Presentation1

AN INTRODUCTION TO PRIVATE PLACEMENTS, REGULATION D AND RULE 144.

SHARON DREWOCTOBER 22 , 2010

Corporate Practice Group

PURPOSE:

• A U T H O R I T Y D E R I V E D F R O M C O M M E R C E C L A U S E• S T O C K M A R K E T C R A S H O F 1 9 2 9 / D E P R E SSI O N• P R O T E C T U. S. I N V E S T O R S• S TAT E B LU E SKY L AW S

REQUIREMENT:A L L O F F E R S A N D SA L E O F SE C U R I T I E S F R O M A U S I SS U E R U SI N G A N Y M E A N S O R I N ST R U M E N TA L I T Y O F I N T E R S TAT E C O M M E R C E , M U S T B E R E G I ST E R E D U N L E SS S U C H O F F E R I N G O R S A L E I S E X E M P T E D F R O M R E G I S T R AT I O N U N D E R L AW.

The Securities Act of 1933

THE SECURITIES ACT OF 1933 KEY DEFINITIONS

SECURITY (1) The term ‘‘security’’ means any note, stock, treasury stock,

security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

THE SECURITIES ACT OF 1933 KEY DEFINITIONS (continued)

PERSON (2) The term ‘‘person’’ means an individual, a corporation, a partnership, an

association, a joint-stock company, a trust, any unincorporated organization, or a government or political subdivision thereof. As used in this paragraph the term ‘‘trust’’ shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security.

OFFER/SALE (3) The term ‘‘sale’’ or ‘‘sell’’ shall include every contract of sale or

disposition of a security or interest in a security, for value. The term ‘‘offer to sell’’, ‘‘offer for sale’’, or ‘‘offer’’ shall include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value. The terms defined in this paragraph and the term ‘‘offer to buy’’ as used in subsection (c) of section 5 shall not include preliminary negotiations or agreements between an issuer . . . and any underwriter or among underwriters who are or are to be in privity of contract with an issuer (or any person directly or indirectly controlling or controlled by an issuer, or under direct or indirect common control with an issuer).


ISSUER (4) The term ‘‘issuer’’ means every person who issues or proposes to

issue any security; except that with respect to certificates of deposit, voting-trust certificates, or collateral-trust certificates, or with respect to certificates of interest or shares in an unincorporated investment trust not having a board of directors (or persons performing similar functions) or of the fixed, restricted management, or unit type, the term ‘‘issuer’’ means the person or persons performing the acts and assuming the duties of depositor or manager pursuant to the provisions of the trust or other agreement or instrument under which such securities are issued; except that in the case of an unincorporated association which provides by its articles for limited liability of any or all of its members, or in the case of a trust, committee, or other legal entity, the trustees or members thereof shall not be individually liable as issuers of any security issued by the association, trust, committee, or other legal entity; except that with respect to equipment-trust certificates or like securities, the term ‘‘issuer’’ means the person by whom the equipment or property is or is to be used; and except that with respect to fractional undivided interests in oil, gas, or other mineral rights, the term ‘‘issuer’’ means the owner of any such right or of any interest in such right (whether whole or fractional) who creates fractional interests therein for the purpose of public offering. (bold emphasis added)


ACCREDITED INVESTOR The term ‘‘accredited investor’’ shall mean

a bank as defined in section 3(a)(2) whether acting in its individual or fiduciary capacity; an insurance company as defined in paragraph (13) of this subsection; an investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; a Small Business Investment Company licensed by the Small Business Administration; or an employee benefit plan, including an individual retirement account, which is subject to the provisions of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such Act, which is either a bank, insurance company, or registered investment adviser; or

any person who, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial matters, or amount of assets under management qualifies as an accredited investor under rules and regulations which the Commission shall prescribe.

Dodd-Frank Wall Street Reform and Consumer Protection Act July 21, 2010 became law

Among other things, Title IV changes the definition of accredited investor to mean someone with either personal or jointly with spouse, a net worth over a 4-year period, averaging more than $1 million; excludes residence as part of the calculation; SEC shall adjust for inflation every five years; Commission can also adjust the definition

THE SECURITIES ACT OF 1933 Exempted Securities

This means the Securities Act of 1933 does not apply to these securities: Any security issued or backed the federal or any state

government, and most bank, non-profit organization, savings and loan, some insurance products;

Intrastate sales (governed by Blue Sky laws). Most of which are modeled on Uniform Securities Act of 1956.

Preemption by the Securities Litigation Uniform Standards Act relating to “class actions”;

General right to exempt any transaction under Section 28 of the Act if appropriate and protects investors.

Section 18 general preemption over state laws for covered securities.

THE SECURITIES ACT OF 1933 Exempted Transactions

Transactions by individuals other than the issuer, underwriter or dealer;

Transactions not involving any public offering (private placements);

Transactions by dealers (with a long list of conditions);

Brokers transactions by instructions of private person;

Issuer sales to accredited investors not exceeding $5M.

Otherwise must file a registration statement.

FEDERAL REGULATION D

MANTRA: “ANY OFFER TO SELL SECURITIES MUST BE REGISTERED WITH THE SEC OR QUALIFY FOR AN EXEMPTION FROM REGISTRATION.”

Regulation D is a federal regulation codified at 17 CFR Section 230.501 et seq. Rules 504, 505 and 506 of Reg D provide conditions for exemption

from registration of issuer offers to sell securities. Issuer is required to file a Form D electronically within days of

first sale of securities under any of the Rules.

Defines Accredited Investor (as yet not updated by Dodd-Frank Act) Bank Non-profit with assets exceeding $5M

REGULATION D (CONTINUED)

Any natural person with a net worth either alone or with spouse exceeds $1M at the time of purchase of securities;

Any natural person with an income in the two past years in excess of$200k; or with spouse, in excess of $300k each of the last two years and reasonably expects that income level to be sustained in year of purchase;

Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of issuer;

Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in §230.506(b)(2)(ii); and

Any entity in which all of the equity owners are accredited investors.

REGULATION D: RULE 504

Exemption available to non-blank check companies if there is no solicitation or advertising to the public, and; Restricted Securities

(1)To qualify for exemption under this §230.504, offers and sales must satisfy the terms and conditions of §§230.501 and 230.502 (a), (c) and (d), except that the provisions of §230.502 (c) and (d) will not apply to offers and sales of securities under this §230.504 that are made: (i) Exclusively in one or more states that provide for the registration of the securities, and

require the public filing and delivery to investors of a substantive disclosure document before sale, and are made in accordance with those state provisions;

(ii) In one or more states that have no provision for the registration of the securities or the public filing or delivery of a disclosure document before sale, if the securities have been registered in at least one state that provides for such registration, public filing and delivery before sale, offers and sales are made in that state in accordance with such provisions, and the disclosure document is delivered before sale to all purchasers (including those in the states that have no such procedure); or

(iii) Exclusively according to state law exemptions from registration that permit general solicitation and general advertising so long as sales are made only to “accredited investors” as defined in §230.501(a).

(2) The aggregate offering price for an offering of securities under this §230.504, as defined in §230.501(c), shall not exceed $1,000,000, less the aggregate offering price for all securities sold within the twelve months before the start of and during the offering of securities under this §230.504, in reliance on any exemption under section 3(b), or in violation of section 5(a) of the Securities Act.


Unrestricted Securities –

The company registers the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors;

A company registers and sells the offering in a state that requires registration and disclosure delivery and also sells in a state without those requirements, so long as the company delivers the disclosure documents required by the state where the company registered the offering to all purchasers (including those in the state that has no such requirements); or

The company sells exclusively according to state law exemptions that permit general solicitation and advertising, so long as the company sells only to “accredited investors”


Limitation on aggregate offering price. The aggregate offering price for an offering of securities shall not exceed $5,000,000, less the aggregate offering price for all securities sold within the twelve months before the start of and during the offering of securities under this section in reliance on any exemption under section 3(b) of the Act or in violation of section 5(a) of the Act.

Limitation on number of purchasers. There are no more than or the issuer reasonably believes that there are no more than 35 purchasers of securities from the issuer in any offering under this section.


Limitation on number of purchasers. There are no more than or the issuer reasonably believes that there are no more than 35 purchasers of securities from the issuer in any offering under this section.

Nature of purchasers. Each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description.

RULE 144*

Safe harbor provision for the resale of restricted or controlled securities. There are five general conditions.

Holding Period. Before you may sell any restricted securities in the marketplace, you must hold them for a certain period of time. If the company that issued the securities is subject to the reporting requirements of the Securities Exchange Act of 1934, then you must hold the securities for at least six months. If the issuer of the securities is not subject to the reporting requirements, then you must hold the securities for at least one year. The relevant holding period begins when the securities were bought and fully paid for. The holding period only applies to restricted securities. Because securities acquired in the public market are not restricted, there is no holding period for an affiliate who purchases securities of the issuer in the marketplace. But the resale of an affiliate's shares is subject to the other conditions of the rule. Additional securities purchased from the issuer do not affect the holding period of previously purchased securities of the same class. If you purchased restricted securities from another non-affiliate, you can tack on that non-affiliate's holding period to your holding period. For gifts made by an affiliate, the holding period begins when the affiliate acquired the securities and not on the date of the gift. In the case of a stock option, such as one an employee receives, the holding period begins as of the date the option is exercised and not the date it is granted.

* Most material for this portion is directly from ww.sec.gov/investor/pubs/rule144.htm

RULE 144 (continued)

Adequate Current Information. There must be adequate current information about the issuer of the securities before the sale can be made. This generally means that the issuer has complied with the periodic reporting requirements of the Exchange Act.

Trading Volume Formula. If you are an affiliate, the number of equity securities you may sell during any three-month period cannot exceed the greater of 1% of the outstanding shares of the same class being sold, or if the class is listed on a stock exchange or quoted on Nasdaq, the greater of 1% or the average reported weekly trading volume during the four weeks preceding the filing a notice of sale on Form 144.

Ordinary Brokerage Transactions. If you are an affiliate, the sales must be handled in all respects as routine trading transactions, and brokers may not receive more than a normal commission.

Filing a Notice of Proposed Sale With the SEC. If you are an affiliate, you must file a notice with the SEC on Form 144 if the sale involves more than 5,000 shares or the aggregate dollar amount is greater than $50,000 in any three-month period. The sale must take place within three months of filing the Form and, if the securities have not been sold, you must file an amended notice.

RULE 144 (continued)

Non Affiliates If not (and have not been for at least three months) an affiliate of the

company issuing the securities and have held the restricted securities for at least one year, you can sell the securities without regard to the above conditions. If the issuer of the securities is subject to the Exchange Act reporting requirements and you have held the securities for at least six months but less than one year, you may sell the securities as long as you satisfy the current public information condition.

No Public Resale Available Even if you have met the conditions of Rule 144, you can't sell your

restricted securities to the public until you've gotten the legend removed from the certificate. Only a transfer agent can remove a restrictive legend. But the transfer agent won't remove the legend unless you've obtained the consent of the issuer—usually in the form of an opinion letter from the issuer's counsel—that the restricted legend can be removed. Unless this happens, the transfer agent doesn't have the authority to remove the legend and execute the trade in the marketplace.

FINAL THOUGHTS

Assume that the offer must be registered as a starting point;

Every offer/sale is different so facts matterOver disclose where possibleUse checklists when guiding clients

THE END

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