Exempt Transactions • The exempt securities above can be sold and resold without ever being subject to the section 5 registration requirements. • There are also transaction exemptions that cover only one sale; resales of the same securities might be subject to registration unless the resale is also exempt. o Integration Issuers will attempt to qualify for transaction exemptions to avoid the costs of registration. When an issuer makes several offerings fairly close together and claims that one or more are exempt, the S.E.C. might decide that the several offerings are integrated (i.e., part of a single offering), which often results in a violation of section 5. There are two ways to avoid having several offerings integrated— qualify under the S.E.C.'s general five-factor test, discussed below, or qualify for the specific "safe harbor" provision particular to the transaction ex¬emption being used. o Five-factor test -The S.E.C. will consider the following in determining whether several offerings are integrated: Whether the offerings are part of a single plan of financing; Whether the offerings involve issuance of the same class of security; Whether the offerings are made at about the same time; Whether the same type of consideration is to be received; and Whether the offerings are made for the same general purpose. o Mortgage transactions Certain mortgages initiated by regulated financial institutions and participating interests in the mortgages sold to investors are exempt. "Restricted securities" • Rule 144 defines "restricted securities" to include o (i) privately offered securities acquired from an issuer or control person; o (ii) securities issued pursuant to rules 505 or 506, or to rule 701(c) (employee benefit plans); o (iii) securities sold under rule 144A (infra); and o (iv) other securities not previously offered to the public. • Sales by control persons o Rule 144 states when and how many securities a control person may sell without making those who purchase and resell "underwriters." o The rule applies to both restricted and nonrestricted securities held by control persons. Requirements of rule 144 • The limitations of rule 144 do not apply to sales by persons who are not affiliates of the issuer and have not been so for the last three months, and who have held the securities for at least two years. • For all other sales of restricted securities, or sales by affiliates of the issuer, the following requirements must be met: o Adequate public information about the issuer Such information must be available to the public at the time of sale. o One-year holding period for restricted securities The restricted securities cannot be resold until one year after they were acquired, and this period is tolled until the initial buyer has fully paid for the securities. o Limitation on amount of securities sold During any three-month period, the volume of restricted securities, and securities held by control persons, that can be sold may not exceed the greater of: • (i) 1% of the shares of the outstanding class, • (ii) if the security is traded on an exchange, the average weekly reported volume of the security on all exchanges and/or automated securities quotations systems for the four weeks prior to the filing of a notice of sale, and • (iii) the average weekly reported volume of trading in the securities reported through the consolidated transaction reporting system during the four weeks prior to filing the notice of sale. • Limitation on manner of sale o Sales made under rule 144 must be made directly with a "market-maker" (infra) or in "broker's transactions." • Notice of intent to sell o A seller who intends to sell more than 500 shares or any number of shares for more than $10,000 must file a notice of intention with the S.E.C. • Nonexclusive rule o Rule 144 is not exclusive; sales may be made pursuant to a registration statement, another exemption, or regulation A. SECTION 4(2) PRIVATE OFFERING CONSIDERATIONS IN DETERMINING WHETHER THE PRIVATE OFFERING EXEMPTION APPLIES, CONSIDER THE FOLLOWING: • Need for protection of the 1933 Act o (if the offerees are sophisticated in investing, the exemption is more likely to apply). • Access to information o (if the offerees had a close relationship with the issuer, or the issuer gave the offerees the same type of information that would be contained in a registration statement, the exemption is more likely to apply). • Number of offerees o (if there are many offerees, the offering will likely be deemed public and not exempt regardless of any other factor). • Absence of resales o (if the securities are resold within a short time, the exemption can be destroyed). • Other factors that make the offering look "public" o (e.g., if the offering involves millions of dollars, o the securities are readily marketable, o the offerees are a diverse group, or o the offering is made through public advertising, the offering will likely be considered public and the exemption will not apply) REGULATION D EXEMPTIONS—A SUMMARY RULE 504 RULE 505 RULE 506 When is Disclosure Required When required by state law When sales made to unaccredited investors When sales made to unaccredited investors Is General Solicitation Permitted Generally No, except in some circumstance where state law is followed NO NO Are Re sales Limited Yes, except in some circumstances where state law is followed YES YES Are there Price Limitations YES – 1M during any 12 month period YES – 5M during any 12 month period NO Are there limitations on the number of buyers NO YES – no more than 35 unaccredited buyers…unlimited accredited buyers YES – no more than 35 unaccredited buyers (who must be sophisticated in financial matters; any number of accredited buyers KEY POINTS OF RULE 147—A SUMMARY INTEGRATION SAFE HARBOR o Sales of other securities are ignored if they occur six months or more before or after the rule 147 offering. COMING TO REST o Securities will be deemed to have come to rest within a state if no sales are made to nonresidents during the time the securities are being issued or within nine months after the last sale by the issuer. TRIPLE 80% PLUS PRINCIPAL OFFICE TEST o An issuer will be considered to be doing business in a state if its principal office is in the state and: o At least 80% of its gross revenues are derived from business in the state; and o At least 80% of its assets are held in the state; and o At least 80% of the proceeds from issuance of the securities are used in the state. RESIDENCE o Under rule 147, an individual's residence is determined objectively, by the location of the individual's primary residence, rather than by the individual's domicile, which is determined by subjective intent. CHECKLIST OF RULE 144 REQUIREMENTS UNDER RULE 144 -PURCHASERS MAY RESELL THEIR SECURITIES WITHOUT VIOLATING THE 1933 ACT, IF THE FOLLOWING CRITERIA ARE SATISFIED: • NOT BEEN A CONTROL PERSON o Is the sale by a person who has not been a control person for the last three months, and o who has held the securities for at least two years? If so, the securities may be freely resold. If not, the remaining issues should be checked. • PUBLIC HAVE ADEQUATE INFORMATION o Does the public have adequate information about the issuer, either through reports filed under the 1934 Act or from voluntary disclosure? • SECURITIES ARE RESTRICTED o If the securities are restricted, have they been held for at least one year since they were acquired from the issuer and fully paid for? • VOLUME LIMITATIONS o Have sales subject to rule 144 by any one person exceeded the following volume limitations over any three-month period? 1% of the shares of the outstanding class of securities in question. The average weekly trading volume for the security, if traded on a national exchange or in NASDAQ, for the four weeks prior to filing a notice of sale. The average weekly trading volume for the security reported through the consolidated transaction reporting system contemplated by rule HAa3-l of the 1934 Act. • MANNER OF SALE o Is the manner of the sale (by broker or market maker) proper (the seller generally may not solicit orders or pay a commission to anyone other than the broker, or the broker may not do more than execute the sale for the customary commission or solicit orders to buy, and must make reasonable inquiry to ensure that the seller has the right to sell without registering)? • NOTICE OF INTENTION TO SELL o If the seller intends to sell more than 500 shares or any number of shares for more than $10,000, has a notice of intention to sell been filed with the S.E.C.?