 502(a) specifically provides that A and B will not be integrated. Rule 502(a), however, does not provide a safe harbor to the possible integration of offering C with either offering A or B. In resolving that question, the issuer should consider the factors listed in the Note to Rule 502(a). [Jan. 26, 2009]
Question: Would simultaneous offerings by affiliated issuers, such as a corporate general partner and its limited partnership, selling their securities as units in a single plan of financing for the same general purpose be considered to be an integrated offering?
Answer: Yes. See the Intuit Telecom Inc. no-action letter (Mar. 24, 1982) issued by the Division. [Jan. 26, 2009]
Question: May the reference in Rule 502(b)(2)(ii)(A) to the annual report to shareholders for the “most recent fiscal year” include the annual report prepared for the previous year?
Answer: Yes, provided that delivery of the annual report for the present year is not yet required under Exchange Act Rules 14a-3 or 14c-3, and the prior year’s report meets the requirements of Rule 14a-3 or 14c-3. [Jan. 26, 2009]
Question: A reporting company with a fiscal year ending on December 31 is making a Regulation D offering in February. The company has filed all the material required to be filed under Sections 13, 14 and 15(d) of the Exchange Act in the last 12 calendar months. It does not have an annual report to shareholders, an associated definitive proxy statement, or a Form 10-K for its most recently completed fiscal year. The issuer’s last registration statement was filed more than two years ago. What is the appropriate disclosure under Regulation D?
Answer: The issuer may base its disclosure on the most recently completed fiscal year for which an annual report to shareholders or Form 10-K was timely distributed or filed. The issuer should supplement the information in the report used with the information contained in any reports or documents required to be filed under Sections 13(a), 14(a), 14(c) and 15(d) of the Exchange Act since the distribution or filing of that report and with a brief description of the securities being offered, the use of the proceeds from the offering, and any material changes in the issuer’s affairs that are not disclosed in the documents furnished. See Rule 502(b)(2)(ii)(C). [Jan. 26, 2009]
Question: If the issuer is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, what information does Regulation D require to be delivered to non-accredited investors in a Rule 505 or 506 offering?
Answer: In these types of offerings, Rule 502(b)(2)(ii) of Regulation D sets forth two alternatives for disclosure: the issuer may deliver certain recent Exchange Act reports (the annual report, the definitive proxy statement, and, if requested, the Form 10-K) or it may provide a document containing the same information as in the Form 10-K or Form 10 under the Exchange Act or in a Form S-1 or Form S-11 registration statement under the Securities Act. In either case, the rule calls for the delivery of certain supplemental information. [Jan. 26, 2009]
Question: Under Rule 502(b)(2)(iii), an issuer that must provide a disclosure document, whether it is a reporting or non-reporting issuer, is required to identify and make available those exhibits that would accompany the registration form or report upon which the disclosure document is modeled. Does a Regulation D issuer have to make available an opinion of counsel as to the legality of the securities being issued and, if there are representations made as to material tax consequences, a supporting opinion of counsel regarding such tax consequences?
Answer: Yes. [Jan. 26, 2009]
Question: In an offering under Regulation D, must the opinion of counsel regarding the legality of the issuance of the securities contain an opinion as to whether the issuer has a valid claim to the Regulation D exemption?
Answer: No. [Jan. 26, 2009]
Question: What type of information specified in Rule 502(b)(2) is an issuer required to furnish for any corporate general partner in a Regulation D offering where the issuer is a limited partnership?
Answer: The issuer should furnish for any corporate general partner an audited balance sheet as of the most recently completed fiscal year. [Jan. 26, 2009]
Question: Under Rule 502(b)(2)(i)(B)(2) and (3), if a limited partnership issuer cannot obtain the required financial statements for a Regulation D offering without unreasonable effort or expense, it may provide tax basis financials. Do these provisions also apply to the financial statements required in a Regulation D offering for general partners as well as properties to be acquired?
Answer: Yes. [Jan. 26, 2009]
Question: What are the information delivery requirements under Rule 502(b) for an investment company excluded from registration by virtue of Section 3(c) of the Investment Company Act of 1940 that sells securities to non-accredited investors relying on Rule 506?
Answer: Such a company must furnish to non-accredited investors, to the extent material to an understanding of the company, its business, and the securities being offered:
- the same kind of non-financial information as would be required in a registration statement under the Securities Act for a registered investment company on a form that it would be entitled to use if it were registering the offering under the Securities Act, such as a registration statement on Form N-1A, or Form N-2; and
- financial statement information equivalent to that required of operating companies under Rule 502(b)(2)(i)(B). [Jan. 26, 2009]
Question: May an issuer of securities provide the disclosure required by Rule 502(b) by means of electronic delivery, such as an email message with electronic attachments?
Answer: Yes. Rule 502(b) requires only that the disclosures be “furnished.” It contains no requirement that the disclosures be provided or delivered using a particular medium. The Commission’s views regarding the use of electronic delivery are provided in Securities Act Release No. 7856 (Apr. 28, 2000). [Jan. 26, 2009]
Question: An issuer furnishes potential investors a short form offering memorandum in anticipation of actual selling activities and the delivery of an expanded disclosure document later. Does Regulation D permit the delivery of disclosure in two installments?
Answer: So long as all the information is delivered a reasonable amount of time before sale, the use of a fair and adequate summary followed by a complete disclosure document is permitted under Regulation D. Disclosure in such a manner, however, should not obscure material information. [Jan. 26, 2009]
Question: Under Rule 502(b)(2)(i)(B), for a non-reporting issuer that has been formed with minimal capitalization immediately before a Regulation D offering, must the Regulation D disclosure document contain an audited balance sheet for the issuer?
Answer: In analyzing this or any other disclosure question under Regulation D, the issuer starts with the general rule that it is obligated to furnish the specified information “to the extent material to an understanding of the issuer, its business, and the securities being offered.” Thus, in this particular case, if an audited balance sheet is not material to the investor’s understanding, then the issuer may elect to present an alternative to its audited balance sheet. [Jan. 26, 2009]
Question: Rule 501(b)(2)(ii)(B) refers to the information contained “in a registration statement on Form S-1.” Does this requirement envision delivery of Parts I and II of the Form S-1?
Answer: No, only Part I. [Jan. 26, 2009]
Question: May a Canadian issuer filing under the MJDS use its most recent filing on Form 40-F, F-9 or F-10 to satisfy the information requirements of Rule 502(b)?
Answer: Yes. Although Rule 502(b)(2)(ii)(D) permits a foreign private issuer to use its most recent Form 20-F or Form F-1 to meet Rule 502’s information requirements, but does not mention the MJDS forms, an MJDS filer may use its most recent filing on Form 40-F, F-9 or F-10 to satisfy Rule 502(b)’s information requirements. [Jan. 26, 2009]
Question: Does Rule 502(c), which prohibits general solicitation and general advertising in connection with the offer and sale of securities, bar product advertising?
Answer: Rule 502(c) does not bar product advertising, although such advertising is not permitted under the rule when it involves the solicitation of an offer to buy a security. Whether or not particular product advertising constitutes a solicitation in contravention of Rule 502(c) depends on the facts and circumstances. [Jan. 26, 2009]
Question: A reporting company proposes to offer securities under Regulation D. Because of the size and price of the offering, the company feels compelled by Section 10(b) of the Exchange Act to issue a press release discussing the offering. Would such a press release by the issuer constitute general solicitation or general advertising, activities which are not permitted by Rule 502(c) in connection with most Regulation D offerings?
Answer: The company should refer to the Rule 135c safe harbor for reporting issuers giving notice of proposed unregistered offerings. [Jan. 26, 2009]
Question: If a solicitation were limited to accredited investors, would it be deemed in compliance with Rule 502(c)?
Answer: The mere fact that a solicitation is directed only to accredited investors will not mean that the solicitation is in compliance with Rule 502(c). Rule 502(c) relates to the nature of the offering, not the nature of the offerees. [Jan. 26, 2009]
Question: An issuer is preparing a private placement in reliance on Rule 506. The offering will require the issuance of more than 20% of the outstanding stock of the corporation, triggering an NYSE shareholder approval requirement. Thus, the issuer must file a proxy statement at the same time as the beginning of the offering. At the time of filing the proxy statement, the offering will not be subscribed. Would the information about the private placement required in the proxy statement by the NYSE rule and Item 11 of Schedule 14A violate the ban on general solicitation in Rule 502(c)?
Answer: The issuer may seek to rely upon the safe harbor in Rule 135c when filing the proxy statement with the Commission that includes information about the private placement as required by the NYSE rule and Item 11 of Schedule 14A. If the proxy statement disclosure about the private placement does not satisfy the requirements of Rule 135c(a), then the disclosure will violate the ban on general solicitation in Rule 502(c). In general, issuers should be mindful that, unless the closing of the offering and the solicitation of shareholder votes are timed correctly, the information about the private placement included in the proxy statement could be viewed as conditioning the market for the securities offered in the private placement. [Jan. 26, 2009]
Question: An investor in a Regulation D offering wishes to resell the securities within three months after the offering. The issuer has agreed to register the securities for resale. Will the proposed resale under the registration statement violate Rule 502(d)?
Answer: No. The function of Rule 502(d) is to restrict the unregistered resale of securities. Where the resale will be registered, however, such restriction is unnecessary. [Jan. 26, 2009]
Section 257. Rules 503 and 503T– Filing of Notice of Sales
Question: Where must an issuer’s notice to the SEC of an exempt offering on Form D be filed?
Answer: On September 15, 2008, a transition period of six months began during which filers have the option of making Form D filings with the SEC in three different ways:
- The old Form D (called “Temporary Form D”), on paper at the SEC’s main office, 100 F Street, N.E., Washington, D.C. 20549;
- The new Form D, on paper at the address noted above; and
- The new Form D, electronically, through the Internet, on the SEC’s EDGAR filing system.
Beginning March 16, 2009, all filers will be required to file the new Form D electronically, through the Internet, on the SEC’s EDGAR filing system. Additionally, beginning March 16, 2009, whenever a company amends a Form D filing — regardless of whether it was originally submitted on paper or electronically, or on Temporary Form D or on new Form D — the company will be required to submit the amendment electronically on the revised Form D. [Jan. 26, 2009]
Question: When must an issuer file the initial Form D for an offering with the SEC?
Answer: Form D is required to be filed with the SEC within 15 days after the first sale of securities sold based on a claim of exemption under Rule 504, 505 or 506 of Regulation D or Section 4(6) of the Act. For this purpose, the date of first sale is the date on which the first investor is irrevocably contractually committed to invest, which, depending on the terms and conditions of the contract, could be the date on which the issuer receives the investor’s subscription agreement or check. If the date on which a Form D is required to be filed falls on a Saturday, Sunday or holiday, the due date is the first business day following. [Jan. 26, 2009]
Question: May the Form D be signed by the issuer’s attorney?
Answer: Form D may be signed on behalf of the issuer by anyone who is duly authorized to do so. [Jan. 26, 2009]
Question: In order to avoid questions concerning when the first “sale” of securities in an offering under Regulation D takes place, may an issuer file its Form D as soon as the offering commences even though no sales have yet been made?
Answer: Yes. [Jan. 26, 2009]
Question: Rule 503 requires an issuer to file a Form D not later than 15 days after the first sale in a Regulation D offering. When should the Form D be filed in a best efforts offering where subscriptions are held in escrow until a minimum level is attained?
Answer: The Form D should be filed not later than 15 days after the first subscription is received into escrow. [Jan. 26, 2009]
Question: When Regulation D is used in connection with a stock option plan, when should the Form D be filed?
Answer: When Regulation D is used in connection with a stock option plan, the Form D should be filed not later than 15 days after the first option exercise. [Jan. 26, 2009]
Question: Is the filing of a Form D in connection with an offer or sale a condition to the availability of a Regulation D exemption for that offer or sale?
Answer: No. The filing of a Form D is a requirement of Rule 503(a), but it is not a condition to the availability of the exemptions in Rules 504, 505 and 506 of Regulation D. Rule 507 states some of the potential consequences of the failure to comply with Rule 503. [Jan. 26, 2009]
Question: Will a Rule 506 offering lose “covered security” status under Section 18 of the Securities Act if an issuer fails to file a notice of the offering with the SEC?
Answer: No. A “covered security” under Section 18 of the Securities Act is defined to include a security with respect to an offering that is exempt from registration under the Act pursuant to SEC rules or regulations issued under Section 4(2) of the Act. Rule 506 was issued under Section 4(2) of the Act. Filing a notice of the offering is not a condition that must be met to qualify for the Rule 506 exemption. [Sep. 14, 2009]
Section 258. Rule 504 — Exemption for Limited Offerings and Sales of Securities Not Exceeding $1,000,000
Question: May a foreign issuer that is not subject to Section 15(d) and whose securities are exempt from Section 12(g) under Rule 12g3-2(b) be eligible to use Rule 504?
Answer: Yes. Rule 504 is available to any issuer that is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. [Jan. 26, 2009]
Question: The exemptions in Rules 504 and 505 are not available to an investment company. How is the term “investment company” defined for purposes of Rules 504 and 505?
Answer: The provisions in Rules 504 and 505 that bar an investment company from using the exemptions is construed to mean an investment company as that term is defined in Section 3 of the Investment Company Act of 1940. [Jan. 26, 2009]
Question: Are Rules 504 and 505 available to investment companies?
Answer: Both Rules 504 and 505 are unavailable to investment companies. Section 3(c)(1) of the Investment Company Act exempts from the definition of investment company any issuer with not more than 100 stockholders that is not making and does not propose to make a “public offering.” For purposes of Section 3(c)(1), offerings under Rules 504 and 505 could be public or non-public depending on the facts and circumstances. [Jan. 26, 2009]
Question: Must the aggregate offering price of a Rule 504 offering under Regulation D be reduced by the amount of a secondary offering made by the issuer’s parent within the prior 12 months in reliance on Regulation A?
Answer: Yes. See Rule 504(b)(2) of Regulation D. [Jan. 26, 2009]
Section 259. Rule 505 — Exemption for Limited Offers and Sales of Securities Not Exceeding $5,000,000
Question: If the corporate parent of the general partner in a proposed limited partnership offering has recently undergone bankruptcy, would the bankruptcy proceeding disqualify the limited partnership from using the Rule 505 exemption of Regulation D under Rule 505(b)(2)(iii)?
Answer: Inasmuch as the bankruptcy proceeding would not disqualify the limited partnership from using Regulation A under Rule 262, the limited partnership would not be disqualified from using the Rule 505 exemption of Regulation D under Rule 505(b)(2)(iii). [Jan. 26, 2009]
Question: An issuer preparing to conduct an offering of equity securities under Rule 505 raised $2,000,000 from the sale of debt instruments under Rule 505 eight months earlier. How much may the issuer raise in the proposed equity offering?
Answer: $3,000,000. A specific condition to the availability of Rule 505 for the proposed offering is that its aggregate offering price not exceed $5,000,000 less the proceeds for all securities sold under Securities Act Section 3(b) within the last 12 months. [Jan. 26, 2009]
Question: An issuer is planning a Rule 505 offering. Ten months earlier, the issuer conducted a Rule 506 offering. Must the issuer consider the previous Rule 506 offering when calculating the allowable aggregate offering price for the proposed Rule 505 offering?
Answer: No. The Commission issued Rule 506 under Securities Act Section 4(2), and Rule 505(b)(2)(i) requires that the aggregate offering price be reduced by previous sales under Securities Act Section 3(b). Note that under Rule 502(a), these offerings will not have to be integrated because they are separated by six months. [Jan. 26, 2009]
Question: Rules 504 and 505 contain examples as to the calculation of the allowed aggregate offering price for a particular offering. Do these examples contemplate integration of the offerings described?
Answer: No. The examples have been provided to demonstrate the operation of the limitation on the aggregate offering price in the absence of any integration questions. [Jan. 26, 2009]
Question: Note 2 to Rule 504 is not restated in Rule 505. Does the principle of the note apply to Rule 505?
Answer: Yes. Note 2 to Rule 504 sets forth a general principle to the operation of the rule on limiting the aggregate offering price, which is the same for both Rules 504 and 505. It provides that if, as a result of one offering, an issuer exceeds the allowed aggregate offering price in a subsequent unintegrated offering, the exemption for the first offering will not be affected. [Jan. 26, 2009]
Section 260. Rule 506 — Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering
Question: May an issuer of securities with a projected aggregate offering price of $3,000,000 rely on Rule 506?
Answer: Yes. The availability of Rule 506 is not dependent on the dollar size of an offering. [Jan. 26, 2009]
Question: Rule 506 requires the issuer to reasonably believe that each purchaser who is not an accredited investor either alone or with a purchaser representative has such knowledge and experience in financial and business matters that the purchaser is capable of evaluating the merits and risks of the prospective investment. Rule 506 is not an exclusive basis for satisfying the requirements of the private offering exemption in Section 4(2). See Preliminary Note 3 to Regulation D. What is the relevance of the nature of the offerees in an offering that relies exclusively on Section 4(2) as its basis for exemption from registration?
Answer: In an offering relying exclusively on Section 4(2) for an exemption from registration, all offerees who purchase must possess the requisite level of sophistication. The sophistication of offerees who do not purchase is not a fact that in and of itself should determine mechanically the availability of the exemption; the number and the nature of the offerees, however, are relevant in determining whether an issuer has engaged in a general solicitation or general advertising that could preclude reliance on the exemption in Section 4(2). [Jan. 26, 2009]
Question: Must offerings exempt under Rule 506 comply with state securities law requirements?
Answer: Securities issued in Rule 506 exempt offerings are considered “covered securities” under Section 18 of the Securities Act of 1933. See Section 18(b)(4)(D). Section 18(a) preempts state registration and review of, but not state anti-fraud authority with respect to, offerings for these “covered securities.” For Rule 506 exempt offerings, however, Section 18 does not preempt state requirements that the issuer file a notice with the states together with a consent to service of process and any required fee with the states. See Section 18(b)(4)(D) and Section 18(c) of the Securities Act. [Jan. 26, 2009]
Question: A company is conducting a continuing private offering in reliance on Rule 506, which limits the number of purchasers to 35. There have been 35 purchasers of securities in the offering as calculated pursuant to Rule 501(e). May a company sell securities to additional purchasers in the offering and rely on Rule 506 if some of the original 35 purchasers have now redeemed their securities such that there are currently less than 35 holders of the company’s securities?
Answer: No. Once a company sells to 35 purchasers, as calculated pursuant to Rule 501(e), the company has reached the limitation on purchasers as set forth in Rule 506. The fact that a purchaser subsequently transfers or redeems her securities does not reset the number of purchasers or enable the company to sell to additional purchasers. [Jan. 26, 2009]
Sections 261 to 270. Rules 507 to 610 [Reserved]
Section 271. Rule 701 — Exemption for Offers and Sales of Securities Pursuant to Certain Compensatory Benefit Plans and Contracts Relating to Compensation
Question: Are terms used in (but not defined in) Rule 701 interpreted to have the same meanings as the same terms defined in Rule 405?
Answer: Yes. Examples of such terms include “affiliate,” “majority-owned subsidiary,” “parent,” and “subsidiary.” [Jan. 26, 2009]
Question: Is a company that files Exchange Act reports on a voluntary basis, or in accordance with a contractual obligation, eligible to use Rule 701?
Answer: Yes. [Jan. 26, 2009]
Question: Are foreign private issuers that are not subject to the Exchange Act’s reporting requirements eligible to use Rule 701, whether or not they publish their non-U.S. disclosure documents in accordance with Exchange Act Rule 12g3-2(b)?
Answer: Yes. [Jan. 26, 2009]
Question: A company that is not subject to the reporting requirements of Exchange Act Section 13 or 15(d) issued options in reliance on Rule 701. This company is acquired by another company, which is subject to the reporting requirements of Exchange Act Section 13(a) or 15(d) and assumes the private company’s outstanding options so that they become exercisable for shares of the acquiring company. May the acquiring company rely on Rule 701(b)(2) to exempt their exercise?
Answer: No. [Jan. 26, 2009]
Question: Are securities analysts excluded from receiving securities issued under Rule 701 or registered on Form S-8 as “consultants” or “advisors” because their services, as securities industry professionals, are inherently capital-raising or promote or maintain a market for the issuer’s securities?
Answer: Yes. [Jan. 26, 2009]
Question: Must an issuer use a rolling period consisting of the 12 months immediately preceding the date of the transaction in question for determining whether it has exceeded the sales ceiling in Rule 701(d)(2) and whether it must comply with the additional disclosure requirements under Rule 701(e); or may the issuer elect a fixed 12-month period such as the calendar year or its fiscal year?
Answer: The issuer may choose to calculate its sales under Rule 701(d)(2) and 701(e) on the basis of either a fixed period or a rolling 12-month period but must continue using the chosen calculation method consistently. [Jan. 26, 2009]
Question: If an issuer sells shares in excess of the Rule 701(d) limits, does it lose the Rule 701 exemption for all shares sold in the applicable 12-month period or just for the excess shares? May the issuer rely on another available exemption from Securities Act registration for sales of excess shares for which Rule 701 is not available?
Answer: The Rule 701 exemption would not be available for sales of shares that exceed the Rule 701(d) limits. Rule 701(f) provides, however, that sales under Rule 701 are not subject to integration with other sales that are otherwise exempt from the registration requirements of the Securities Act. Therefore, an issuer may rely on an available alternative exemption such as a limited offering exemption under Rule 504 of Regulation D or a private placement exemption under Rule 506 of Regulation D or Section 4(2) for the sales in excess of the Rule 701(d) limits, and rely on Rule 701 for sales that do not exceed the Rule 701(d) limits. [Jan. 26, 2009]
Question: May an issuer sell $1,000,000 of securities under Rule 701(d)(2)(i) during any consecutive 12-month period, regardless of the calculations in Rules 701(d)(2)(ii) and (iii)?
Answer: Yes. Rule 701(d) limits the amount that may be sold to the “greatest” of $1,000,000, 15% of total assets, or 15% of the outstanding amount of the class of securities being offered. [Jan. 26, 2009]
Question: To calculate the 15% of assets and the 15% of securities tests under Rule 701(d)(2)(ii) and (iii), may an issuer use either its balance sheet as of the last day of its most recently ended fiscal year or a more recent balance sheet?
Answer: Yes, an issuer is permitted to choose either balance sheet. See the American Bar Association no-action letter (Dec. 7, 2000) issued by the Division. [Jan. 26, 2009]
Question: Within 12 months of an original option grant, the issuer reprices the option grant at a lower exercise price, which, in turn, lowers the aggregate sales price or amount of securities sold during the 12-month period. May the issuer exclude the original grant in determining the amount of securities that may be sold and whether it has an obligation under Rule 701 to deliver the additional disclosure called for when its issuance level exceeds $5 million?
Answer: Yes, but the issuer must count the repriced options as a new sale, and include them in determining its aggregate sales price or amount of securities sold within any consecutive 12-month period that includes the repricing date. [Jan. 26, 2009]
Question: May an issuer disregard options that are cancelled or forfeited when applying the Rule 701(d) and (e) limits?
Answer: Yes. Once options are forfeited or cancelled, those options need not be counted for purposes of the Rule 701(d) and (e) limits. [Jan. 26, 2009]
Question: Rule 701(e) prescribes additional disclosure that must be delivered a reasonable time before sale if the aggregate sales price or amount of securities sold during any consecutive 12-month period exceeds $5 million. Must this disclosure be provided to all investors in the Rule 701 offering, or only to those investors who purchase securities after the issuer exceeds the $5 million threshold? What are the consequences of non-compliance?
Answer: The Rule 701(e) disclosure must be provided to all investors in the Rule 701 offering if the issuer believes that sales will exceed the $5 million threshold in the coming 12-month period, not only to those who purchase securities after the issuer exceeds the $5 million threshold. As stated in Securities Act Release No. 7645 (Feb. 25, 1999):
“This requirement will obligate issuers to provide disclosure to all investors if the issuer believes that sales will exceed the $5 million threshold in the coming 12-month period. If the disclosure has not been provided to all investors before sale, the issuer will lose the exemption for the entire offering when sales exceed the $5 million threshold.” [Jan. 26, 2009]
Question: A private issuer has a broad-based employee stock purchase plan that relies on the Rule 701 exemption. Employees sign up for payroll deductions at the start of a year, and the payroll deductions accumulated over the course of the year are applied to purchase shares on a single purchase date at the end of the year. Employees have the right to withdraw from the plan and have their payroll deductions refunded at any time during the year until shortly before the single purchase date. May the private issuer provide the Rule 701(e) disclosure shortly before the single purchase date?
Answer: Yes. [Jan. 26, 2009]
Question: A foreign issuer intends to conduct a Rule 701 offering exceeding the $5 million threshold in Rule 701(e). Is the issuer required under Rule 701(e)(4) to deliver to investors financial statements that are no more than 180 days old, or can the issuer deliver its annual and interim financial statements only at the frequency required of foreign issuers that are Exchange Act reporting companies?
Answer: The issuer must follow the 180-day requirement, regardless of whether it furnishes financial statements reconciled to U.S. GAAP or prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, both of which are allowed under Rule 701(e)(4). The 180-day requirement effectively means that the financial statements must be available on at least a quarterly basis unless sales of securities are limited to particular times of the year. [Jan. 26, 2009]
Question: May an issuer of securities provide the disclosure required by Rule 701(e) by means of electronic delivery, such as an email with attachments?
Answer: Yes. Rule 701(e) requires only that the disclosures be “provided” and “delivered.” It contains no requirement that the disclosures be provided or delivered using a particular medium. In general, the federal securities laws do not prescribe the medium to be used for providing information to investors by or on behalf of issuers of securities. For guidance on using electronic delivery to provide disclosure under the federal securities laws, see Securities Act Release No. 7856 (Apr. 28, 2000). [Jan. 26, 2009]
Sections 272 to 276. Rules 800 to 902 [Reserved]
Section 277. Rule 903 — Offers or Sales of Securities by the Issuer, a Distributor, Any of their Respective Affiliates, or Any Person Acting on Behalf of Any of the Foregoing; Conditions Relating to Specific Securities
Question: When must a foreign private issuer determine the particular category of the Regulation S safe harbor for an offering of securities outside the United States?
Answer: An issuer must determine the particular category of the Regulation S safe harbor upon which it will rely at the time it makes the offshore offering. If, after the offering is made, changes occur in the issuer’s circumstances that would permit it to qualify for a different category of the safe harbor in the future, there will be no change in the distribution compliance period for the outstanding securities issued under the prior category. [Jan. 26, 2009]
Sections 278 to 280. Rules 904 to 1001 [Reserved]
INTERPRETIVE RESPONSES REGARDING PARTICULAR SITUATIONS
Sections 501 to 509. Rules 100 to 133 [Reserved]
Section 510. Rule 134 — Communications Not Deemed a Prospectus
510.01 Rule 134 does not authorize the inclusion in tombstone ads of photographs of investment properties or descriptions of the tax benefits of investments. [Jan. 26, 2009]
510.02 A tombstone ad prepared pursuant to Rule 134 for use in connection with a registered public offering generally can be provided to existing shareholders along with a regularly provided quarterly report during the pre-effective period. [Jan. 26, 2009]
510.03 A broker-dealer participating in a registered public offering may send its clients a small reply card, along with a copy of a tombstone advertisement, to assist customers who wish to request a copy of the prospectus. [Jan. 26, 2009]
510.04 Although suitability requirements are not permitted under a literal reading of Rule 134, Rule 134(a)(16) does permit the inclusion of “any statement or legend required by any state law or administrative authority.” In light of the position by the California Department of Corporations that advertisements for direct participation programs (limited partnerships) must include suitability requirements, issuers may use suitability requirements in Rule 134 advertisements distributed in California when they are included to comply with the Department’s position. [Jan. 26, 2009]
510.05 Tombstone ads may contain a statement that the securities would be subject to early redemption or could be called by the issuer. [Jan. 26, 2009]
510.06 A commodity fund was advised that even though it bears some resemblance to an investment company, this fact does not automatically entitle it to include in its Rule 134 notice all of the information about its business that investment companies are permitted to include pursuant to Rule 482. The fund was reminded that Rule 134 permits only a brief indication of an issuer’s business. [Jan. 26, 2009]
Sections 511 to 512. Rules 134a to 134b [Reserved]
Section 513. Rule 135 — Notice of Proposed Registered Offerings
513.01 A press release issued pursuant to Rule 135 in connection with an initial public offering may state that the shares to be offered have not yet been authorized and therefore their issuance is subject to shareholder approval. [Jan. 26, 2009]
513.02 A letter to be sent to holders of limited partnership units in various oil and gas programs, for the purpose of determining their interest in converting the smaller programs into one new large program, may involve the offer of a security of the new program within the meaning of Securities Act Sections 2(a)(3) and 5. Any such communication, if it is an offer, would either have to be registered under the Securities Act or exempt from Securities Act registration. For registered offerings, Rule 135 would permit a simple notice describing the purpose and terms of such an offering, but would not allow the solicitation of indications of interest. [Jan. 26, 2009]
513.03 A cash out merger of Company A by Company B has been approved by Company B’s shareholders. Prior to consummation of the merger, Company B intends to make a registered public offering and proposes to send a Rule 135 notice to Company A’s shareholders. Such a notice would come within the term “publishe[d] through any medium” in Rule 135 and thus is permissible. [Jan. 26, 2009]
Sections 514 to 521. Rules 135a to 138 [Reserved]
Section 522. Rule 139 — Publications or Distributions of Research Reports by Brokers or Dealers Distributing Securities
522.01 Rule 139 defines “offer for sale” in relation to certain dealer publications, and provides limited relief from the application of Section 5 to such publications when used in connection with registered offerings by reporting companies or certain foreign private issuers with offshore trading histories or that have a $700 million worldwide public float. The rule cannot be extended by analogy to offerings of other non-reporting companies, since the public availability of the information contained in Exchange Act reports is a fundamental basis of the rule. [Jan. 26, 2009]
522.02 A reporting company filed a registration statement on Form S-4 for a Rule 145 merger transaction. Shareholders had voted to approve the transaction and no further shareholder vote regarding valuation contingencies was required. The approval of a regulatory authority was needed before the transaction could be closed. On these facts the sale of the shares occurred when shareholders voted to approve the merger; accordingly, the registered offering had been completed for purposes of Rule 139. [Jan. 26, 2009]
522.03 The broker-dealer that acted as underwriter in an initial public offering now has a small long position in the underwritten stock in its investment account as a result of bad orders. The issue otherwise sold out. On these facts, the distribution was concluded for purposes of the Rule 139 safe harbor provisions, notwithstanding the stock held in the investment account. As a result, the broker-dealer could make recommendations regarding the issuer’s securities without concern that those recommendations would be deemed to be offers or sales. [Jan. 26, 2009]
Section 523. Rules 139a [Reserved]
Section 524. Rule 140 — Definition of “Distribution” in Section 2(a)(11) for Certain Transactions
524.01 A limited liability company sought to issue to its employees the stock of its financing member, which has the sole purpose of issuing stock to the public and investing the proceeds thereof in the LLC’s securities. Because of this relationship, Rule 140 requires the LLC to register as co-issuer on any Securities Act registration statement filed by the financing member for the sale of the financing member’s stock. Accordingly, the LLC would be included as a registrant on any Form S-8 filed by the financing member. It is therefore not necessary to analyze whether the financing member is a “subsidiary” of the LLC for purposes of determining whether the finance member may register its stock on Form S-8 for sale to employees of its “parent.” [Jan. 26, 2009]
Sections 525 to 527. Rules 141 to 143 [Reserved]
Section 528. Rule 144 — Persons Deemed Not to be Engaged in a Distribution and therefore Not Underwriters — General Guidance
528.01 Rule 144 is not available for sales of an issuer’s securities by its subsidiary, since a parent-issuer may not do indirectly through a subsidiary what it may not do directly under Rule 144. See Securities Act Release No. 5306 (Sept. 26, 1972). For example, a subsidiary, which is not a bank or trust company, that acts as trustee for its parent’s employee benefit plan would not be permitted to rely on Rule 144 for sales of its parent’s securities in connection therewith. [Jan. 26, 2009]
528.02 Unregistered resales of restricted securities may be made in markets outside the United States, including foreign exchanges, in reliance on Rule 144 or the safe harbor provisions of Regulation S. Any arrangement to return the restricted securities to U.S. markets may indicate, as suggested by Securities Act Release No. 7190 (June 27, 1995), an evasive scheme to avoid registration, which would invalidate any safe harbor claim. [Jan. 26, 2009]
528.03 A person holds only restricted securities and has held them for less than the requisite Rule 144(d) holding period. Such person cannot effect a short sale of securities of that class, and then cover with such person’s restricted securities (even though the restricted securities are now eligible for sale) since the initial short sale did not qualify under Rule 144. See Securities Act Release No. 6099, Question 82 (Aug. 2, 1979). [Jan. 26, 2009]
528.04 Rule 144 is not available for the sale of securities acquired by an underwriter or finder as compensation for services rendered in connection with a registered public offering. The securities held by the underwriter or finder are not considered restricted securities because they were not acquired in a transaction or chain of transactions not involving any public offering. As such, Rule 144 may not be relied upon for their sale. However, Rule 144 may be applied constructively for the resale of such shares in the following manner:
(1) provided that six months has elapsed since the last sale under the registration statement, an underwriter or finder may resell the shares in accordance with the provisions of Rule 144(c), (e), and (f), except for the notice requirement. See Securities Act Release No. 6099, Question 10 (Aug. 2, 1979);
(2) a purchaser of the shares from an underwriter or finder receives restricted securities unless the sale is made with an appropriate, current prospectus, or unless the sale is made pursuant to the conditions contained in (a) above;
(3) a purchaser of the shares from an underwriter or finder who receives restricted securities may include the underwriter’s or finder’s holding period, provided that the underwriter or finder is not an affiliate of the issuer; and
(4) if an underwriter or finder transfers the shares to its employees, the employees may tack the firm’s holding period for purposes of Rule 144(d), but they must aggregate sales of the distributed shares with those of other employees, as well as those of the underwriter or finder, for a six-month period from the date of the transfer to the employees. [Jan. 26, 2009]
528.05 A company in bankruptcy proposes to issue stock to an unrelated party for the acquisition of another business. Although the issuance will be part of the court-approved reorganization plan, it will not meet the requirements for the Securities Act exemption afforded by Section 1145(a) of the Bankruptcy Code because the issuance will not be in exchange for a bankruptcy claim or administrative expense. The company will rely on Securities Act Section 4(2) for its registration exemption. Because the offer and sale of the securities under the plan of reorganization are not exempt under Section 1145, the securities are restricted securities under Rule 144(a)(3) and may be publicly resold under Rule 144 or registered prior to resale. [Jan. 26, 2009]
528.06 The cessation of affiliate status is a facts-and-circumstances determination, and counsel should not assume that it ceases instantly when, for example, the former affiliate resigns from his or her position at the company. [Jan. 26, 2009]
528.07 A company issued securities under Securities Act Section 3(a)(6) but has lost its eligibility to use that exemption in the future. Shares held by affiliates of the company may be resold pursuant to the provisions of Rule 144 (except for the holding period provisions). [Jan. 26, 2009]
528.08 A private purchaser wishes to invest directly in an issuer but wants to acquire unrestricted securities. Through arrangements and understandings with the issuer, an existing shareholder with shares that are either restricted securities currently eligible for sale under Rule 144 or unrestricted securities sells the shares to the private purchaser. At about the same time, the issuer sells an equivalent number of shares to the existing shareholder. The Division’s view is that the shares taken by the private purchaser from the existing shareholder will be restricted securities within the meaning of Rule 144(a)(3). The holding period will date to the private acquisition. A public resale of the shares acquired from the existing shareholder without regard to the conditions of Rule 144 would raise serious issues under Securities Act Section 5 for all parties to the transactions. [Jan. 26, 2009]
Section 529. Rule 144(a) — Definitions
529.01 An affiliate settlor transfers unrestricted shares to a charitable remainder trust. The control securities are the only asset of the trust. The entire income interest in the trust is held by the affiliate and the affiliate’s family members sharing the same residence. Income distributions are made annually. Whether the trust is an “affiliate” of the issuer under Rule 144(a)(1) and whether the trust and the settlor are the same “person” under Rule 144(a)(2) are separate questions to be resolved under the separate standards of Rules 144(a)(1) and (a)(2), respectively. Further, the affiliate status of the trust is not necessarily changed by the use of an independent trustee. [Jan. 26, 2009]
529.02 An affiliate purchased common stock of its company in a private transaction from a non-affiliate who acquired the shares in the open market. Since such shares are not restricted securities within the meaning of Rule 144(a)(3), the Rule 144(d)(1) holding period requirement does not apply to resales of these shares by the affiliate. However, all of the other requirements of the rule would have to be complied with by the affiliate for any of its sales of the shares under the rule. [Jan. 26, 2009]
529.03 Securities were inadvertently sold to a company’s employees under a “stale” Form S-8 registration statement. For purposes of resale by the purchasing employees, the securities would be treated as if they were unrestricted so as not to penalize innocent purchasers under the “stale” Form S-8. [Jan. 26, 2009]
529.04 An affiliate transfers securities acquired in the open market to her spouse (a non-affiliate) pursuant to, and on or subsequent to the date of, a court-approved divorce settlement agreement. The non-affiliate spouse need not consider such securities restricted because the securities were not “sold” to the spouse by the affiliate. [Jan. 26, 2009]
529.05 An underwriter receives, as compensation for managing an exempt industrial development bond offering, warrants to purchase securities of the corporation using the industrial development bond-financed facility. Such warrants will be deemed restricted securities for purposes of Rule 144. [Jan. 26, 2009]
Section 530. Rule 144(b) — Conditions to be Met
530.01 Where a non-affiliate acquired securities in a private transaction under Rule 144(b)(1), the fact that it executed an investment letter for the acquired securities would not prevent it from reselling the securities without any restrictions under Rule 144. [Jan. 26, 2009]
530.02 An affiliate pledges restricted securities of an Exchange Act reporting issuer (an issuer that is, and has been for at least the 90-day period immediately before the sale, subject to the reporting requirements of Exchange Act Section 13 or 15(d)) to a non-affiliate pledgee on a non-recourse basis. The non-affiliate pledgee receives those restricted securities after the affiliate pledgor defaults. The non-affiliate pledgee (who has not been an affiliate during the preceding three months) may utilize Rule 144(b)(1)(i) to sell the securities, provided six months have elapsed from the time of the pledge and the Rule 144(c)(1) condition is satisfied as required under Rule 144(b)(1)(i). If, however, the pledge had been made with recourse, the pledgee could tack the pledgor’s holding period to its own for purposes of satisfying the six-month holding period requirement of Rule 144(d)(1)(i). [Jan. 26, 2009]
530.03 Provided that the donor and donee have held the stock for a combined period of six months and that the Rule 144(c)(1) condition is satisfied as required under Rule 144(b)(1)(i), a non-affiliate donee (who has not been an affiliate during the preceding three months) who receives stock of an Exchange Act reporting issuer (an issuer that is, and has been for at least the 90-day period immediately before the sale, subject to the reporting requirements of Exchange Act Section 13 or 15(d)) from an affiliate donor may resell the stock under Rule 144(b)(1)(i) without a three-month waiting period because the donor and the donee are not the same “person” as defined in Rule 144(a)(2). [Jan. 26, 2009]
530.04 A non-affiliate estate may utilize Rule 144(b)(1), even though the decedent was an affiliate. [Jan. 26, 2009]
530.05 A person who enters into a binding contract for the sale of restricted securities within three months after ceasing to be an affiliate of the issuer of such securities may not utilize Rule 144(b)(1), even though the delivery of the securities takes place more than three months after such person loses affiliate status. [Jan. 26, 2009]
530.06 The settlor of a trust for the benefit of the settlor’s children (who are past the age of majority and do not live with the settlor) is an affiliate of the issuer, and the trust holds restricted securities. Neither the independent trustee nor the beneficiaries are affiliates or have been affiliates during the preceding three months. The trustee may sell the restricted securities under Rule 144(b)(1). [Jan. 26, 2009]
530.07 A person owns 20% of newly formed Company A and has held restricted securities of Company B for more than one year. The person, who is not an affiliate of Company B and has not been an affiliate during the preceding three months, effects a negotiated sale of the restricted securities to Company A, in accordance with all of the applicable requirements of Rule 144(b)(1). As a result, Company A now owns unrestricted securities of Company B. [Jan. 26, 2009]
Section 531. Rule 144(c) — Current Public Information
531.01 A corporation had a registered public offering in 2000. Since then, it has continuously filed periodic reports under Section 15(d) of the Exchange Act, even though it has always had fewer than 300 record holders. The corporation has just had a second public offering. In view of the history of voluntary reporting, the Division staff was of the view that holders of restricted securities need not wait 90 days from the effective date of the registration statement before commencing sales of such securities pursuant to Rule 144, assuming the issuer is current in its voluntary reporting. [Jan. 26, 2009]
531.02 An issuer was required to file a Form 10-K on February 14, 2005. Because its executive offices had burned down in early February, the issuer filed a Form 12b-25 for an extension of time, extending the due date for the Form 10-K to March 1. The issuer was unable to file on March 1, and thereby became delinquent. A director sold the issuer’s stock on March 4 pursuant to Rule 144. Before the sale was made, the director’s broker checked with the Division’s staff, and was told that the issuer was current in its Exchange Act filings. This information was incorrect. The issuer’s attorney was advised that Rule 144 was not available for the sale by the director, because the director’s relationship to the issuer was such that the director had reason to believe that the issuer was not current in reporting. It should be noted that a seller under Rule 144 may not rely on a verbal representation by any Division staff member as to the current reporting status of an issuer, and Division staff members therefore will decline to answer inquiries on such matters. [Jan. 26, 2009]
531.03 A parent has guaranteed the outstanding debt securities (all of which are unlisted) of its wholly owned subsidiary and furnishes summarized disclosure with respect to the subsidiary in its Exchange Act reports. The subsidiary does not file Exchange Act reports. In these circumstances, the subsidiary will be deemed to satisfy the public information requirement of Rule 144(c)(1) with respect to the guaranteed debt securities so long as its parent satisfies that requirement with respect to itself and continues to provide summarized disclosure concerning the subsidiary in accordance with Rule 3-10 of Regulation S-X. Restricted debt securities of the subsidiary could be sold in accordance with the provisions of the rule. [Jan. 26, 2009]
Section 532. Rule 144(d) — Holding Period for Restricted Securities
532.01 A pledgor who is an affiliate defaults on a loan that is secured, in a bona fide pledge situation, by stock acquired in the open market. The pledgee may sell the stock without regard to the holding period requirement of Rule 144. A new holding period for the pledgee is not necessary because the securities were acquired solely by operation of the pledge agreement and therefore are not deemed to have been “sold” to the pledgee by the affiliate. [Jan. 26, 2009]
532.02 If a preferred stockholder tenders shares to the issuer and receives in return cash plus a new series of preferred, the stockholder may tack its holding period for the old preferred to that for the new series. [Jan. 26, 2009]
532.03 New investors in a closely-held investment partnership, and existing partners to whom assets have been redistributed upon withdrawal of other partners, may rely on the position on tacking set forth in Question 34(a) in Securities Act Release No. 6099 (Aug. 2, 1979), provided the fundamental character of the partnership is not changed. [Jan. 26, 2009]
532.04 In a stock-for-stock acquisition, the closing will be delayed until the acquired corporation’s year-end revenues have been determined, giving the acquiring corporation an “out” if such revenues do not reach a pre-determined level. The Rule 144 holding period for recipients of the acquiring corporation’s stock will not begin until the closing because the recipients will not be at economic risk until that time. [Jan. 26, 2009]
532.05 A closely-held corporation distributes restricted securities of an issuer pro rata and without consideration to its shareholders, which are three limited partnerships. Each of these limited partnerships, in turn, distributes the restricted securities pro rata and without consideration to its partners (about 10 people in each instance). Tacking of holding periods from corporation to partnerships, and from partnership to partners, is permitted for purposes of Rule 144(d). [Jan. 26, 2009]
532.06 Question 22 of Securities Act Release No. 6099 (Aug. 2, 1979), dealing with the holding period under Rule 144(d) for restricted securities under an employee benefit plan, does not apply where restricted securities are issued to an employee in connection with an individually negotiated employment agreement. The employee’s holding period begins to run at the time the securities vest, assuming any conditions, such as continued employment, have been fulfilled. [Jan. 26, 2009]
532.07 Pro rata redemptions of partnership interests in a closely-held investment partnership with partners receiving distributions of restricted securities in kind, as, for example, in liquidation, would allow partners to tack the partnership holding period for purposes of Rule 144(d). [Jan. 26, 2009]
532.08 An affiliate transfers restricted stock to a corporation of which the affiliate owns 84%. The corporation intends to sell the restricted stock and convey to the affiliate an interest in the corporation equal to the proceeds of the sale. Tacking by the corporation of the affiliate’s holding period would not be permitted for purposes of Rule 144 because the transfer to the corporation is deemed to be a private sale which commences a new holding period for the purchaser. [Jan. 26, 2009]
532.09 Investor A purchased 100 shares of restricted stock of a reporting company by executing a promissory note which did not meet the requirement of Rule 144(d)(2). Since this obligation is not considered to be “full payment of the purchase price” under the rule, Investor A’s holding period commences only at such time or times as Investor A actually makes payment on the note. Investor A paid off half the amount of the note over six months ago and, accordingly, the holding period requirement for 50 shares (half the total of 100) has been met. Investor A recently sold 50 shares of the restricted stock in a registered offering. The question presented was whether the shares sold in the registered offering must be regarded as the shares as to which the holding period had run. Although Rule 144 does not establish a guide for this situation, it was decided that Investor A could deem the registration statement to relate solely to the shares for which the holding period requirement had not been satisfied. As a result, Investor A may now sell all of the remaining 50 shares under Rule 144, assuming Rule 144(c) is satisfied. [Jan. 26, 2009]
532.10 Securities have been escrowed by an issuer as a contingent payment in connection with an acquisition. The escrow agreement gives the intended beneficiary the right to sell the securities during the life of the escrow, on condition that the sale proceeds are returned to the escrow account. Rule 144(d)(3)(iii) provides that securities acquired as a contingent payment in connection with the sale of a business shall be deemed to have been acquired at the time of the sale, for purposes of the holding period requirement of Rule 144(d). This provision, however, applies only to those securities that have actually been acquired in satisfaction of a contingency. Since the shares in this case are still subject to a contingency and have not been formally acquired, the beneficiary may not rely on Rule 144(d)(3)(iii) to satisfy the holding period requirement of the rule for sales made during the period the escrow arrangement is in effect. [Jan. 26, 2009]
532.11 A corporation distributes to its employees as a bonus restricted securities of an affiliated issuer which it acquired at an earlier date. For purposes of the holding period provisions of Rule 144(d), the employees would not be able to tack the corporation’s holding period to their own. The employer-employee relationship of the parties suggests that the distribution is being made as a form of compensation for services rendered, rather than as a gift (for which tacking would be permitted). [Jan. 26, 2009]
532.12 An employee acquires restricted stock pursuant to a “price hook” plan, whereby the employee pays only a portion of the purchase price when acquiring the stock from the company. The remainder is to be paid when the stock is resold. The stock may not be resold under Rule 144, because the holding period requirement cannot be met under this arrangement, as the stock will not be fully paid for until the time of sale. [Jan. 26, 2009]
532.13 Convertible notes with accrued but unpaid interest are exchanged for shares of the issuer. The holding period for the notes can be tacked to the holding period on the shares under Rule 144(d)(3)(ii) only if the exchange “consist[s] solely of other securities of the same issuer.” Although the right to receive payment for the accrued interest could be construed as additional consideration that is inconsistent with Rule 144(d)(3)(ii), the holding period for the convertible notes can be tacked to the holding period for all of the shares received in the exchange. This position is consistent with Securities Act Section 3(a)(9), which exempts certain exchanges where securities of the same issuer are the only consideration. [Jan. 26, 2009]
532.14 A private offering is made on a minimum/maximum basis (i.e., shares are not issued and proceeds not delivered to the company from an escrow account unless a minimum amount is sold). The Rule 144 holding period for shares acquired in such an offering would begin at the time a shareholder pays for its shares and its payment is deposited in the escrow account. At that time, the shareholder is at risk for purposes of Rule 144(d), since it is committed to participating in the offering if the minimum amount is sold. [Jan. 26, 2009]
532.15 A Nevada corporation that holds restricted securities of another issuer effects a merger to change its domicile to Delaware. The restricted securities become the property of the Delaware successor as a result of the merger. Because of the exception for migratory transactions in Rule 145(a)(2), the merger is not a sale within the meaning of the Securities Act. The holding period of the Nevada predecessor for the restricted securities is not disturbed by the succession. [Jan. 26, 2009]
532.16 The holder of restricted securities of a foreign private issuer exchanges them for an equivalent number of American Depositary Receipts (“ADR”) with the depositary. The ADR will be a restricted security itself with a holding period identical to that on the underlying security. The ADR may be sold in reliance on Rule 144 to the same extent the underlying security could have been sold. Note that Form F-6, which relates to the issuance of depositary shares evidenced by American Depositary Receipts, requires that the deposited securities be offered and sold in transactions registered under the Securities Act or exempt from registration. See General Instruction I.A(2) of Form F-6. [Jan. 26, 2009]
532.17 An affiliate holder of restricted securities bona fide pledges the securities to a bank to secure payment of a loan. In the event of default, the bank is required to exhaust the collateral before proceeding against the pledgor personally. For purposes of Rule 144(d)(3)(iv), the pledge is a recourse arrangement, so that the bank will have the benefit of the pledgor’s holding period. [Jan. 26, 2009]
532.18 A promissory note, secured by the restricted securities purchased with the note, will meet the collateral standard of Rule 144(d)(2)(ii) if the note is also secured by other property with independent fair market value at least equal to the purchase price of the restricted securities. [Jan. 26, 2009]
532.19 An officer purchases securities from an issuer paying the full purchase price in cash. Thereafter, the officer purchases an equal number of shares through the use of a promissory note, securing the note with the officer’s first purchase of securities. The use of such collateral to secure the promissory note is within the requirements of Rule 144(d)(2)(ii), and the holding period for the second purchase would begin when the note is given to the issuer. [Jan. 26, 2009]
532.20 A company sold shares to its employees pursuant to a private placement. The employees could borrow the entire purchase price from a non-affiliate bank, giving a note guaranteed by the company and placing the shares in escrow. If the company had to repay the note, it could repurchase the shares at book value. This arrangement, in substance, is the same as giving a note to the company in payment for the shares, and therefore, pursuant to Rule 144(d)(2), full payment of the purchase price has not been satisfied. [Jan. 26, 2009]
532.21 A non-affiliate acquired warrants from an issuer more than two years ago in partial consideration for the sale of a subsidiary. The non-affiliate wanted to pay the exercise price with shares of the issuer that it planned to purchase just prior to the exercise (for tax reasons) and then tack the holding period of the warrants to the holding period for the shares received upon exercise. The holding period of warrants that are turned in for the spread’s worth of shares underlying the warrants (a “cashless exercise”) can be tacked to the holding period for the shares received. However, under these facts, because the proposed transaction would allow the non-affiliate to do indirectly what the non-affiliate could not do directly (pay the exercise price in cash and tack the holding period of the warrants to the holding period of the shares received upon exercise), tacking would not be permitted under Rule 144. A person using securities to exercise restricted stock purchase warrants should use the shorter of the holding period on the warrants or on the other securities used in payment to find the holding period for the shares received on exercise. [Jan. 26, 2009]
532.22 Where a seller surrendered a secured promissory note of the issuer as consideration for the cashless exercise of a warrant from the same issuer, the Division staff was of the view that the holding period of the note could not be tacked to the common stock received upon the exercise of the warrant. Under the particular facts, the note did not appear to be a “security” under the standards enunciated in Reves v. Ernst & Young, 494 U.S. 56 (1990), and therefore, it would not qualify as a security of the issuer for purposes of tacking under Rule 144(d)(3)(ii). [Jan. 26, 2009]
532.23 An affiliate of an issuer secures a loan with restricted securities. The restricted securities are hypothecated to the lender, rather than pledged, and an irrevocable stock power is granted. On a default under the loan, the lender could use the two instruments to cause legal title to be transferred to itself. For purposes of the lender’s holding period calculation, the hypothecation agreement and the irrevocable stock power may be construed as the equivalent of a pledge. Subject to the requirements for good faith and recourse against the borrower, the lender would be able to use the borrower’s holding period under Rule 144(d)(3)(iv). [Jan. 26, 2009]
532.24 A company issues a convertible note with interest payable in shares of the company. The decision to pay the interest on the convertible note in the form of shares is solely at the discretion of the company. In determining whether the Rule 144(d)(1) holding period requirement has been satisfied in regard to such shares received as interest, the holding period of the note may be tacked to the holding period of the shares. [Apr. 24, 2009]
Section 533. Rule 144(e) — Limitation on Amount of Securities Sold
533.01 A company’s common stock trades both on an individual share basis and in units, with each unit consisting of one share of common stock together with a detachable warrant. For purposes of Rule 144, the volume limitation for the common stock may be computed on the basis of all common shares traded, including those traded as part of a unit, since the common shares in the units are separable from the warrants. [Jan. 26, 2009]
533.02 H transfers stock to W in connection with a divorce settlement. H and W need not aggregate sales under Rule 144 once they are no longer married. Moreover, they will not be deemed to be selling in concert merely because of the settlement arrangement. [Jan. 26, 2009]
533.03 An affiliate sells both restricted convertible notes and restricted shares. The shares attributable to the notes sold plus the shares sold separately amount to less than one percent of the outstanding stock. Such sales would be within the volume limitations of Rule 144(e). See Securities Act Release No. 6099 (Aug. 2, 1979), at Question 46. [Jan. 26, 2009]
533.04 An affiliate of an issuer is the general partner of three limited partnerships which hold restricted securities of the issuer. If such limited partnerships transfer the restricted securities to all the partners, the affiliate must, for purposes of determining its volume limit under Rule 144(e), aggregate its Rule 144 sales of the distributed securities with (1) the Rule 144 sales of the distributed securities by the other partners who are affiliates of the issuer and (2) the Rule 144 sales of the same class of securities by the limited partnerships, for a period of six months following the distribution (if the issuer had been subject to the reporting requirements of Exchange Act Section 13 or 15(d) for a period of at least 90 days immediately before the distribution) or one year following the distribution. Further aggregation may also be required if the affiliate is “acting in concert” with other persons under Rule 144(e)(3)(vi). Absent “acting in concert,” the affiliate partners and the limited partnerships need not aggregate their sales of the distributed shares with the sales of the distributed shares by partners who are not affiliates of the issuer. The non-affiliate partners are not subject to the volume limitation under Rule 144(e). [Jan. 26, 2009]
533.05 A closely-held investment partnership is an affiliate of ABC Co. The partnership distributed all of its restricted securities of ABC Co. held in its portfolio to all of its partners on a pro rata basis and without consideration from its partners. The partners who are affiliates of ABC Co. must aggregate their Rule 144 sales of the distributed shares of ABC Co. with (1) the Rule 144 sales of the distributed shares by all other partners who are affiliates of ABC Co. and (2) the Rule 144 sales of the same class of securities by the partnership, for a period of six months following the distribution (if ABC Co. had been subject to the reporting requirements of Exchange Act Section 13 or 15(d) for a period of at least 90 days immediately before the distribution) or for a period of one year following the distribution. Aggregation may also be required if the partners are “acting in concert” under Rule 144(e)(3)(vi). Absent “acting in concert,” the partnership and the partners who are affiliates of ABC Co. need not aggregate their sales of the distributed shares with the sales of the distributed shares by partners who are not affiliates of ABC Co. The non-affiliate partners are not subject to the volume limitation under Rule 144(e). [Jan. 26, 2009]
533.06 Warrants originally issued in tandem with common shares are now trading separately. Holders of the warrants who wish to sell rather than exercise the warrants must consider the warrants a class of securities separate from the common stock for purposes of complying with the volume limitations of Rule 144(e). [Jan. 26, 2009]
533.07 A company has notified its transfer agent of the issuance of additional common stock. No other announcement has been made. Rule 144(e)(1)(i) permits the sale of one percent of the shares outstanding as shown by “the most recent report or statement published by the issuer.” The notice to the transfer agent is insufficient publication to allow use of the increased number of shares for purposes of the alternative one percent volume limit of Rule 144(e)(1)(i). [Jan. 26, 2009]
533.08 An affiliate wishing to sell shares pursuant to Rule 144 discovered that a broker-dealer had executed, during the last week of the four-week period, a 100,000 share trade in the issuer’s stock that had not been reported in the average weekly reporting volume of trading of such securities on all national securities exchanges and/or reported through the automated quotation system of a registered securities association. The Division staff advised that the affiliate would have to rely solely on the reported volume. [Jan. 26, 2009]
533.09 Non-affiliates pledged unrestricted bank holding company securities to the holding company’s affiliated bank as collateral for loans made by the affiliated bank in the ordinary course of its business. Following default, the affiliated bank foreclosed and sought to sell the holding company securities. The Division staff took the position that sales of pledged securities by the affiliated bank could be effected pursuant to Rule 144 since the bank was effecting the sale as a pledgee in a bona fide loan situation and its decision to sell was occasioned solely by the borrowers’ default. For purposes of Rule 144(e), the Division staff also took the position that such sales would have to be aggregated with any other sales by the bank as pledgee, but not with other sales by the pledgors. The latter conclusion was based on the fact that had the pledgors sold the securities themselves, they would not have been subject to Rule 144. [Jan. 26, 2009]
Sections 534 to 535. Rules 144(f) to 144(g) [Reserved]
Section 536. Rule 144(h) — Notice of Proposed Sale
536.01 An affiliate distributee from a partnership who is required to aggregate its sales with those of other affiliate distributees need not file a Form 144 if such affiliate distributee sells no more than 5,000 shares or shares with a market value not exceeding $50,000 in any three-month period, notwithstanding sales made by other distributees. [Jan. 26, 2009]
536.02 A subsidiary bank, acting in its fiduciary capacity, sells unrestricted shares of its holding company parent for an unaffiliated trust account. Form 144 need not be filed solely because of the bank’s involvement, because the bank is not making a sale for its own account. [Jan. 26, 2009]
536.03 An affiliate of the issuer files a notice on Form 144 reporting the proposed sale of less than the full amount of securities that could be sold under the volume tests of Rule 144(e). During the same three-month period, the affiliate wishes to make additional Rule 144 sales in an amount that, taken together with the original sales, would not exceed the maximum number of securities that could have been sold at the time of the notice. The affiliate may not file an amended Form 144 to accomplish additional sales because a Form 144 must represent the affiliate’s intent at the time of its filing. The affiliate may file a new Form 144 to sell additional securities, so long as these new sales satisfy the volume limitations existing when the new Form 144 is filed. [Jan. 26, 2009]
536.04 A Form 144, filed on behalf of an affiliate of the issuer by an attorney in fact, should be accompanied by a signed copy of the power of attorney. After such power of attorney is attached to the Form 144, it does not have to be re-filed as an attachment to subsequently filed Forms 144 while it remains in effect. [Jan. 26, 2009]
536.05 An affiliate of the issuer proposes to make Rule 144 sales of both common stock and securities convertible into common stock. For purposes of determining whether the 5,000 shares or $50,000 condition to filing Form 144 has been met, the convertible securities should be regarded as having been converted into the common stock in the same manner as provided by Rule 144(e)(3)(i). [Jan. 26, 2009]
536.06 After an affiliate files a Form 144, the issuer declares a stock split. No new filing is required within the three-month period to sell the entire number of shares, on a post-split basis, for which the seller had originally filed. [Jan. 26, 2009]
Sections 537 to 538. Rules 144(i) to 144A [Reserved]
Section 539. Rule 145 — Reclassification of Securities, Mergers, Consolidations and Acquisitions of Assets
539.01 A holding company reorganization was to be carried out pursuant to Section 251(g) of the Delaware General Corporation Law and would not trigger a shareholder vote or appraisal rights. The reorganization was linked to an acquisition transaction with a third party (i.e., its consummation was a condition to closing with respect to the acquisition agreement). The purpose of the reorganization was to obtain more favorable tax treatment for the acquisition. When viewed together with the acquisition, the overall transaction changed the nature of the shareholders’ investment. Therefore the reorganization would involve a “sale” or “offer to sell” for the purposes of Securities Act Section 2(a)(3) and Rule 145. [Jan. 26, 2009]
539.02 A change from business trust status in one state to corporate status in another state would not be within the change of domicile exception of Rule 145(a)(2) because of the significant change in organizational structure that will occur. [Jan. 26, 2009]
539.03 Statutory mergers by means of security holders’ vote are defined by Rule 145(a)(2), for purposes of Section 2(a)(3), as events of sale. The rule excludes from this definition mergers for the sole purpose of changing the issuer’s state of incorporation. The exclusion itself is limited to migratory transactions occurring exclusively within the United States, from one state to another. Despite the rule’s express domestic limitation, similar transactions changing a foreign issuer’s domicile from one political subdivision of a country to another (such as reincorporation from one Canadian province to another) likewise should not be treated as a sale. However, if a non-U.S. corporation undertakes a merger to incorporate within the United States, the migratory transaction is an event of sale that must be registered with the Commission or exempt from registration. [Nov. 26, 2008]
539.04 Item 17(b)(7) of Form S-4 states generally that the financial statements of acquired companies that were not previously Exchange Act reporting companies need be audited only to the extent practicable, unless the Form S-4 prospectus is to be used for resales by any person deemed an underwriter within the meaning of Rule 145(c), in which case such financial statements must be audited. The Division staff was asked whether a resale pursuant to Rule 145(d), in lieu of the Form S-4 prospectus, would require the financial statements to be audited. The Division staff noted that Rule 145(d) is not included in the Instruction to Item 9.01 of Form 8-K regarding sales pursuant to Rule 144 during the 71-day extension period for filing financial statements. As the audited financial statements for the acquired company would be required pursuant to Item 9.01 of Form 8-K, a resale pursuant to Rule 145(d) would not be permitted until they are filed. [April 2, 2008]
539.05 A proposed Rule 145 merger is submitted for a vote of shareholders at an annual meeting at which directors are also to be elected. Incumbent directors would be deemed “underwriters” with respect to the securities issuable in the merger transaction for purposes of paragraph (c) of Rule 145, even though they are not candidates for reelection. [Jan. 26, 2009]
539.06 A former affiliate of a shell company that was acquired in a registered Rule 145 transaction received four percent of the outstanding shares of the acquiring company. Although Rule 145(d)(2)(i) would permit the former affiliate to sell publicly one percent of the outstanding shares every three months, the former affiliate wishes to sell the entire four percent in a single transaction. The former affiliate (who is not an affiliate of the acquiring company) was advised that Rule 145(d) did not preclude a private sale of the entire amount, but the buyer in any such private transaction would have to step into the shoes of the seller and comply with Rule 145(d) in making public resales of the securities. [Jan. 26, 2009]
539.07 A person subject to Rule 145(c) converts preferred stock received in a Rule 145 transaction into common stock. Such person may tack the holding period for the preferred to that of the common in determining eligibility to use Rule 145(d)(2) to the extent permitted by Rule 144(d). [Jan. 26, 2009]
539.08 A partnership distributes restricted shares of shell company A to its partners, X and Y. X and Y hold enough shares of A to be deemed to be affiliates. Consequently, when corporation B later acquires shell company A, and the shares of A are exchanged for shares of B, the two partners must sell their shares of B pursuant to Rule 145(d), as Rule 145(c) applies because A is a shell company. However, they need not aggregate their sales for purposes of the volume limitation of paragraph (e) of Rule 144, except to the extent that they are acting in concert or are the same person for purposes of Rule 144. [Jan. 26, 2009]
539.09 An affiliate of company A acquires securities of company B in a Rule 145 transaction. The affiliate gives some of those securities to a charity, and then — some time later — becomes an affiliate of B. Although such affiliate must now sell B shares pursuant to all the provisions of Rule 144 since such person is an affiliate of B, the charity can continue to sell pursuant to the provisions of Rule 145(d), to the extent Rule 145(c) applies. [Jan. 26, 2009]
539.10 X acquires stock in a registered Rule 145 offering, but is subject to the resale restrictions of Rule 145(d) because X is an affiliate of the acquired company and Rule 145(c) applies. Pursuant to and on or subsequent to the date of a court-approved divorce settlement, X transfers some of the shares to spouse Y who is not an affiliate. The shares are not subject to resale restrictions in Y’s hands because Y is not subject to the Rule 145(d) restrictions and the resale status of a spouse receiving securities in a divorce proceeding under these circumstances will be determined by the status of Y and not by the status of X. [Jan. 26, 2009]
539.11 Less than six months after a Rule 145 transaction, a person deemed to be an underwriter by Rule 145(c) dies. The estate of the 145(c) underwriter may in general sell publicly in the same manner the decedent could have, that is, under paragraphs (c), (e), (f), and (g) of Rule 144, which apply due to Rule 145(d)(2)(i). If the estate is not an affiliate of the issuer, it will be able to sell subject only to the current public information requirement in Rule 144(c) because of the relief provided to unaffiliated estates by Rule 144(e) and Rule 144(f). [Jan. 26, 2009]
Section 540. Rule 146 [Reserved]
Section 541. Rule 147 — “Part of an Issue,” “Person Resident,” and “Doing Business Within” for Purposes of Section 3(a)(11)
541.01 A local bank, whose shares are held only by Texas residents, is planning to form a bank holding company and exchange shares with its shareholders under Rule 147. If shareholders move out of state during the time required to obtain regulatory approvals, such shareholders may be “cashed out” to retain the Rule 147 exemption, assuming cashing out is permitted under the applicable state law. [Jan. 26, 2009]
541.02 A family trust is located in a state where a Rule 147 offering is to be made. A beneficiary with a half-interest in the trust resides in another state. The trust may not be offered securities or purchase securities in the Rule 147 offering. [Jan. 26, 2009]
Sections 542 to 572. Rules 148 to 173 [Reserved]
Section 573. Rule 174 — Delivery of Prospectus by Dealers; Exemptions Under Section 4(3) of the Act
573.01 A registrant’s initial public offering has been consummated, but the Rule 174 prospectus delivery period is still applicable. The registrant is considering making a material acquisition that it considers probable. The registrant would need to supplement the prospectus as appropriate so that the prospectus complies with Securities Act Section 10(a) at the time of any delivery required pursuant to Rule 174. [Jan. 26, 2009]
573.02 Company A, which is not an Exchange Act reporting company, proposes to use Form S-3 to issue debt securities that would be guaranteed by its Exchange Act reporting parent. Company A is a wholly-owned subsidiary of parent and the guarantee is full and unconditional. The exemption from prospectus delivery requirements provided by Rule 174(b) would be available for this offering because the parent would be subject to the Exchange Act reporting requirements immediately prior to the time of filing the registration statement, Company A would be wholly-owned by parent, and parent would fully and unconditionally guarantee the debt securities. [Jan. 26, 2009]
573.03 If an exchange has approved an issue for trading as of the earlier of the effective date or the day the offering commences, but actual trading cannot commence until closing, with when-issued trading occurring in the interim, Rule 174(d) would be available for the when-issued trading. [Jan. 26, 2009]
573.04 The prospectus delivery requirements of Rule 174(d) apply in the context of savings and loan conversions, when a subscription offering to existing depositors at a specified price range is followed by an offering to the general public at a fixed price. The commencement of the subscription offer would be the commencement of a bona fide public offering for purposes of Rule 174(d). Although the security would not commence trading until closing, if, as of commencement of the offering, the security is authorized for inclusion in an electronic inter-dealer quotation system sponsored and governed by the rules of a registered securities association, the 25-day prospectus delivery period of Rule 174(d) would be available. [Jan. 26, 2009]
573.05 Rule 174 shortens to 25 days the prospectus delivery period for initial public offerings that are immediately listed for trading on an exchange or eligible for quotation on an automated quotation system of a national securities association. However, Exchange Act Rule 15c2-8(d) provides that broker-dealers must continue to deliver the same prospectuses, upon request, for the full 90-day period. While Rule 174(d) relieves broker-dealers of an obligation to deliver prospectuses in connection with every deal during the full 90-day period, it does not change broker-dealers’ obligations to deliver prospectuses upon request during that time. [Jan. 26, 2009]
Sections 574 to 597. Rules 175 to 400 [Reserved]
Section 598. Rule 401 — Requirements as to Proper Form
598.01 As set forth in Rule 401, a registration statement must meet the form requirements at the time it is first filed, and also at the time of any Section 10(a)(3) post-effective amendment. A registration statement on one form may be changed to any other form for which it is then eligible by pre-effective or post-effective amendment, with one exception. An issuer may not file a pre-effective or post-effective amendment to change a registration statement that is not an automatic shelf registration statement to an automatic shelf registration statement. Instead, the issuer must file a new registration statement on Form S-3 or Form F-3, designated as an automatic shelf registration statement. Except for registration statements and post-effective amendments described in Rule 401(g), once a registration statement is declared effective, it is deemed to be on the proper form. [Apr. 24, 2009]
598.02 Pursuant to Instruction 3 to the signature requirements for Form S-3, a corporation may sign and file a registration statement on Form S-3 for an offering of non-convertible debt or preferred securities if it has a reasonable basis to believe that the investment rating of such securities at the time of sale will permit use of the form. If an investment grade rating is not received, a post-effective amendment would be required when the issuer cannot satisfy Form S-3 eligibility requirements without such a rating. [Jan. 26, 2009]
598.03 A registrant has an effective Form S-3 for a secondary offering. At the time of filing, all requirements for use of the form were met. Now, three months later, it appears that a dividend payment on certain preferred stock may be missed. The registrant may continue to use the effective Form S-3 so long as there is no need to update the registration statement for purposes of Securities Act Section 10(a)(3). At the time that updating is necessary, Rule 401 would require the use of whatever form is available to the registrant at that time. [Jan. 26, 2009]
Sections 599 to 602. Rules 401a to 404 [Reserved]
Section 603. Rule 405 — Definition of Terms
603.01 Under Rule 405, the definition of “dividend or interest reinvestment plan” would cover a plan whereby limited partners could reinvest cash flow distributions into the partnership for additional partnership interests. [Jan. 26, 2009]
603.02 A company with a December 31 fiscal year-end emerged from bankruptcy in mid-January of 2008. In March 2008, the company filed a Form 10-K with audited financial statements for the fiscal year ended December 31, 2007. The Form 10-K did not include audited financial statements for the period in the beginning of January prior to the company’s emergence from bankruptcy. The company will remain an “ineligible issuer” pursuant to sub-paragraph (1)(iv)(B) of the definition of “ineligible issuer” in Rule 405 until it files audited financial statements for a period ending subsequent to its emergence from bankruptcy. [Jan. 26, 2009]
603.03 A well-known seasoned issuer with an effective automatic shelf registration statement filed a Form 10-K prior to the Form 10-K due date. Because the Form 10-K failed to include audited financial statements and was therefore materially deficient, the issuer planned to amend the Form 10-K, and asked whether eligibility as a well-known seasoned issuer would be reassessed at the time of the amendment. Rule 405 requires an issuer to reassess its well-known seasoned issuer status at the time it files a Form 10-K to update a shelf registration statement for Section 10(a)(3) purposes. Under these facts, as the originally filed Form 10-K was so materially deficient that it would not be considered filed for purposes of assessing form eligibility, the issuer would need to reassess its well-known seasoned issuer status at the time it files its amended Form 10-K. If the amended Form 10-K is not filed by the Form 10-K due date, the issuer would not be eligible as a well-known seasoned issuer on or after that due date, because it would not be timely in its Exchange Act filings. [Jan. 26, 2009]
Sections 604 to 608. Rules 406 to 411 [Reserved]
Section 609. Rule 412 — Modified or Superseded Documents
609.01 A calendar year company proposed to file a registration statement on Form S-3 on February 1, 2006. The registrant would include financial statements for the year ended December 31, 2005, and incorporate its Form 10-K for the year ended December 31, 2004. The registrant was concerned because the financial statements in the 2004 Form 10-K would become out of date. Rule 412(a), however, has the effect in these circumstances of automatically superseding the December 31, 2004 financial statements for purposes of the Form S-3 filing. In the event the registrant wished to remove all doubt about outdated financial statements in the Form 10-K being superseded by later financials included in the Form S-3, Rule 412(b) permits it to include a specific statement in the Form S-3 on the subject. [Jan. 26, 2009]
Section 610. Rule 413 — Registration of Additional Securities and Additional Classes of Securities
610.01 An issuer filed a registration statement on Form S-4 for a merger. Inadvertently, the number of shares registered was not sufficient to cover certain shares issuable upon the exercise of options during the period after the effective date of the registration statement but prior to the consummation of the merger. Rule 413(a) does not permit the registration of additional shares by post-effective amendment. Counsel was informed that: (1) it could rely on Rule 462(b) to prepare and file a short-form registration statement provided the amount to be registered was within the 20% limit and the other conditions were met; or (2) it could file a new registration statement that could be combined with the earlier registration statement pursuant to Rule 429. [Jan. 26, 2009]
610.02 In its effective Form S-8, a company registered 500,000 shares for sale by the company pursuant to an option plan, and 1,000 previously unregistered shares for resale on a resale prospectus pursuant to General Instruction C to Form S-8. The company may not rely on General Instruction C.3.(a) (which applies only to control securities and allows the addition of persons to the resale prospectus list of selling shareholders by means of a post-effective amendment or Rule 424(b) prospectus supplement) to shift any of the 500,000 shares registered on the primary portion to the resale prospectus since to do so would amount to registering additional securities by means of a post-effective amendment in contravention of Rule 413. [Jan. 26, 2009]
Section 611. Rule 414 — Registration by Certain Successor Issuers
611.01 A California corporation merged with a Delaware corporation for the purpose of changing its domicile. Rule 414 permits the Delaware corporation to use the registration statements of the California corporation by filing an amendment expressly adopting the statements of the predecessor. Because the merger entails the issuance of securities of a corporation different from the original registrant, the amendment should contain a new opinion of counsel on the legality of the issuance and counsel’s consent. [Jan. 26, 2009]
611.02 In order for Rule 414 to effect registration of a successor issuer, paragraph (c) requires that the succession be approved by the predecessor’s security holders at a meeting for which proxies were solicited pursuant to Exchange Act Section 14(a) or information was furnished to security holders pursuant to Exchange Act Section 14(c). When the predecessor is an Exchange Act Section 15(d) company rather than a Section 12 company, and thus not subject to Section 14, the requirements of Rule 414(c) will be met when the proxy or information statement is prepared and votes are solicited substantially in accordance with Section 14. [Jan. 26, 2009]
611.03 A Form S-4 registration statement will be filed to convert an existing corporation into a trust that will have the same assets and management as its predecessor. Because of applicable tax law or state law provisions, the new trust will not be created until after the Form S-4 has become effective. The company sought advice as to who would be the registrant for the Form S-4 and who should sign the registration statement. Using Rule 414 as a model, the existing company may execute and file the registration statement. At the time the trust is formed, it should file a post-effective amendment adopting the registration statement. [Jan. 26, 2009]
Section 612. Rule 415 — Delayed or Continuous Offering and Sale of Securities
612.01 Rule 415(a)(1)(vii) permits a delayed or continuous offering in the case of mortgage-related securities. Although the Securities Act and the rules thereunder do not define mortgage-related securities, the Exchange Act was amended to provide such a definition in Section 3(a)(41). Because the term in Rule 415 was intended to have the same meaning as ultimately decided upon by Congress, a security meeting the definition in Exchange Act Section 3(a)(41) will also be deemed to be a mortgage-related security for purposes of Rule 415. In the case of a traditional mortgage-related securities offering which does not fall within the definition, consideration should be given to whether another subsection of Rule 415(a)(1) is available, for example, Rule 415(a)(1)(ix) or (x). Securities offerings registered in reliance on Rule 415(a)(i)(ix), unlike those registered in reliance on subsections (vii) and (x), are subject to the two-year limitation of Rule 415(a)(2), unless registered on Form S-3 or Form F-3. [Jan. 26, 2009]
612.02 An insurance company acquired 55% of the common stock of a company in a private transaction. It now holds these restricted securities as a reserve against claims. As the result of an annual state inspection, the insurance company has been questioned regarding the sufficiency of its reserves. In order to enhance the value of the restricted securities, it wishes to have them registered. Any registration statement filed for this purpose would be governed by Rule 415 because the insurance company may not intend to sell the securities immediately. Since the issuer would be deemed a subsidiary of the insurance company, it would be unable to rely upon Rule 415(a)(1)(i). Therefore, another paragraph of Rule 415 (a)(1) would have to be available in order to register the offering on a delayed or continuous basis. [Jan. 26, 2009]
612.03 An issuer that is not eligible to register a delayed primary offering on Form S-3 pursuant to Instruction I.B.1. of the form intends to conduct a rights offering for 30 days. Following that time, the shares not subscribed for will be sold in a firm commitment underwriting. The offering may be made in reliance on Rule 415(a)(1)(ix). Item 512(c) of Regulation S-K contemplates this result. [Jan. 26, 2009]
612.04 In the case of a registration statement pertaining to an offering of convertible debentures and the common stock underlying the debentures, Rule 415 typically is not applicable to the continuous offering of the underlying common stock because that offering is exempt from registration pursuant to Section 3(a)(9). In cases when the Section 3(a)(9) exemption is unavailable (for example, when securities are convertible into securities of another issuer, when conversion terms require that the shareholder pay consideration at the time of conversion, or when conversion arrangements involve the payment of compensation for soliciting the exchange), absent another exemption, Rule 415(a)(1)(iv) is applicable. Rule 415 applies to registered offerings made on a delayed or continuous basis. [Jan. 26, 2009]
612.05 A registrant files a Form S-3 shelf registration statement for the delayed sale of debentures. Depending upon the level of interest rates at the time the offering actually takes place, the registrant may seek an opinion of California counsel to the effect that the offering does not violate the California usury laws. Such an opinion may be filed as an exhibit to a Form 8-K, since such forms are automatically incorporated by reference into Form S-3 registration statements. [Jan. 26, 2009]
612.06 An issuer with an effective acquisition shelf registration statement may follow the procedures described in Securities Act Release No. 6578 (Apr. 23, 1985) and the Service Corporation International interpretive letter (Oct. 31, 1985) issued by the Division to update the registration statement for use in subsequent acquisitions. [Jan. 26, 2009]
612.07 Questions have arisen concerning the application of Rule 415 to medium term note offerings. Many of these offerings begin promptly and are made on a continuous basis in reliance on Rule 415(a)(1)(ix). Others, however, are made on a delayed basis in reliance on Rule 415(a)(1)(x) since they do not begin promptly after effectiveness, but are continuous in nature once begun. An issuer eligible to rely on Rule 415(a)(1)(x) may file one registration statement that covers several immediate, continuous or delayed offerings, each a different program for a new series of notes. [Jan. 26, 2009]
612.08 A Rule 415 offering provides that purchasers within the first 60 days will receive a security with a higher yield than that to be received by subsequent purchasers. The registrant wished to extend the preferential purchase period for an additional 30 days. The Division staff has taken the position that such an extension is a material change in the plan of distribution, which according to the Item 512(a)(iii) undertaking would require a post-effective amendment (or, for registration statements on Form S-3 or F-3, compliance with one of the methods in Item 512(a)(1)(B)). [July 3, 2008]
612.09 It is important to identify whether a purported secondary offering is really a primary offering, i.e., the selling shareholders are actually underwriters selling on behalf of an issuer. Underwriter status may involve additional disclosure, including an acknowledgment of the seller’s prospectus delivery requirements. In an offering involving Rule 415 or Form S-3, if the offering is deemed to be on behalf of the issuer, the Rule and Form in some cases will be unavailable (e.g., because of the Form S-3 “public float” test for a primary offering, or because Rule 415(a)(1)(i) is available for secondary offerings, but primary offerings must meet the requirements of one of the other subsections of Rule 415). The question of whether an offering styled a secondary one is really on behalf of the issuer is a difficult factual one, not merely a question of who receives the proceeds. Consideration should be given to how long the selling shareholders have held the shares, the circumstances under which they received them, their relationship to the issuer, the amount of shares involved, whether the sellers are in the business of underwriting securities, and finally, whether under all the circumstances it appears that the seller is acting as a conduit for the issuer. [Jan. 26, 2009]
612.10 The registrant filed a registration statement on Form S-11 relating to a “shelf” offering of mortgage backed bonds to be issued in series. The registrant was informed that it would not be necessary to file post-effective amendments and supplemental indentures each time a new series of bonds was to be issued. The response was conditioned upon two factors:
1. A basic form of supplemental indenture including everything but the collateral for a particular series is filed at the time the registration is declared effective and the basic indenture is qualified; and
2. The registrant files a prospectus supplement in supplement form describing the issuance of the series and the collateral therefor.
This position is consistent with Instruction 1 to Item 601(a) of Regulation S-K. When a registrant does not satisfy these conditions, supplemental indentures and amended underwriting agreements may be filed only by post-effective amendment and not as exhibits to a Form 8-K. The reason is that Form S-11 does not permit incorporation by reference to subsequently filed Exchange Act reports, such as a Form 8-K. [Jan. 26, 2009]
612.11 Securities to be issued in connection with business combinations may be registered for the shelf pursuant to Rule 415(a)(1)(viii). While this rule does not limit the Securities Act registration form used, not all forms are available for business combinations. In particular, Form S-3 is not available for business combinations of any kind. The “for cash” proviso in General Instruction I.B.1 of Form S-3 is interpreted as prohibiting the use of the form not only for third-party exchange offers but also for any other business combination, however structured. See Securities Act Release No. 6534 (May 9, 1984), at fn. 14. Form S-3 may be used for a secondary offering of shares which were originally received from the issuer in connection with a business combination, assuming it is a genuine secondary offering. [Jan. 26, 2009]
612.12 A controlling person of an issuer owns a 73% block. That person will sell the block in a registered “at-the-market” equity offering. Rule 415(a)(4) applies only to offerings by or on behalf of the registrant. A secondary offering by a control person that is not deemed to be by or on behalf of the registrant is not restricted by Rule 415(a)(4). [Jan. 26, 2009]
612.13 Pursuant to a shelf registration statement, from time to time a company issues securities through a firm commitment underwriting at a fixed price based on the prior day’s closing price. These firm commitment takedowns would not be considered “at the market offerings” because they are at a fixed price. However, sales into an existing trading market of securities of the same class made by broker-dealer firms who buy securities in such takedowns may be deemed indirect primary offerings made “at the market” within the meaning of Rule 415(a)(4), thereby triggering registration and prospectus delivery requirements. [Jan. 26, 2009]
612.14 In exchange for “consulting services,” a private operating company intended to sell about 13 percent of its stock to a public company whose sole business was providing consulting services. The consulting services involved preparing a registration statement, applying for listing, obtaining market makers and several other services related to developing a market or raising capital. The public company intended to distribute about half of the 13 percent of the operating company stock it would receive to its stockholders as a “dividend” through a “spin-off.” It also wanted to register the rest of the stock it would receive for resale pursuant to Rule 415(a)(1)(i). The transaction is a primary offering of the operating company through the public company and its shareholders and the registration statement would need to cover the entire distribution of these shares and the dividend shares, including their further distribution to the public. The registration statement would need to name the public company and its shareholders as underwriters and include appropriate disclosure about them, such as the information described in Item 507 of Regulation S-K. In addition, because the operating company was not eligible to do an at the market offering on a primary basis pursuant to Rule 415(a)(4), the securities offered and sold pursuant to the registration statement would have to be offered and sold at a fixed price for the duration of the offering. [Jan. 26, 2009]
612.15 A company with minimal operations (parent company) and about 750 shareholders intended to create a subsidiary with no significant operations and spin it off to its shareholders, immediately after which the subsidiary would merge with a private operating company that has about 20 shareholders. After the merger, about 95 percent of the equity of the merged entity would be owned by former shareholders of the operating company, about four percent would be owned by the shareholders of the parent company, and about one percent would by owned by some insiders of the parent company who would receive stock in the operating company as a finder’s fee in connection with structuring the transaction. It was contemplated that Securities Act registration statements covering the shares to be issued in the spin-off and the merger would be filed. In addition, after the merger some insiders of the parent company would sell shares of the merged entity that they would receive due to the spin-off and due to the exchange of the finder’s fee shares in the merger.
Based on these facts, the transaction is a primary offering of the operating company through the parent company and its shareholders. As such, rather than registering parts of this transaction (i.e., the spin-off and merger), the entire distribution of the operating company shares to the public would need to be registered as a primary offering. The registration statement would have to name the parent company and its shareholders as underwriters, and include appropriate disclosure about them, such as the information described in Item 507 of Regulation S-K. In addition, because the operating company was not eligible to do an at the market offering on a primary basis pursuant to Rule 415(a)(4), the registration statement would have to include a fixed price for the duration of the offering. [Jan. 26, 2009]
612.16 A real estate investment trust utilizes an UPREIT structure whereby the REIT is the general partner of a limited partnership that holds all of the REIT’s properties. Limited partners of the limited partnership may elect to convert their limited partnership units into common shares of the REIT on a one-for-one basis; however, the REIT may elect to pay cash instead of shares upon conversion. The REIT may register the issuance of common shares outstanding underlying limited partnership units pursuant to Rule 415(a)(1)(iv). If the REIT satisfies the registrant eligibility requirements in Instruction I.A of Form S-3, it may register the offering on Form S-3 pursuant to Instruction I.B.4 of the form. [Jan. 26, 2009]
612.17 Plans of financing can involve periodic adjustments of interest or dividend rates, rollovers of securities, and plans to buy back and re-market securities, sometimes coupled with “puts” or guarantees (which themselves are securities). Filings involving such plans require an analysis of Section 5 and Rule 415 issues with respect to all securities involved in the offerings. Even after the original offering of the securities has terminated, the registrant may still be engaged in a continuous or delayed offering with respect to the future periodic issuance or modification of securities. These subsequent transactions may involve primary offerings of the issuer’s securities to the extent the issuer pays a remarketing or auction agent or otherwise is involved in subsequent sales such as in the remarketings or auctions. [Nov. 26, 2008]
Section 613. Rule 416 — Securities to be Issued as a Result of Stock Splits, Stock Dividends and Anti-Dilution Provisions and Interests to be Issued Pursuant to Certain Employee Benefit Plans
613.01 A registration statement for warrants and the underlying common stock was declared effective. The terms of the warrants included an anti-dilution clause, providing for a change in the amount of securities to be issued to prevent dilution resulting from stock splits or stock dividends. Subsequent to effectiveness, the issuer declared a preferred stock dividend on its common stock. Under the terms of the anti-dilution provision, warrant holders, upon exercise, would receive shares of common stock and a corresponding number of shares of preferred stock. Assuming a “sale” of preferred stock to the warrant holders is involved in the exercise of the warrant, the registration statement would not, under Rule 416, be deemed to cover the shares of preferred stock to be issued in connection with the anti-dilution provision, since these shares are of a different class from those registered. [Jan. 26, 2009]
613.02 When a registrant has a stock split prior to the completion of a registered distribution that is not covered by anti-dilution provisions, Rule 416(b) provides that the registration statement may be deemed to cover the additional securities if a post-effective amendment is filed to reflect the increase in the amount of securities registered. A company with securities registered on Form S-3 may not increase the number of shares registered by filing a Form 8-K. Instead, a post-effective amendment is required. The post-effective amendment could be limited to the facing page, an explanatory note and the Part II information, unless additional changes are being made to the prospectus. [Jan. 26, 2009]
Sections 614 to 615. Rules 417 to 418 [Reserved]
Section 616. Rule 419 — Offerings by Blank Check Companies
616.01 In a blank check offering, if a consummated acquisition meeting the requirements of Rule 419 has not occurred by a date 18 months after the effective date of the initial registration statement, funds held in the escrow or trust account must be returned to investors pursuant to Rule 419(e)(2)(iv) and escrowed securities must be returned to the registrant. In sum, the transaction must be unwound. For example, when the securities of a blank check company are all gifted to charities and no cash is actually paid, if after the expiration of the 18-month period no acquisition has been consummated, such escrowed shares must be returned to the registrant. [Jan. 26, 2009]
616.02 When a blank check company files a registration statement covering the resale of securities by selling shareholders, the issuer is required to comply with Rule 419 if the securities offered under the registration statement are “penny stock.” Rule 419 applies to all registered offerings of securities by blank check companies when the securities are “penny stock,” as defined in Exchange Act Rule 3a51-1. [Jan. 26, 2009]
Sections 617 to 619. Rules 420 to 423 [Reserved]
Section 620. Rule 424 — Filing of Prospectuses, Number of Copies
620.01 For EDGAR header purposes, when filing a Rule 424(b) prospectus supplement in connection with an offering that involves an initial effective registration statement and a second registration statement registering additional securities under Rule 462(b), the Rule 424(b) supplement must be filed under the registration number (33- or 333-) for the initial registration statement. The cover page of the Rule 424(b) supplement should, however, set forth the registration numbers of both the initial registration statement and the Rule 462(b) registration statement. [Jan. 26, 2009]
620.02 When a supplement to a prospectus is used, the Securities Act prospectus delivery requirements are not satisfied by delivery to broker/dealers of a supplement unattached to the prospectus. The supplement must be attached to the prospectus either physically or electronically so that the prospectus being delivered includes both the supplement and the prospectus. See Securities Act Release No. 6714 (May 27, 1987). The exceptions to this position involve Form S-8 and dividend reinvestment plans filed on Form S-3. In those cases, updating of the existing registration statement, without including the full prospectus, is accomplished through the use of Rule 424 supplements that are distributed to plan participants who have previously received a prospectus, or, in the case of Form S-8, through compliance with Rule 428. Such supplements must include a legend indicating that a full prospectus will be provided upon request. [Jan. 26, 2009]
620.03 A change in currency in which securities may be issued is not a fundamental change and may be accomplished by prospectus supplement under Rule 424(c). [Jan. 26, 2009]
620.04 A reduction of the commission paid to the underwriter or selling agent may be accomplished by prospectus supplement when the price of the securities is not changed. [Jan. 26, 2009]
Sections 621 to 623. Rules 425 to 427 [Reserved]
Section 624. Rule 428 — Documents Constituting a Section 10(a) Prospectus for Form S-8 Registration Statement; Requirements Relating to Offerings of Securities Registered on Form S-8
624.01 Rule 428(b)(2) requires the registrant to deliver, along with the documents containing the information required by Part I of Form S-8, one of: the latest Rule 14a-3(b) annual report, the latest Form 10-K, the latest Rule 424(b) prospectus, or an effective Form 10. An issuer that changed its fiscal year filed a six-month transition report on Form 10-K subsequent to its latest annual report on Form 10-K. When such issuer is relying on the Rule 428(b) Form 10-K delivery alternative, it must deliver both the latest annual report on Form 10-K and the transition report on Form 10-K in order to satisfy the Rule 428(b) requirement. [Jan. 26, 2009]
Section 625. Rule 429 — Prospectus Relating to Several Registration Statements
625.01 An issuer filed a registration statement on Form S-4 for a merger. Inadvertently, the number of shares registered was not sufficient to cover certain shares issuable upon the exercise of options during the period after the effective date of the registration statement but prior to the consummation of the merger. Rule 413(a) does not permit the registration of additional shares by post-effective amendment. Counsel was informed that: (1) it could rely on Rule 462(b) to prepare and file a short-form registration statement provided the amount to be registered was within the 20% limit and the other conditions were met; or (2) it could file a new registration statement that could be combined with the earlier registration statement pursuant to Rule 429. [Jan. 26, 2009]
Section 626. Rule 430 [Reserved]
Section 627. Rule 430A — Prospectus in a Registration Statement at the Time of Effectiveness
627.01 The instruction to paragraph (a) of Rule 430A provides that changes in volume and price representing no more than a 20% change in the maximum offering price set forth in the registration statement fee table may be made pursuant to a Rule 424(b)(1) prospectus supplement. The 20% threshold may be calculated using the high end of the range in the prospectus at the time of effectiveness and may be measured from either the high end (in the case of an increase in the offering price) or low end (in the case of a decrease in the offering price) of that range. [Apr. 24, 2009]
627.03 A registration statement went effective listing $800 million of debt generically in its fee table and containing a prospectus specifying three classes of debt. The prospectus states that $300 million would be offered of each of the first two classes of debt and $200 million of the third class would be offered. The registrant wishes to change the allocation of the $800 million among the 3 classes after the effective date. Instruction to paragraph (a) of Rule 430A would allow the registrant, without filing a post-effective amendment, to increase a class or classes of debt by up to $160 million (20% of $800 million) with a corresponding reduction of the other class or classes by $160 million. The decrease and increase are not each counted as a 20% change (and thereby equating to a 40% change) since they are made in parallel as one reallocation. [Jan. 26, 2009]
Section 628. Rule 430B — Prospectus in a Registration Statement After Effective Date
628.01 An issuer that was eligible to conduct a primary offering of securities pursuant to General Instruction I.B.1 of Form S-3 planned to file an unallocated shelf registration statement and conduct an immediate takedown following effectiveness. The issuer would include a base prospectus in the Form S-3 and asked whether a prospectus supplement for the immediate takedown would also need to be filed as part of the registration statement prior to effectiveness. With regard to the immediate takedown, the issuer was not required to include a prospectus supplement pre-effectively to disclose the information about the immediate takedown that would be known at the time of effectiveness because Rule 415(a)(1)(x) permits immediate takedowns and the prospectus supplement for such takedown would become part of the registration statement and the filing would cause a new effective date of the registration statement. [Jan. 26, 2009]
Sections 629 to 631. Rules 430C to 432 [Reserved]
Section 632. Rule 433 — Conditions to Permissible Post-Filing Free Writing Prospectuses
632.01 Rule 433(d)(4) does not provide an exception from the filing requirements of Rule 433(d)(1)(i)(C). Accordingly, if a free writing prospectus is used by the issuer or any offering participant that includes the final terms of the securities or of the offering, the issuer must file a description of the final terms regardless of whether the issuer has previously filed a final prospectus supplement that includes the final terms of the securities under Rule 424. [Jan. 26, 2009]
632.02 An underwriter distributed a free writing prospectus through a widely-used subscription news and financial data service and the free writing prospectus was available to all subscribers of the service. In this case, the free writing prospectus was “distributed . . . in a manner reasonably designed to lead to its broad unrestricted dissemination” for purposes of Rule 433(d)(1) notwithstanding the fact that the news and financial data service was a subscription service. [Jan. 26, 2009]
Section 633. Rule 436 — Consents Required in Special Cases
633.01 A registrant filing on Form S-8 incorporated a Form 10-K that contained its 2007 financial statements certified by one accounting firm, and its 2005 and 2006 financial statements certified by a different accounting firm. Rule 436 would require the filing of the consents of both accounting firms for purposes of the Form S-8 registration statement. [Jan. 26, 2009]
Sections 634 to 638. Rules 437 to 455 [Reserved]
Section 639. Rule 456 — Date of Filing; Timing of Fee Payment
639.01 After filing a Form S-3ASR that relied on the pay-as-you-go provisions in Rule 456(b), an issuer filed a Rule 424 prospectus supplement to reflect a completed takedown. The fee table included in the prospectus supplement failed to include a number of shares (or aggregate offering amount) that were later sold pursuant to the underwriter’s over allotment option and the issuer did not pay a fee for those shares within the cure period permitted by Rule 456(b)(1)(i). Although failing to identify the over allotment shares in the fee table and pay the fee constituted a Section 6 violation, Rule 456(b)(2) provides that such failures do not cause the registrant to violate Section 5 because the registrant relied on the pay-as-you-go provisions and the class of securities sold pursuant to the over allotment option was identified in the Form S-3ASR at the time it was filed. The issuer was advised that it should address its Section 6 violation by filing an additional prospectus supplement under either Rule 424(b)(2) or (b)(5) and under Rule 424(b)(8) with a fee table reflecting the over allotment shares and paying the associated filing fee at that time. [Jan. 26, 2009]
639.02 Well-known seasoned issuers that rely on Rule 456(b) to defer payment of filing fees are required to pay the fees “within the time required to file the prospectus supplement pursuant to Rule 424(b) . . . for the offering.” When an issuer plans to use both a preliminary and a final prospectus, the required fee must be paid within the time required to file the final prospectus supplement, as the issuer may not know the actual amount offered at the time the preliminary prospectus is filed. [Jan. 26, 2009]
Section 640. Rule 457 — Computation of Fee
640.01 When a registrant has filed a registration statement for two separate securities and then wishes to increase the amount of one security and decrease the other, the registrant can file a pre-effective amendment to reflect such increase and decrease in the calculation of registration fee table and reallocate the fees already paid under the registration statement between the two securities. [Jan. 26, 2009]
640.02 A registrant using Rule 457(a) can increase the number of shares covered by a registration statement by adding them in the pricing amendment prior to effectiveness. The registration fee for the additional shares should be based on the actual offering price, rather than the estimated offering price used for the initial filing. [Jan. 26, 2009]
640.03 A registration statement for 1,000,000 shares of preferred stock went effective with an estimated offering price of $15 per share. The fee was calculated and paid in reliance on Rule 457(a). After the effective date, but prior to the commencement of sales, the registrant sought to increase the number of shares to 1,150,000 and increase the offering price to $17.50 per share. Because more shares are going to be sold than were registered, the registrant must file a new registration statement to register the additional 150,000 shares at $17.50 per share. A short-form registration statement under Rule 462(b) would be possible since the number of additional shares (150,000) times the new price ($17.50) is less than 20% of the aggregate dollar amount in the calculation of registration fee table in the original effective registration statement ($15,000,000); provided, however, that no confirmations may be sent prior to the filing of the Rule 462(b) registration statement. [Jan. 26, 2009]
640.04 A registration statement went effective registering $15,000,000 of preferred stock under Rule 457(o). The prospectus indicated that 1,000,000 shares were being offered. After the effective date, but prior to the commencement of sales, the registrant sought to increase the price from the intended $15 maximum to $17.50, without changing the number of shares in the offering. Because registration was done by dollar amount (Rule 457(o)), not by number of shares (Rule 457(a)), and such dollar amount is increasing, the registrant must file a new registration statement to register the additional $2,500,000 of preferred stock. A short-form registration statement under Rule 462(b) would be possible since the $2,500,000 is less than 20% of the aggregate dollar amount registered in the calculation of registration fee table in the original effective registration statement ($15,000,000); provided, however, that no confirmations may be sent prior to the filing of the Rule 462(b) registration statement. [Jan. 26, 2009]
640.05 A registration statement went effective registering $15,000,000 of preferred stock under Rule 457(o). The prospectus indicated that 1,000,000 shares were being offered. After the effective date, but prior to the commencement of sales, the registrant sought to increase the number of shares in the offering to 1,300,000 and decrease the price from the intended $15 to $11.50. Because the new aggregate offering amount (1,300,000 x $11.50) does not exceed the $15,000,000 registered, no new registration statement need be filed. [Jan. 26, 2009]
640.06 Company A planned to register its securities for issuance in connection with the purchase of company B’s assets. Company B would not be liquidated after completion of the transaction. In calculating the filing fee, Company A should look to Rule 457(d) and base the fee on the market value of the assets to be received. [Jan. 26, 2009]
640.07 Rule 457(f) provides that the filing fee for an acquisition registration statement is determined on the basis of the value of the shares of the acquired company. However, this method does not work for a registration statement filed for an acquisition shelf, since the entities to be acquired are not yet known. The filing fee for such a shelf registration statement should therefore be based on the market value of the registrant’s shares as provided in Rule 457(c). [Jan. 26, 2009]
640.08 A company was registering shares issuable on exercise of stock options. At the time of filing, the company had not yet issued options so that there was no option exercise price. The company only had public debt outstanding and there was no market for its common stock. The company had a negative book value. The company was advised to calculate the filing fee, for purposes of Rule 457(h), based on a good faith estimate of the value of the securities underlying the options. [Jan. 26, 2009]
640.09 A question was raised as to the filing fee for a letter of credit guarantee backing municipal bonds. Because the letter of credit was issued by a corporation rather than a bank, it had to be registered even though the underlying securities were exempt. If the filing fee were based on the amount of municipal securities covered by the guarantee the fee would be overstated. The entire amount of the offering need not be allocated to the guarantee and the filing fee may be based on the amount charged by the corporation for issuing the letter of credit by analogy to Rule 457(k) and (l). [Jan. 26, 2009]
640.10 An issuer proposed to register redeemable notes in a series of registration statements. 90% of the notes to be issued under each registration statement was expected to redeemed within 30 days of issuance. Because most of the securities being registered would be outstanding for only a brief period of time, the issuer sought relief from the filing fee requirements. The issuer cited Rule 457(m), which provides relief in certain circumstances when exempt commercial paper is being registered along with non-exempt commercial paper. Since the notes in question were not commercial paper, the full filing fee was payable. [Jan. 26, 2009]
640.11 A company filed a registration statement on October 1, 2003, paying a $50,000 filing fee. Only half of the securities so registered were sold. On March 1, 2008, the company filed a different registration statement for which it owed a filing fee of $15,000. The company was able to offset this fee by transferring $25,000 of the earlier $50,000 filing fee. The $25,000 represented the entire filing fee paid on all unsold shares from the October 1, 2003 registration statement. For purposes of future transfers under Rule 457(p), the $25,000 so transferred was considered paid on March 1, 2008. Assuming the other conditions of Rule 457(p) were satisfied, the $10,000 that was transferred in excess of the fee due for the second registration statement, as well as any portion of the $15,000 fee that remained unused after completion or termination of the offering would be available for transfer to another registration statement initially filed before March 1, 2013. [Jan. 26, 2009]
640.12 An asset-backed issuer inquired whether it could offset fees paid by another registrant/depositor if both registrant/depositors were wholly-owned subsidiaries of the same parent company. These “brother-sister” entities may use the fee offset provisions of Rule 457(p) to offset fees paid by the other “brother-sister” entity. [Jan. 26, 2009]
Sections 641 to 642. Rules 459 to 460 [Reserved]
Section 643. Rule 461 — Acceleration of Effective Date
643.01 Written notification that the issuer and the underwriter will be making oral acceleration requests may be made by counsel for the issuer or the underwriter in its cover letter accompanying the registration statement or an amendment thereto. Oral acceleration requests should not simply be left on voicemail of a Division staff member. [Jan. 26, 2009]
Section 644. Rule 462 — Immediate Effectiveness of Certain Registration Statements and Post-Effective Amendments
644.01 Pursuant to Rule 457(a), a company registered 2,300,000 shares at $22.6875 per share for an aggregate offering price of $52,181,250. After effectiveness, the shares were priced at $31. That higher price was never reflected in the calculation of registration fee table on the cover page of the registration statement. The company wishes to increase the size of the offering using Rule 462(b). It must register the additional shares at the $31 price. Thus, the company may register up to 336,653 additional shares at $31 under Rule 462(b) (calculated by taking 20% of $52,181,250 and dividing it by $31). [Jan. 26, 2009]
644.02 In a single offering not relying on Rule 415 that is both primary and secondary, the 20% increase in the offering size available under Rule 462(b) is calculated on the total aggregate dollar amount of the offering and may be allocated between the primary and secondary sellers in any manner desired. For example, an offering of $100 million in securities — $80 million primary and $20 million secondary — could be increased by $20 million under Rule 462(b) and all $20 million could be allocated to the previously identified secondary seller(s). [Jan. 26, 2009]
644.03 Pursuant to Rule 457(a), a company included in the calculation of registration fee table on its initially filed version of Form S-3 1,000,000 shares of common stock at $20 per share for an aggregate offering price of $20,000,000. Before effectiveness, the company included a supplemental fee table in an amendment to the S-3 to register 200,000 more shares of common stock at the new higher bona fide estimate of $25 per share (for an increase in the aggregate offering of $5,000,000). After effectiveness and pricing at $26 per share, the company wishes to register additional shares under Rule 462(b). The Rule 462(b) limit for registering additional shares is calculated by taking 20% of $25,000,000 (derived by adding the $20,000,000 and the $5,000,000) and dividing it by the $26 actual price to permit registration under Rule 462(b) of no more than 192,307 shares. [Jan. 26, 2009]
644.04 A registration statement for 1,000,000 shares of preferred stock under Rule 457(a) went effective with an offering price of $15 per share. After the effective date, but prior to the commencement of sales, the registrant sought to increase the number of shares to 1,150,000 and increase the offering price to $17.50 per share. Because more shares are going to be sold than were registered, the registrant must file a new registration statement to register the additional 150,000 shares at $17.50 per share. A short-form registration statement under Rule 462(b) would be possible since the number of additional shares (150,000) times the new price ($17.50) is less than 20% of the aggregate dollar amount in the calculation of registration fee table in the original effective registration statement ($15,000,000); provided, however, that no confirmations may be sent prior to the filing of the Rule 462(b) registration statement. [Jan. 26, 2009]
644.05 A registration statement went effective registering $15,000,000 of preferred stock under Rule 457(o). The prospectus indicated that 1,000,000 shares were being offered. After the effective date, but prior to the commencement of sales, the registrant sought to increase the price from the intended $15 maximum to $17.50, without changing the number of shares in the offering. Because registration was done by dollar amount (Rule 457(o)), not by number of shares (Rule 457(a)), and such dollar amount is increasing, the registrant must file a new registration statement to register the additional $2,500,000 of preferred stock. A short-form registration statement under Rule 462(b) would be possible since the $2,500,000 is less than 20% of the aggregate dollar amount registered in the calculation of registration fee table in the original effective registration statement ($15,000,000); provided, however, that no confirmations may be sent prior to the filing of the Rule 462(b) registration statement. [Jan. 26, 2009]
644.06 For EDGAR header purposes, when filing a Rule 424(b) prospectus supplement in connection with an offering that involves an initial effective registration statement and a second registration statement registering additional securities under Rule 462(b), the Rule 424(b) supplement must be filed under the registration number (33- or 333-) for the initial registration statement. The cover page of the Rule 424(b) supplement should, however, set forth the registration numbers of both the initial registration statement and the Rule 462(b) registration statement. [Jan. 26, 2009]
644.07 A registrant has an effective shelf registration statement with $500 million of unused capacity. The registrant wanted to use Rule 462(b) to increase the shelf capacity by 20% to $600 million, and then simultaneously takedown $200 million in common stock and $400 million in convertible debt, in separate offerings. However, Rule 462(b) was not available in this situation, as it can only be used once per delayed shelf offering and only at the time of final takedown. The registrant could takedown $200 million in common stock and then increase the convertible debt capacity from $300 million to $360 million in connection with a final takedown of convertible debt that would deplete the shelf. [Jan. 26, 2009]
644.08 An issuer filed a registration statement on Form S-4 for a merger. Inadvertently, the number of shares registered was not sufficient to cover certain shares issuable upon the exercise of options during the period after the effective date of the registration statement but prior to the consummation of the merger. Rule 413(a) does not permit the registration of additional shares by post-effective amendment. Counsel was informed that: (1) it could rely on Rule 462(b) to prepare and file a short-form registration statement provided the amount to be registered was within the 20% limit and the other conditions were met; or (2) it could file a new registration statement that could be combined with the earlier registration statement pursuant to Rule 429. [Jan. 26, 2009]
Section 645. Rule 463 — Report of Offering of Securities and Use of Proceeds Therefrom
645.01 Rule 463 requires periodic disclosure of sales of securities and use of proceeds during an issuer’s first registered offering. If the offering is a shelf offering of asset-backed securities, the Rule 463 reporting obligation is deemed satisfied by a report at the end of the first takedown. However, if new issuers are formed in connection with subsequent takedowns, for example, a series of single purpose corporations, each takedown by a new issuer will give rise to a new Form 10-D or Form 10-K Rule 463 reporting obligation. [Jan. 26, 2009]
645.02 Since a registered spin-off transaction typically does not generate any proceeds for the issuer, Item 701(f) of Regulation S-K disclosure pursuant to Rule 463 is not required. [Jan. 26, 2009]
645.03 Securities of a one-bank holding company are issued pursuant to an automatically effective registration statement filed in reliance on General Instruction G to Form S-4. At a later date, the company files a registration statement on Form S-1 covering an offering for cash. The reporting obligation of Rule 463 is conditioned on the effectiveness of the issuer’s first registration statement and, accordingly Regulation S-K Item 701(f) disclosure need not be provided with respect to the offering registered on Form S-1. [Jan. 26, 2009]
645.04 When a registration statement contemplates separate closings of limited partnerships to be formed in a series, the closing of each partnership in the series will be considered an “effective date” for purposes of triggering an obligation to provide disclosure pursuant to Rule 463. [Jan. 26, 2009]
645.05 If a registrant’s first filing under the Securities Act is a secondary offering, no disclosure need be provided in response to Item 701(f) of Regulation S-K since there is no use of proceeds. However, such a secondary offering would not constitute “the first registration statement filed under the Act by an issuer” for purposes of Rule 463. Accordingly, the first primary Securities Act offering by that registrant would necessitate disclosure under Item 701(f). [July 3, 2008]
645.06 Use of proceeds disclosure is required in the issuer’s first periodic report filed following the effective date of its first registration statement filed under the Securities Act, even if the registration statement covered a best-efforts offering that has not closed on the due date of that periodic report. [July 3, 2008]
645.07 On the same registration statement, in its initial public offering, a company registered X shares for sale to the public and Y shares for issuance pursuant to employee benefit plans. The Division staff agreed with the company’s analysis that it need report the use of proceeds as required by Rule 463 and Item 701(f) of Regulation S-K only for the shares sold to the public, and could omit the information relating to the employee benefit plan shares in reliance on Rule 463(d)(3). The Division staff’s response is premised on the representation that the employee benefit plan shares were originally registered for that purpose; had it been a matter of converting shares originally registered for sale to the public that remained unsold to the employee benefit purpose, this position would not apply. [July 3, 2008]
Sections 646 to 654. Rules 464 to 498 [Reserved]
Section 655. Rule 501 — Definitions and Terms Used in Regulation D
655.01 In a Regulation D offering, an owner of a mining property is selling interests in the property to investors for cash. The owner is retaining a royalty interest in the property providing the owner the right to share in a percentage of production. In computing the aggregate offering price under Rule 501(c), only the purchase price should be considered, which may include the initial cash payment, plus any subsequent payments that are fixed at the transaction date. This position reflects the fact that the royalty payments that will be made to the seller of the property as a share in future production are treated as operating expenses, rather than capitalized costs for the property. See Securities Act Release No. 6455, Question No. 32 (Mar. 3, 1983). [Jan. 26, 2009]
Section 656. Rule 502 — General Conditions to be Met
656.01 A promotional brochure that solicits investors for a proposed Regulation D offering is intended to be mailed to the members of the Thoroughbred Owners and Breeders Association, to be distributed at a sale of horses, and to be run as an advertisement in a trade journal. These activities would constitute a general solicitation in connection with the offer or sale of a security, and therefore would render those aspects of Regulation D subject to Rule 502(c) unavailable. [Jan. 26, 2009]
656.02 A corporation that has purchased securities in a Regulation D offering commences dissolution proceedings before it has received the actual stock certificates. The corporation requests the issuer to issue the certificates in the name of the corporation’s three shareholders to whom the corporation is distributing all of its assets. The Regulation D issuer may do this without violating the limitations on resale in Rule 502(d). [Jan. 26, 2009]
Sections 657 to 658. Rules 503 to 504 [Reserved]
Section 659. Rule 505 — Exemption for Limited Offers and Sales of Securities Not Exceeding $5,000,000
659.01 Rule 505 is not available to any issuer that falls within any of the disqualifications for the use of Regulation A. See Rule 505(b)(2)(iii). One such disqualification arises where the issuer or any of its directors, officers, general partners, or underwriters is subject to an order of the Commission entered under Section 15(b) of the Exchange Act, which deals with broker/dealer registration and regulation. See Rule 262(b)(3). The issuer in the case presented was a broker/dealer that was censured four years ago pursuant to a Commission order. Because that censure has no continuing force, the issuer is not “subject to an order of the Commission” and is thus not disqualified from using Rule 505. [Jan. 26, 2009]