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Securities Act Sections

Last Update: March 4, 2011

These Compliance and Disclosure Interpretations (“C&DIs”) comprise the Division’s interpretations of the Securities Act Sections. Some of these C&DIs were first published in prior Division publications and have been revised in some cases. The bracketed date following each C&DI is the latest date of publication or revision.

QUESTIONS AND ANSWERS OF GENERAL APPLICABILITY

Section 101. Securities Act Section 2(a)(1)

None

Section 102. Securities Act Section 2(a)(2) [Reserved]

Section 103. Securities Act Section 2(a)(3)

Question 103.01

Question: If a company declares a dividend that is payable in either cash or securities at the election of the recipients, does the declaration of the dividend need to be registered under the Securities Act?

Answer: No, as there is no sale of the dividend shares under the Securities Act. [Nov. 26, 2008]

Question 103.02

Question: Does a transfer of restricted securities from a person’s employee benefit plan account to the person’s IRA need to be registered?

Answer: No, because there is no sale. The transfer does not effect a change in the beneficial ownership of the securities. [Nov. 26, 2008]

Question 103.03

Question: A shelf registration statement is filed for the sale of preferred stock. The issuer contemplates that some of the preferred stock may be issued at a later date in a series that permits immediate conversion of the preferred into common stock. Must the issuer register the common stock on the shelf registration statement at the time of effectiveness?

Answer: No. When this series of convertible preferred stock is to be offered at a later date, however, the common stock underlying it would have to be registered in a separate registration statement (unless the conversion is exempt, e.g., under Securities Act Section 3(a)(9)). An alternative would be for the shelf registration statement at the outset to include a sufficient amount of common stock to cover the issuance pursuant to the convertible series. (N.B.: A separate registration statement would not be necessary if the issuer was eligible to file, and did file, an automatic shelf registration statement at the outset and the common stock was subsequently included on the automatic shelf registration statement.) [Nov. 26, 2008]

Question 103.04

Question: Where the offer and sale of convertible securities or warrants are being registered under the Securities Act, and such securities are convertible or exercisable within one year, must the underlying securities be registered at that time?

Answer: Yes. Because the securities are convertible or exercisable within one year, an offering of both the overlying security and underlying security is deemed to be taking place. If such securities are not convertible or exercisable within one year, the issuer may choose not to register the underlying securities at the time of registering the convertible securities or warrants. However, the underlying securities must be registered no later than the date such securities become convertible or exercisable by their terms, if no exemption for such conversion or exercise is available. Where securities are convertible only at the option of the issuer, the underlying securities must be registered at the time the offer and sale of the convertible securities are registered since the entire investment decision that investors will be making is at the time of purchasing the convertible securities. The security holder, by purchasing a convertible security that is convertible only at the option of the issuer, is in effect also deciding to accept the underlying security. [Aug. 14, 2009]

Sections 105 to 109. Securities Act Sections 2(a)(5) to 2(a)(9) [Reserved]

Section 104. Securities Act Section 2(a)(4)

Question 104.01

Question: When a statutory trust registers the offer and sale of beneficial units in multiple series, or a limited partnership registers the offer and sale of limited partnership interests in multiple series, on a single registration statement, should each series be treated as a separate registrant?

Answer: No. Even though a series of beneficial units or limited partnership interests may represent interests in a separate or discrete set of assets – and not in the statutory trust or limited partnership as a whole – unless the series is a separate legal entity, it cannot be a co-registrant for Securities Act or Exchange Act purposes. For these types of offerings, the disclosure in the Securities Act registration statement or Exchange Act report should be presented on a series basis, including series-level (1) financial statements and audit opinions, (2) business and property descriptions, (3) risk factor disclosure, and (4) evaluations and disclosure about the effectiveness of disclosure controls and procedures and internal controls and procedures. In addition, materiality determinations generally should be made at the series level. While the “Controls and Procedures” section of the periodic report (Item 9A in the 10-K and Item 4 in the 10-Q) should clarify that the scope of the evaluation and disclosure covers each series individually, as well as the registrant as a whole, the certifications required by Exchange Act Rule 13a-14(a) or 15d-14(a) may not be modified and must be made in the form required. [Apr. 24, 2009]

Section 110. Securities Act Section 2(a)(10)

Question 110.01

Question: Section 2(a)(10) of the Securities Act sets forth the definition of “prospectus.” Clause (a) of Section 2(a)(10) provides an exception from the definition of “prospectus” for a communication that is sent or given after the effective date of the registration statement if “it is proved that prior to or at the same time with such communication a written prospectus meeting the requirements of subsection (a) of Section 10 at the time of such communication was sent or given to the person to whom the communication was made.” Is Rule 172 available to satisfy the condition to the exception in clause (a) of Section 2(a)(10) that the Section 10(a) prospectus be “sent or given to the person to whom the communication was made”?

Answer: No. Rule 172 provides that a final Section 10(a) prospectus will be deemed to precede or accompany the carrying or delivery of a security for sale for purposes of Securities Act Section 5(b)(2) and provides a conditional exemption from Securities Act Section 5(b)(1) for written confirmations and notices of allocations. Rule 172 does not provide a means to satisfy the “sent or given” language in clause (a) of Section 2(a)(10). As the Commission stated in Securities Act Release No. 8591 (Jul. 19, 2005), in footnote 561, “a final prospectus only filed as provided in Rule 172 will not be considered to be sent or given prior to or with a written offer within the meaning of clause (a) of Securities Act Section 2(a)(10).” [Nov. 26, 2008]

Section 111. Securities Act Section 2(a)(11)

Question 111.01

Question: Securities Act Rule 415(a)(4) was amended in 2005 to permit an issuer to register an at-the-market offering of equity securities without identifying an underwriter in its registration statement and without a limitation on the amount of the offering. Did this amendment also change the Commission's interpretation, as set forth in Securities Act Release No. 6334 (Aug. 6, 1981), that "any market professional — a market maker, specialist, or ordinary broker-dealer — who purchases a registered security as principal from the registrant or who sells that security for the registrant as agent ordinarily would be deemed a statutory underwriter under Section 2[(a)](11) of the Securities Act even in the absence of a specific written agreement between the issuer and that market professional"?

Answer: No. [June 4, 2010]

Sections 112 to 117. Securities Act Sections 2(a)(12) to Section 2A [Reserved]

Section 118. Securities Act Section 3(a)(2)

None

Section 119. Securities Act Section 3(a)(3)

None

Sections 120 to 121. Securities Act Sections 3(a)(4) to 3(a)(5) [Reserved]

Section 122. Securities Act Section 3(a)(6)

None

Sections 123 and 124. Securities Act Sections 3(a)(7) and 3(a)(8) [Reserved]

Section 125. Securities Act Section 3(a)(9)

Question 125.01

Question: Preferred stock will be issued in a Section 3(a)(9) exchange, and dividends on the preferred will be paid in either additional stock or cash, at the company’s option. Will the issuance of any additional stock paid as dividends also be exempt?

Answer: Yes. [Nov. 26, 2008]

Question 125.02

Question: Is the Section 3(a)(9) exemption available for the issuance of securities of one issuer to the holders of debt securities of another issuer if the obligation on such debt securities of the other issuer has been fully and unconditionally assumed by the issuer of the new securities?

Answer: Yes. Once the issuer has fully and unconditionally assumed the obligations on the debt securities of the other issuer, the transaction becomes the exchange of that obligation for the new security of the issuer with its existing security holders. [Nov. 26, 2008]

Question 125.03

Question: Section 3(a)(9) is not available if any commission or other remuneration is paid for soliciting the exchange. An issuer proposes to use the services of a proxy solicitor in connection with an exchange transaction. Would Section 3(a)(9) be available for the transaction?

Answer: Yes, but only if the services of the solicitor are ministerial and involve no recommendation with respect to the proposed exchange or encouragement to vote in a particular manner. [Nov. 26, 2008]

Question 125.04

Question: Would Section 3(a)(9) be available for the conversion of preferred stock into common stock if a condition of the conversion is the waiver of accrued but unpaid dividends on the preferred stock?

Answer: Yes. The waiver of accrued but unpaid dividends would not make the exemption unavailable. [Nov. 26, 2008]

Question 125.05

Question: A subsidiary has outstanding a class of debentures guaranteed by its parent. The subsidiary proposes to offer a new debenture in exchange for the guaranteed debenture. The new debenture will not be guaranteed by its parent. Will the Section 3(a)(9) exemption be available for the exchange?

Answer: No, because the proposed exchange of the parent guarantee for the subsidiary’s debt involves two different issuers. [Nov. 26, 2008]

Question 125.06

Question: An issuer proposes to retain a third party for the purpose of consulting with institutional investors as to what they would consider to be an acceptable exchange offer. Would the issuer satisfy the condition of Section 3(a)(9) that “no commission or other remuneration be paid or given directly or indirectly for soliciting such exchange” if it paid such third party?

Answer: No. Accordingly, Section 3(a)(9) would not be available. For examples of the types of activities of a third party, such as a financial advisor, that are consistent with the Section 3(a)(9) exemption, see the Seaman Furniture Co., Inc. no-action letter (Oct. 10, 1989) issued by the Division. [Apr. 24, 2009]

Question 125.07

Question: An issuer proposes to conduct a going private issuer tender offer in which it will offer debt securities for its outstanding common stock. Would the issuer be precluded from relying on the exemption from registration provided by Section 3(a)(9) for the issuance of the debt securities simply because it pays an investment banker’s fee for a fairness opinion on the terms of the transaction?

Answer: No. In order to constitute the disqualifying type of remuneration or commission specified in Section 3(a)(9), the remuneration must be paid or given for soliciting the exchange of securities. Payment of a fee for an investment banker’s opinion as to the fairness of the transaction is not considered to be a fee paid for soliciting the exchange of securities. It should be noted, however, that if the investment banker is also conducting soliciting activities, the Section 3(a)(9) exemption would not be available. [Nov. 26, 2008]

Question 125.08

Question: When securities are exchanged for other securities of the issuer under Section 3(a)(9), do the securities received assume the character of the exchanged securities?

Answer: Yes. For example, if restricted securities are exchanged, the new securities are deemed to be restricted securities and tacking of the holding period of the former securities is permitted. [Nov. 26, 2008]

Question 125.09

Question: Rule 415 applies to registered offerings made on an immediate, delayed or continuous basis. 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 where the Section 3(a)(9) exemption is unavailable (for example, where securities are convertible into securities of another issuer, where conversion terms require that the shareholder pay consideration at the time of conversion, or where conversion arrangements involve the payment of compensation for soliciting the conversion) and absent another exemption, which part of Rule 415 is applicable?

Answer: Rule 415(a)(1)(iv). [Nov. 26, 2008]

Question 125.10

Question: U.S. issuers acquiring Canadian companies often use an offering structure designed to allow Canadian security holders of the acquired business to defer a tax event in the sale of those securities. Canadian law will currently tax the disposition of shares in a Canadian enterprise through a business combination, but provides an exemption where the consideration is paid in securities of another Canadian issuer. To allow Canadian shareholders to qualify for this tax deferral, U.S. issuers have effected acquisitions with the shares of a Canadian subsidiary whereby holders of common shares in the Canadian subsidiary indirectly share the same dividend, liquidation, and voting rights as held by common stockholders of the U.S. parent. The Canadian subsidiary's shares also carry the right to convert into shares of the U.S. parent. May the U.S. parent rely on Securities Act Section 3(a)(9) to exempt the conversion of subsidiary shares into parent shares?

Answer: No. Section 3(a)(9) exempts from registration exchanges of securities by the issuer exclusively with its own security holders. By its terms, the exemption is not available for issuer exchanges of its securities with the security holders of another person, even including security holders of a subsidiary. Notwithstanding other similarities between the parent and subsidiary shares, ownership of a subsidiary's securities in this fact pattern intrinsically represents an ownership interest in the subsidiary that is not directly shared by security holders of the parent. As a result, conversion to the parent's securities cannot satisfy the "same-issuer" requirement of Section 3(a)(9). [Aug. 14, 2009]

Question 125.11

Question: A company is structuring a pre-packaged bankruptcy. Prior to the bankruptcy filing, may the company rely on Section 3(a)(9) for a solicitation of security holders, and then, following the bankruptcy filing, complete the exchange pursuant to the registration exemption in Section 1145 of the Bankruptcy Code?

Answer: Yes. In this instance, the company would need to file a Form T-3 before commencing the pre-bankruptcy filing solicitation. [June 4, 2010]

Section 126. Securities Act Section 3(a)(10)

See Staff Legal Bulletin No. 3A.

Section 127. Securities Act Section 3(a)(11)

Question 127.01

Question: A Section 3(a)(11) offering generally is public in nature. Are securities acquired in such an offering “restricted securities” under Rule 144(a)(3)?

Answer: No. [Nov. 26, 2008]

Question 127.02

Question: If an issuer plans to conduct an intrastate offering pursuant to the Section 3(a)(11) exemption, may the issuer engage in general advertising or a general solicitation?

Answer: There is no prohibition in Securities Act Rule 147 regarding general advertising or general solicitation. Any such general advertising or solicitation, however, must be conducted in a manner consistent with the requirement that offers made in reliance on Section 3(a)(11) and Rule 147 be made only to persons resident within the state or territory of which the issuer is a resident. [Nov. 26, 2008]

Section 128. Securities Act Section 3(a)(12)

None

Sections 129 to 133. Securities Act Sections 3(a)(13) to Section 4(1) [Reserved]

Section 134. Securities Act Section 4(2)

Question 134.01

Question: Can a registration statement for a secondary offering be filed if the securities to be offered pursuant to the registration statement have not yet been sold to the selling security holders?

Answer: No. When the primary sale will be made in reliance upon the Section 4(2) exemption, having a registration statement for resale on file before the private offering takes place would cast doubt upon the validity of the exemption because distribution is clearly contemplated. Also, the registration of a secondary offering under such circumstances may call into question whether the offering is a genuine secondary. The resale registration statement may be filed if securities are privately placed, with the closing of the private placement contingent on filing or effectiveness of a resale registration statement. At the time of filing the registration statement, the purchasers in the private placement must be irrevocably bound to purchase the securities subject only to the filing or effectiveness of the registration statement or other conditions outside their control, and the purchase price must be established at the time of the private placement. The purchase price cannot be contingent on the market price at the time of effectiveness of the registration statement. [Nov. 26, 2008]

Question 134.02

Question: A company with a pending registration statement intends to withdraw the registration statement and immediately thereafter complete the same offering without registration in reliance upon the Section 4(2) private offering exemption. Is this consistent with Section 5 of the Securities Act?

Answer: No. The filing of a registration statement for a specific securities offering (as contrasted with a generic shelf registration) constitutes a general solicitation for that securities offering, thus rendering Section 4(2) unavailable for the same offering. As the Commission noted in Securities Act Release No. 8828 (Aug. 3, 2007), in footnote 122, “the Commission or a court could find a violation of Section 5 where a company begins an offering as a private placement and seeks to complete that offering pursuant to a registration statement, or where a company commences a registered offering and seeks to complete that offering through a private placement, except in those circumstances specified in Securities Act Rule 155.” [Nov. 26, 2008]

Question 134.03

Question: A company proposes to file a registration statement to register issuances of securities to purchasers who committed to purchase securities from the issuer before the filing of the registration statement on the condition that the securities be registered before issuance. Can the company register the issuance of securities to purchasers as a primary offering?

Answer: No. It appears that the purpose of this procedure is to provide the purchasers with registered (rather than restricted) securities. This procedure is not consistent with the registration provisions of the Securities Act, which cover offers and sales of securities, not issuances. In this situation, it appears that the offers were made and the commitments obtained before filing in reliance upon the Section 4(2) private placement exemption. If so, the registration statement should cover resales by the purchasers, not issuances to the purchasers, provided that the purchasers have become irrevocably bound to acquire the securities prior to the filing of the registration statement subject only to conditions outside their control and the purchase price is established at the time of the private placement and is not contingent on the market price at the time of effectiveness of the registration statement. [Nov. 26, 2008]

Section 135. Securities Act Section 4(3)

None

Section 136. Securities Act Sections 4(4)

None

Sections 137 to 138. Securities Act Sections 4(5) to 4(6) [Reserved]

Section 139. Securities Act Section 5

Question 139.01

Question 139.02

Question: Is an issuer required to file new powers of attorney with respect to the signatures in a new registration statement?

Answer: Yes. [Nov. 26, 2008]

Question 139.03

Question: Can an issuer issue shares as a prize or award to employees without registration under the Securities Act?

Answer: While the issuance of small numbers of shares as prizes or awards to employees may be made without Securities Act registration, if such awards are tied to the achievement of specific goals (e.g., sales goals) by individual employees, an offer or sale requiring registration may be involved. When tied to the achievement of specific goals, the share awards may, in fact, constitute compensation for services performed or to be performed by the employees that would amount to a disposition of the shares for value and a “sale” of the shares to the employees. [Nov. 26, 2008]

Question 139.04

Question: An issuer has closed a blind pool/blank check offering. When must the issuer file a post-effective amendment to its registration statement pursuant to Securities Act Rule 419(d) to describe an operating business that will be acquired?

Answer: The issuer should file a post-effective amendment as soon as it becomes reasonably probable that the operating business will be acquired. The issuer should not wait until the acquisition has been consummated. The obligation to file a post-effective amendment is in addition to the obligation to file Forms 8-K to report both the entry into a material non-ordinary course agreement and the completion of the transaction. See Securities Act Release No. 8587 (Jul. 15, 2005). (Note: This interpretation does not apply to real estate offerings subject to Industry Guide 5, which has separate provisions regarding the acquisition of property.) [Nov. 26, 2008]

Question 139.05

Question: The offer and sale of underwriters’ warrants often are registered along with the public offering for which the warrants constitute underwriters’ compensation. When the underwriters’ warrants are registered, must the securities underlying those warrants also be registered?

Answer: If the warrants are exercisable within one year, the securities underlying those warrants must be registered. If the warrants are not exercisable for more than one year, there is not deemed to be a concurrent offering of the underlying securities and the offer and sale of those securities need not be registered along with the underwriters’ warrants. If the offer and sale of the underlying securities were registered initially, then due to the unique nature of underwriters’ warrants, the issuer should file a post-effective amendment to the original registration statement for the resales of the securities using any form for which the registrant then qualifies. If the underlying securities were not registered initially, a new registration statement must be filed for the resales of the underlying securities. [Nov. 26, 2008]

Question 139.06

Question 139.07

Question: Under Securities Act Rule 153, brokers or dealers effecting transactions on a national securities exchange, through a trading facility of a national securities association, or through a registered alternative trading system are deemed to satisfy their prospectus delivery obligations to each other (but not to purchasers other than brokers or dealers) under Securities Act Section 5(b)(2) if they meet the conditions of the rule. May a broker or dealer rely on Rule 153 for transactions effected in a security admitted with unlisted trading privileges on or through an exchange (or facility thereof), a trading facility of a national securities association, or an alternative trading system?

Answer: Yes. [Nov. 26, 2008]

Question 139.08

Question 139.09

Question 139.10

Question: A company privately placed convertible securities in reliance on the exemption provided by Section 4(2). The company agreed to file a registration statement within two months after the private placement closing to register the resale of the common stock issuable on conversion of the convertible securities. The securities were convertible into common stock using a conversion ratio based on the company’s common stock trading price at the time of conversion. Can the company use Form S-3 to register the resale of the common stock prior to conversion? Can the company use Rule 416 to register for resale an indeterminate number of shares that it may issue due to the operation of the conversion formula?

Answer: If the company satisfies the Form S-3 registrant eligibility requirements and the offering satisfies the Form’s secondary offering requirements, the company may use Form S-3 to register, prior to the conversion, the resale of the common stock issuable upon conversion of the outstanding convertible securities. The company may not use Rule 416 to register for resale an indeterminate number of shares resulting from operation of the conversion formula. Rule 416 does not apply by its terms in these circumstances, because the floating conversion rate is not “similar” to an anti-dilution provision. Instead, the company must make a good-faith estimate of the maximum number of shares that it may issue on conversion to determine the number of shares to register for resale. If the number of registered shares is less than the actual number issued, the company must file a new registration statement to register the additional shares, assuming the selling securityholder desires to sell those additional shares. It may use Rule 462(b), if available, for this purpose.

The selling securityholder information in the registration statement, at the time of effectiveness, must include the total number of shares of common stock that each selling securityholder intends to sell (based on current market price if there is a floating conversion rate tied to market price), regardless of any contractual or other restriction on the number of securities a particular selling securityholder may own at any point in time. As the selling securityholders resell shares of common stock following conversion, the company must file prospectus supplements, as necessary, to update the disclosure of the number of shares that each selling securityholder intends to sell, reflecting prior resales. The plan of distribution in the prospectus filed as part of the registration statement must specify, in compliance with Item 508 of Regulation S-K, how each selling securityholder intends to dispose of the securities it receives on conversion. [Nov. 26, 2008]

Question 139.11

Question: A company privately placed convertible securities in reliance on the exemption provided by Section 4(2), but has not yet issued some or all of the convertible securities. The company agreed to file a registration statement within two months after the private placement closing to register the resale of the common stock issuable on conversion of the convertible securities. The securities were convertible into common stock using a conversion ratio based on the company’s common stock trading price at the time of conversion. Can the company use Form S-3 to register the resale of the common stock prior to conversion?

Answer: Unless the transaction involving the issuance of the convertible security meets the conditions under which a company may file a registration statement for resale of privately placed securities before their actual issuance (commonly known as a “PIPE,” or private-investment, public-equity transaction, as discussed below), the registration for resale of the common stock underlying the unissued convertible security would not be viewed as a valid secondary offering. Instead, the transaction would be treated as an indirect offering by the issuer, and thus a primary offering, with the investor being identified in the registration statement as an “underwriter.” In such circumstances, the registration statement may not use the phrase “may be an underwriter.” Instead, the disclosure in the registration statement must state that the investor “is an underwriter.” As a result, the company may register on Form S-3 the resale of the underlying common stock, or the convertible security itself, only if the company is eligible to use that Form for a primary offering. In addition, if the company continues to sell privately additional convertible securities after it has filed the registration statement for the securities underlying the previously sold convertible securities, the continuation of the same offering may call into question the Section 4(2) exemption generally claimed for the entire convertible securities offering.

In a PIPE transaction, a company will be permitted to register the resale of securities prior to their issuance if the company has completed a Section 4(2)-exempt sale of the securities (or in the case of convertible securities, of the convertible security itself) to the investor, and the investor is at market risk at the time of filing of the resale registration statement. The investor must be irrevocably bound to purchase a set number of securities for a set purchase price that is not based on market price or a fluctuating ratio, either at the time of effectiveness of the resale registration statement or at any subsequent date. When a company attempts to register for resale shares of common stock underlying unissued, convertible securities, the PIPE analysis applies to the convertible security, not to the underlying common stock. There can be no conditions to closing that are within an investor’s control or that an investor can cause not to be satisfied. For example, closing conditions in capital formation transactions relating to the market price of the company’s securities or the investor’s satisfactory completion of its due diligence on the company are unacceptable conditions. The closing of the private placement of the unissued securities must occur within a short time after the effectiveness of the resale registration statement. [Nov. 26, 2008]

Question 139.12

Question: What is an equity line financing?

Answer: In a typical “equity line” financing arrangement, an investor and the company enter into a written agreement under which the company has the right to put its securities to the investor. Under this put, the company has the right to tell the investor when to buy securities from the company over a set period of time and the investor has no right to decline to purchase the securities. The dollar value of the equity line is set in the written arrangement, but the number of shares that the company will actually issue is determined by a formula tied to the market price of the securities at the time the company exercises its put. [Nov. 26, 2008]

Question 139.13

Question: When may a company file a registration statement for the resale by the investors of securities sold in a private equity line financing?

Answer: In many equity line financings, the company will rely on the private placement exemption from registration to sell the securities under the equity line and will then register the “resale” of the securities sold in the equity line financing. In these types of equity line financings, the delayed nature of the puts and the lack of market risk resulting from the formula price differentiate private equity line financings from financing PIPEs (private investment, public equity). We, therefore, analyze private equity line financings as indirect primary offerings.

While we analyze private equity line financings as indirect primary offerings, we recognize that the “resale” form of registration is sought in these financings. As such, we will permit the company to register the “resale” of the securities prior to its exercise of the put if the transactions meet the following conditions:

the company must have “completed” the private transaction of all of the securities it is registering for “resale” prior to the filing of the registration statement;

the “resale” registration statement must be on the form that the company is eligible to use for a primary offering; and

in the prospectus, the investor(s) must be identified as underwriter(s), as well as selling shareholder(s). [Nov. 26, 2008]

Question 139.14

Question: If the conditions in the answer to Securities Act Sections Question 139.13 are not met, can the company register the “resale” of the securities in a private equity line financing?

Answer: As a general matter, no. However, if the following conditions are met, the company may register the “resale” transaction, as these conditions address our concerns regarding inappropriate use of shelf registration and liability for potential violations of Securities Act Section 5.

The company is eligible to use Form S-3 or Form F-3 for a primary offering of securities.

The company complies with Rule 415(a)(4).

The company addresses, in the prospectus, issues relating to the potential violation of Section 5 in connection with the private transaction.

If the preceding three conditions are not met, the company must withdraw the registration statement and complete the private transaction. [Nov. 26, 2008]

Question 139.15

Question: For the private transaction to be “complete” in a private equity line financing, the investor must be irrevocably bound to purchase all the securities. How does this apply to the company’s put?

Answer: Only the company can have the right to exercise the put and, except for conditions outside the investor’s control, the investor must be irrevocably bound to purchase the securities once the company exercises the put. [Nov. 26, 2008]

Question 139.16

Question: If the investor is permitted to transfer its obligations under the equity line, will the transaction be “completed”?

Answer: No, because the investor is not irrevocably bound. [Nov. 26, 2008]

Question 139.17

Question: If the investor has the ability to make investment decisions under the equity line agreement after the filing of the “resale” registration statement, the investor will not be considered irrevocably bound. What are some elements or conditions that are viewed as continuing to provide the investor with an investment decision?

Answer: Examples that we have observed include:

agreements that give investors the right to acquire additional securities (including the right to acquire additional securities through the exercise of warrants) at the same time or after the issuer exercises its put;

agreements that permit the investor to decide when or at what price to purchase the securities underlying the put; and

agreements with termination provisions that have the effect of causing the investor to no longer be irrevocably bound to purchase the securities underlying the put. [Nov. 26, 2008]

Question 139.18

Question: Is a “due diligence out” a condition to closing within the investor’s control that would prevent the private transaction from being “completed” in a private equity line financing?

Answer: Yes. [Nov. 26, 2008]

Question 139.19

Question: Are conditions to closing such as “bring downs” of customary representations or warranties and customary clauses regarding no material adverse changes affecting the company within the investor’s control that would prevent the private transaction from being “completed” in a private equity line financing?

Answer: No. [Nov. 26, 2008]

Question 139.20

Question: If the company may put securities other than the shares of common stock being registered for “resale,” such as a derivative security convertible into common stock (e.g., a convertible note or a convertible preferred security), would the private transaction be considered “completed” in a private equity line financing?

Answer: No. This is because the investor may have further investment decisions to make regarding the purchase of securities underlying the derivative security and will, therefore, not be irrevocably bound to purchase the securities that are being registered for “resale.” [Nov. 26, 2008]

Question 139.21

Question: How does a company register, as a primary offering (rather than as a “resale” registration in a private equity line financing), the issuance of the put securities under an equity line?

Answer: An equity line financing done as a primary offering in which the put price is based on or at a discount to the underlying stock’s market price at the time of the put exercise is an “at the market” offering under Rule 415(a)(4) and must comply with the requirements of that rule. Further, to register the primary offering, the company must be eligible to register primary offerings on Form S-3 in reliance on General Instruction I.B.1 or General Instruction I.B.6 of such form or on Form F-3 in reliance on General Instruction I.B.1 or General Instruction I.B.5 of such form. In addition, if a company is relying on General Instruction I.B.6 of Form S-3 or on General Instruction I.B.5 of Form F-3, the total amount of securities issuable under the equity line agreement may represent no more than one-third of the company’s public float at the time of execution of the equity line agreement. [Nov. 26, 2008]

Question 139.22

Question: In a resale registration statement for equity line financings, must the investor be identified as an underwriter? Is it appropriate to name the underwriter or underwriters in a prospectus supplement?

Answer: Yes to both questions. The registration statement must identify the investor, in addition to the registered broker-dealer, as an underwriter in the base prospectus, a post-effective amendment or a prospectus supplement. [Nov. 26, 2008]

Question 139.23

Question: When may a company that has entered into a privately placed equity line rely on General Instruction I.B.6 of Form S-3 to register securities issuable under the equity line agreement?

Answer: A company may rely on General Instruction I.B.6. to register on Form S-3 the indirect primary/resale offering of common stock issuable under a privately placed equity line financing only if the company is otherwise eligible to use General Instruction I.B.6 and the total amount of securities issuable under the privately placed equity line agreement represents no more than one-third of the company’s public float at the time of execution of the equity line agreement. Because the sale of all the securities to the investor occurs when the company and the investor enter into the private equity line agreement, the company and the investor need to determine, at that time, whether the maximum number of securities issuable under the equity line are no more than the one-third cap under General Instruction I.B.6. In making such a determination, the company would determine its public float as of a date within 60 days prior to entering into the equity line agreement. [Nov. 26, 2008]

Question 139.24

Question: For purposes of reliance on General Instruction I.B.6 for a privately placed equity line financing, how does the company calculate the 12 calendar month period?

Answer: While the date of entry into the equity line agreement determines the ability of the company rely on General Instruction I.B.6 to register the indirect primary/resale offering of all the securities issuable under the equity line agreement on Form S-3, the actual distribution of these securities to the public does not commence until the effectiveness of the resale registration statement. Thus, for purposes of calculating the 12 calendar month period under General Instruction I.B.6, the period commences from the date of effectiveness of the resale registration statement. A company would not be able to register or offer additional securities on Form S-3 in reliance on General Instruction I.B.6 for such 12 calendar month period unless the company’s public float has increased since the effectiveness of the registration statement on Form S-3. Of course, a company would not be limited from entering into additional agreements and registering resales or registering primary offerings on Form S-1. [Nov. 26, 2008]

Question 139.25

Question: Does the five-factor integration analysis in Securities Act Rule 502(a) apply to the situation in which an issuer is conducting concurrent private and public offerings?

Answer: No. The Commission’s integration guidance in Securities Act Release No. 8828 (Aug. 3, 2007) sets forth a framework for analyzing potential integration issues in the specific situation of concurrent private and public offerings. The guidance clarifies that, under appropriate circumstances, there can be a side-by-side private offering under Securities Act Section 4(2) or the Securities Act Rule 506 safe harbor with a registered public offering without having to limit the private offering to qualified institutional buyers and two or three additional large institutional accredited investors, as under the Black Box (June 26, 1990) and Squadron, Ellenoff (Feb. 28, 1992) no-action letters issued by the Division, or to a company’s key officers and directors, as under our so-called “Macy’s” position. The filing of the registration statement does not eliminate the company’s ability to conduct a concurrent private offering, whether it is commenced before or after the filing of the registration statement. This guidance does not negate the five-factor integration analysis outlined in Securities Act Release No. 4552 (Nov. 6, 1962) and in Rule 502(a), which should be used to test whether two or more otherwise exempt offerings should be treated as a single offering to determine whether an exemption is available.

Specifically, the Commission’s guidance focuses on how the investors in the private offering are solicited – whether by the registration statement or through some other means that would not otherwise foreclose the availability of the Section 4(2) exemption. If the investors in the private offering become interested in the private offering by means of the registration statement, then the registration statement will have served as a general solicitation for the securities being offered privately and Section 4(2) would not be available. On the other hand, if the investors in the private offering become interested in the private offering through some means other than the registration statement – for example, there is a substantive, pre-existing relationship between the investors and the company – then the registration statement would not have served as a general solicitation for the private offering and Section 4(2) would be available, assuming the offering is otherwise consistent with the exemption. Hence, there would be no integration of the private offering with the public offering.

In short, in the specific situation of concurrent public and private offerings, only the guidance set forth in the Securities Act Release No. 8828 applies. [Nov. 26, 2008]

Question 139.26

Question: An issuer and underwriter contemplate conducting an electronic offering by soliciting conditional offers, such as through a modified Dutch auction, prior to effectiveness of the registration statement. What safeguards should the issuer and underwriter implement to comply with Section 5 of the Securities Act?

Answer: While a pre-effective conditional offer is not prohibited by Section 5, a pre-effective sale is prohibited by Section 5(a). An offering involving conditional offers must be structured such that a conditional offer is not in substance a sale. A conditional offer will generally not be deemed a sale if the offeree has not paid any consideration for the securities and has a meaningful opportunity to withdraw the offer after effectiveness of the registration statement. Consideration will not be deemed to have been paid if an underwriter in the offering requires new customers that will submit conditional offers in the offering to comply with the underwriter’s standard minimum account funding requirements that are not based on the specific offering.

A meaningful opportunity to withdraw would include the communication of a reasonable notice of important offering milestones, such as the filing of a request for effectiveness and the granting of effectiveness, a reasonable notice of material changes to the offering disclosure, and a final notice of the opportunity to withdraw at least one hour prior to acceptance of conditional offers. This final notice may be communicated prior to pricing, but pricing must occur prior to acceptance of any conditional offers. In addition, an offeree generally should be required to affirmatively reconfirm a conditional offer if there is a material change to the Section 10 prospectus available at the time of the original conditional offer, the offering prices below or more than 20% above the price range in the prospectus, or more than 15 days elapse between the submission of the conditional offer and acceptance.

The issuer and underwriter should also make sure that pre-acceptance communications do not violate Section 5(b)(1). Assuming the Section 10 compliant preliminary prospectus is available prior to the time conditional offers are solicited, a description of the offering procedures, offering milestones and account opening instructions, such as on a website, will generally not be “offers” for purposes of Section 5(b)(1), to the extent permitted by Rule 134. [Apr. 24, 2009]

Question 139.27

Question: A company completes a private placement of securities in reliance on the Section 4(2) exemption and then files a registration statement for the resale of the privately-placed securities. After the filing of the registration statement but prior to its effectiveness, the company commences and completes a second private placement that is consistent with the interpretive guidance on general solicitation provided in Securities Act Release No. 8828 (Aug. 10, 2007). Can the company include the securities from the second private placement in the pending resale registration statement prior to effectiveness?

Answer: Yes. The second private placement must be consistent with the interpretive guidance in the release and it must be completed before the company can file a pre-effective amendment to include the securities from the second private placement in the resale registration statement. [Aug. 14, 2009]

Question 139.28

Question: Must offers and sales be suspended during the waiting period of a post-effective amendment to an effective registration statement?

Answer: Offers and sales must be suspended if the post-effective amendment is filed for the purpose of a Section 10(a)(3) amendment and the prospectus is already stale for Section 10(a)(3) purposes. In addition, sales, but not offers, must be suspended during the pendency of a post-effective amendment filed for the purpose of complying with the Regulation S-K Item 512(a)(1) undertakings, such as a fundamental change or a material change to the plan of distribution. Offers may continue during this time; however, if the prospectus is used to make offers, it should not be materially deficient. A post-effective amendment filed to add selling stockholders does not require a suspension of offers and sales by selling stockholders already named in the registration statement. [Aug. 14, 2009]

Question 139.29

Question: May an issuer contemplating a registered debt exchange offer execute a lock-up agreement (or agreement to tender) with a note holder before the filing of the registration statement?

Answer: The execution of a lock-up agreement (or agreement to tender) may constitute a contract of sale under the Securities Act. If so, the offer and sale of the issuer's securities would be made to note holders who entered into such an agreement before the exchange offer is made to other note holders.

Recognizing the legitimate business reasons for seeking lock-up agreements in this type of transaction, the staff will not object to the registration of offers and sales when lock-up agreements have been signed in the following circumstances:

the lock-up agreements are signed only by accredited investors;
the persons signing the lock-up agreements collectively own less than 100% of the outstanding principal amount of the particular series of notes;
a tender offer will be made to all holders of the particular series of notes; and
all note holders eligible to participate in the exchange offer are offered the same amount and form of consideration.

When lock-up agreements are executed before the filing of a registration statement and the circumstances noted above are not satisfied, the subsequent registration of the exchange offer on Form S-4 may be inappropriate. An exchange offer is a single transaction, and a transaction that has commenced privately must be completed privately. Similarly, if a note holder actually tenders its notes - for example, by signing a transmittal form - before the filing of the Form S-4, the staff has objected to the subsequent registration of the exchange offer on Form S-4 for any of the note holders because offers and sales have already been made and completed privately. An issuer seeking to lock up note holders must also consider whether such efforts represent the commencement of a tender offer. [Aug. 11, 2010]

Question 139.30

Question: In a negotiated third-party exchange offer, may an acquiring company execute a lock-up agreement (or agreement to tender) before the filing of the registration statement to obtain a commitment from management and principal security holders of a target company to tender their shares in the exchange offer?

Answer: The execution of a lock-up agreement (or agreement to tender) may constitute a contract of sale under the Securities Act. If so, the offer and sale of the acquiror's securities would be made to persons who entered into such an agreement before the exchange offer is made to other target security holders.

Recognizing the legitimate business reasons for seeking lock-up agreements in the course of negotiated third-party exchange offers, the staff will not object to the registration of offers and sales where lock-up agreements have been signed in the following circumstances:

the lock-up agreements involve only executive officers, directors, affiliates, founders and their family members, and holders of 5% or more of the subject securities of the target company;
the persons signing the lock-up agreements collectively own less than 100% of the subject securities of the target;
a tender offer will be made to all holders of the subject securities of the target; and
all holders of the subject securities of the target eligible to participate in the exchange offer are offered the same amount and form of consideration.

When lock-up agreements are executed before the filing of a registration statement and such agreements exceed the circumstances noted above, the subsequent registration of the exchange offer on Form S-4 may be inappropriate. An exchange offer is a single transaction, and a transaction that has commenced privately must be completed privately. Similarly, if a holder actually tenders its subject securities — for example, by signing a transmittal form — before the filing of the Form S-4, the staff has objected to the subsequent registration of the exchange offer on Form S-4 for any of the holders of the subject securities because offers and sales have already been made and completed privately. An acquiring company seeking to lock up holders of the subject securities must also consider whether such efforts represent the commencement of a tender offer. [Aug. 11, 2010]

Question 139.31

Question: May an issuer registering for resale shares underlying convertible debt or convertible preferred shares include in the registration statement additional shares that may be issued pursuant to the terms of the debt or the preferred shares as payment-in-kind interest or dividends?

Answer: Yes. [June 4, 2010]

Question 139.32

Question: An Exchange Act reporting company is conducting an exempt offering pursuant to Regulation S and Rule 144A and intends to include material non-public information in the offering memorandum to be distributed to investors in the exempt offering. In order to satisfy its obligations under Regulation FD, may the company file the complete offering memorandum as an exhibit to an Item 7.01 Form 8-K during the time the offering memorandum is distributed to potential investors in the exempt offering?

Answer: No. The filing of the complete offering memorandum on Form 8-K during the exempt offering period likely would be inconsistent with the exemptions. To avoid this concern while still complying with Regulation FD, the company could file a Form 8-K that sets forth the material non-public information that is included in the offering memorandum, including information about the offering of the type permitted to be disclosed pursuant to Securities Act Rule 135c. [Mar. 4, 2011]

Section 140. Securities Act Section 6

Question 140.01

Question: What is the current fee for the registration of securities under Section 6(b)?

Answer: From time to time, the Commission publishes orders and related press releases concerning current fee rates, which are posted on the Commission’s website at www.sec.gov. These press releases are generally identified as a “Fee Rate Advisory.” [Nov. 26, 2008]

Question 140.02

Question: After filing a Form S-3ASR that relied on the pay-as-you-go provisions in Securities Act Rule 456(b), an issuer filed a Securities Act 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 underwriters’ overallotment option and the issuer did not pay a fee for those shares in the fee table within the cure period permitted by Rule 456(b)(1)(i). How can the issuer resolve this problem?

Answer: Although failing to identify the overallotment shares in the fee table and pay the fee constitutes 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 overallotment option was identified in the Form S-3ASR at the time it was filed. The issuer 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 overallotment shares and paying the associated filing fee at that time. [Nov. 26, 2008]

Question 140.03

Question: How does one calculate the filing fee under Section 6(b) for debt securities sold with original issue discount?

Answer: The public offering price for a security always is the basis for calculating the filing fee under Section 6(b). As a result, the principal amount for debt securities sold with original issue discount will not be the amount on which the fee is calculated. Instead, the substantially smaller amount to be paid by purchasers in the public offering will determine the fee. [Nov. 26, 2008]

Section 141. Securities Act Section 7

Question 141.01

Question: Registration statements covering securities offered and sold in business combinations and reorganizations often describe or include opinions from investment bankers on the financial fairness of the transaction to prospective purchasers in the transaction. Must a consent be filed under Section 7 in regard to such opinions?

Answer: Yes. Section 7 and Securities Act Rule 436 require that the banker’s consent to being named in the registration statement be filed as an exhibit to that registration statement in these circumstances. [Nov. 26, 2008]

Question 141.02

Question: A registrant has engaged a third party expert to assist in determining the fair values of certain assets or liabilities disclosed in the registrant’s Securities Act registration statement. Must the registrant disclose in the registration statement that it used a third party expert for this purpose? In what circumstances must the registrant disclose the name of the third party expert in its registration statement and obtain the third party’s consent to be named?

Answer: The registrant has no requirement to make reference to a third party expert simply because the registrant used or relied on the third party expert’s report or valuation or opinion in connection with the preparation of a Securities Act registration statement. The consent requirement in Securities Act Section 7(a) applies only when a report, valuation or opinion of an expert is included or summarized in the registration statement and attributed to the third party and thus becomes “expertised” disclosure for purposes of Securities Act Section 11(a), with resultant Section 11 liability for the expert and a reduction in the due diligence defense burden of proof for other Section 11 defendants with respect to such disclosure, as provided in Securities Act Section 11(b).

If the registrant determines to make reference to a third party expert, the disclosure should make clear whether any related statement included or incorporated in a registration statement is a statement of the third party expert or a statement of the registrant. If the disclosure attributes a statement to a third party expert, the registrant must comply with the requirements of Securities Act Rule 436 with respect to such statement. For example, if a registrant discloses purchase price allocation figures in the notes to its financial statements and discloses that these figures were taken from or prepared based on the report of a third party expert, or provides similar disclosure that attributes the purchase price allocation figures to the third party expert and not the registrant, then the registrant should comply with Rule 436 with respect to the purchase price allocation figures. On the other hand, if the disclosure states that management or the board prepared the purchase price allocations and in doing so considered or relied in part upon a report of a third party expert, or provides similar disclosure that attributes the purchase price allocation figures to the registrant and not the third party expert, then there would be no requirement to comply with Rule 436 with respect to the purchase price allocation figures as the purchase price allocation figures are attributed to the registrant.

Independent of Section 7(a) considerations, a registrant that uses or relies on a third party expert report, valuation or opinion should consider whether the inclusion or summary of that report, valuation or opinion is required in the registration statement to comply with specific disclosure requirements, such as Item 1015 of Regulation M-A, Item 601(b) of Regulation S-K or the general disclosure requirement of Securities Act Rule 408. [Nov. 26, 2008]

Sections 142 to 143. Securities Act Sections 8 to 9 [Reserved]

Section 144. Securities Act Section 10

Question 144.01

Question: A registrant has an effective registration statement on Form S-3, but at the time of filing its Form 10-K, it no longer satisfies the eligibility requirements of Form S-3. Does the filing of the registrant’s Form 10-K affect the ability of the registrant to continue using its Form S-3?

Answer: Yes. For purposes of Securities Act Rule 401(b), the filing of a Form 10-K containing the registrant’s audited financial statements for its most recently completed fiscal year by the due date of such annual report operates as a Section 10(a)(3) update to a Form S-3 registration statement Therefore, if a registrant were not eligible to use Form S-3 at the time of such updating through the filing of the Form 10-K, it would be required to file a post-effective amendment on whatever other Form would be available to the registrant at the time. [Nov. 26, 2008]

Sections 145 to 150. Securities Act Sections 11 to 16 [Reserved]

Section 151. Securities Act Section 17

None

Sections 152 to 163. Securities Act Sections 18 to 28 [Reserved]

Section 164. Schedules A and B [Reserved]

INTERPRETIVE RESPONSES REGARDING PARTICULAR SITUATIONS

Section 201. Securities Act Section 2(a)(1)

201.01 A sale and leaseback arrangement may constitute an investment contract, depending on the terms of the transaction and the extent to which there are related arrangements (such as arrangements relating to financial or management services). [Nov. 26, 2008]

Section 202. Securities Act Section 2(a)(2) [Reserved]

Section 203. Securities Act Section 2(a)(3)

203.01 An issuer may extend the exercise period for warrants and/or reduce the warrant exercise price through the filing and issuance of an appropriate Rule 424(b) prospectus supplement prior to the initial expiration date of the warrants. The issuer may not permit the exercise of such modified warrants, however, unless a current prospectus under Section 10(a)(3) with respect to the shares underlying the warrants is delivered. [Nov. 26, 2008]

203.02 A holding company reorganization is 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 purpose of the reorganization is to obtain more favorable tax treatment for an acquisition transaction with a third party, and its consummation is a condition to closing the acquisition. When the reorganization is viewed together with the acquisition, the overall transaction changes the nature of the shareholders’ investment. Thus, such reorganization may involve a “sale” or “offer to sell” for the purposes of Section 2(a)(3) and Rule 145. [Nov. 26, 2008]

203.03 An issuer eligible to use Form S-3 proposes to sell debt securities convertible into the common stock of an unaffiliated reporting company. The shares of common stock are restricted securities but may be resold freely in the public market under Rule 144. The registration statement for the offering need only cover the debt securities if the exemption provided by Section 4(1) is available for the sale of the common stock of the unaffiliated reporting company upon conversion of the debt securities. With respect to the information to be provided regarding the issuer of the underlying common stock, see the Morgan Stanley & Co., Incorporated no-action letter (June 24, 1996) issued by the Division. [Nov. 26, 2008]

203.04 Company A purchased approximately 52% of the outstanding common stock of Company B in a tender offer. Company A proposes to complete the acquisition by means of a reverse statutory merger whereby Company B will become an indirect wholly-owned subsidiary of Company A. The plan of merger provides that each remaining share of Company B’s common stock will be exchanged for cash and a note to be issued by Company B. As soon as possible after the merger, a reorganization will be effected in which Company B will be liquidated, its assets distributed to approximately 50 indirect wholly-owned subsidiaries of Company A, and its liabilities (including the notes issued in connection with the merger) assumed by another wholly-owned subsidiary of Company A, New Company B, whose assets will consist of stock of the 50 operating subsidiaries. Because Company A already owns the requisite number of shares of Company B common stock to approve the merger, Company B will not solicit proxies in connection with the merger and therefore no commission or remuneration will be paid in connection with a solicitation. Shareholders will receive an information statement containing the information required to be provided by Regulation 14C and Rule 13e-3.

Since Company B will exist before and after the merger and will exchange notes with its own security holders, counsel took the position that Section 3(a)(9) would exempt the exchange from registration. Counsel also took the view that the assumption of the notes by New Company B in connection with the reorganization would not require registration under the Securities Act since such assumption did not constitute a “sale” or “offer to sell” as defined in Section 2(a)(3). Counsel’s no-sale theory was based on the fact that the noteholders would neither exchange the notes for new notes nor give up any value, since they would not have relinquished any rights attached to the notes. Further, the terms of the notes permit substitution of a successor obligor. Finally, counsel argued that Rule 145 would be inapplicable to the reorganization, since noteholders will not vote on or consent to the reorganization or assumption of the notes by New Company B.

Counsel’s position was premised on treating the merger and reorganization as discrete, independent transactions or, alternatively, as one transaction in which New Company B would be substantially similar to Company B and thereby be a successor issuer. The staff viewed the merger and reorganization as one transaction in which New Company B’s corporate structure, operations and financial condition might differ materially from Company B’s. Because the merger and reorganization may result in a substantial change, Company B and New Company B were viewed as different issuers for purposes of Section 3(a)(9). Furthermore, given the time proximity between the merger and reorganization, New Company B could be viewed as the issuer of the notes. Therefore, the notes were required to be registered prior to presenting the proposal at the special shareholder’s meeting. [Nov. 26, 2008]

203.05 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 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. [Nov. 26, 2008]

203.06 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]

Sections 204 to 209. Securities Act Sections 2(a)(4) to 2(a)(9) [Reserved]

Section 210. Securities Act Section 2(a)(10)

None

Section 211. Securities Act Section 2(a)(11)

211.01 An issuer eligible to use Form S-3 proposes to sell debt securities convertible into the common stock of an unaffiliated reporting company. The shares of common stock are restricted securities but may be resold freely in the public market under Rule 144. The registration statement for the offering need only cover the debt securities if the exemption provided by Section 4(1) is available for the sale of the common stock of the unaffiliated reporting company upon conversion of the debt securities. With respect to the information to be provided regarding the issuer of the underlying common stock, see the Morgan Stanley & Co., Incorporated no-action letter (June 24, 1996) issued by the Division. [Nov. 26, 2008]

Sections 212 to 217. Sections 2(a)(12) to Section 2A [Reserved]

Section 218. Securities Act Section 3(a)(2)

218.01 Securities of an investment company formed to invest only in bank stock would not be exempt securities under Section 3(a)(2) because the investment company is not a bank. [Nov. 26, 2008]

218.02 Section 3(a)(2) provides an exemption for securities issued by states and political subdivisions or public instrumentalities thereof. The section also provides a specific exemption for certain tax-exempt industrial development bonds. Although not covered by the specific exemption, taxable industrial development bonds can qualify for the broader exemption as securities issued by states or public instrumentalities thereof. However, such taxable bond issues must also be examined to determine whether they give rise to separate securities of other persons within the meaning of Rule 131. Absent another exemption, registration of any such separate Rule 131 securities would be required. [Nov. 26, 2008]

218.03 A bank guarantee of an industrial development bond is exempt under Section 3(a)(2) as a security issued by a bank. The underlying industrial development bond, if tax-exempt, likewise would be exempt under Section 3(a)(2), either because it satisfies the specific requirements applicable to tax-exempt industrial development bonds or because it is a security guaranteed by a bank. [Nov. 26, 2008]

218.04 Participations in a banker’s acceptance, offered and sold by a broker who holds the banker’s acceptance, are separate securities which are not exempt as securities issued by a bank within the meaning of Section 3(a)(2). [Nov. 26, 2008]

218.05 The reference in Section 3(a)(2) to Section 103(c) of the Internal Revenue Code is out of date and should read Section 103(b). This reference is important in determining which kinds of tax exempt industrial revenue bonds are exempted from Securities Act registration by Section 3(a)(2). [Nov. 26, 2008]

Section 219. Securities Act Section 3(a)(3)

219.01 Commercial paper payable on demand but in any event no later than 9 months from issuance, satisfies the maturity requirement of the exemption. [Nov. 26, 2008]

219.02 Tracing of commercial paper proceeds to actual “current transactions” is not necessary under Section 3(a)(3) where the proceeds will be commingled with the issuer’s general funds and such funds will be applied in part to current transactions equal in amount to the commercial paper proceeds. [Nov. 26, 2008]

Sections 220 to 221. Securities Act Sections 3(a)(4) to 3(a)(5) [Reserved]

Section 222. Securities Act Section 3(a)(6)

222.01 A company issued securities under Section 3(a)(6) but has lost its eligibility to use that exemption in the future. As a result, shares held by affiliates of the company must be resold pursuant to the provisions of Rule 144, except for the holding period provisions, absent registration or the availability of another exemption. [Nov. 26, 2008]

Sections 223 to 224. Securities Act Sections 3(a)(7) to 3(a)(8) [Reserved]

Section 225. Securities Act Section 3(a)(9)

225.01 Equipment trust notes are convertible into common stock of the user of the equipment deposited in an equipment trust. The term “issuer” with respect to equipment trust certificates is defined in Section 2(a)(4) to mean the person by whom the equipment is used. Accordingly, Section 3(a)(9) would be available for the conversion of the notes into common stock of the user, even though the notes would appear technically to be securities issued by the equipment trust. [Nov. 26, 2008]

225.02 An issuer wishes to solicit holders of outstanding debt securities to approve changes in certain indenture covenants. At the same time, the issuer will increase the interest rate. While this transaction may be deemed to involve the issuance of a new security if it represents a fundamental change in the nature of the investment, the issuance of the new security would be exempt under Section 3(a)(9) if all of the conditions of that provision were met. Since all of the outstanding debt securities were issued in registered public offerings, the new debt securities issued in exchange would not be “restricted” under Rule 144(a)(3). A new indenture would have to be qualified under the Trust Indenture Act of 1939 for the new debt securities. [Nov. 26, 2008]

225.03 Company A proposes to issue convertible preferred stock in exchange for its outstanding common stock. Holders of Company A’s new convertible preferred stock will have the option two years after issuance of exchanging such shares into Company B’s common stock. Section 3(a)(9) would be available for Company A’s first exchange offer, assuming all the conditions of that exemption are complied with. Registration of the offer and sale of Company B’s common stock would be required prior to the time at which the exchangeable preferred stock becomes exchangeable, absent an exemption from registration. [Nov. 26, 2008]

225.04 Company A agreed to buy 80% of Company B’s common stock conditioned on the success of Company A’s tender offer for Company B’s outstanding convertible debentures. Company A hired investment bankers to solicit in connection with the tender offer, which failed. Company A then prepared to buy 85% of Company B’s common stock, conditioned on the success of an exchange offer by Company B of cash and common stock for Company B’s outstanding convertible debentures. No investment banker would be used to solicit the exchange. Under these facts and circumstances:

the earlier solicitation in connection with the tender offer would not taint the subsequent exchange; and

since Company B would not be merged into Company A, the “same issuer” requirement of Section 3(a)(9) would be met. [Nov. 26, 2008]

225.05 An issuer proposed that each share of its outstanding preferred stock would be exchanged for a new class of preferred stock. However, if a majority of holders voted in favor of the exchange, each share of outstanding preferred stock would be converted into the right to receive cash. The issuer instructed a broker-dealer to solicit security holders for acceptance of the cash-only proposal with a commission payable upon majority approval of that proposal. Section 3(a)(9) would not be available for the exchange offer since the solicitation for acceptances of the cash offer was deemed to constitute an indirect solicitation for the rejection of the exchange offer. [Nov. 26, 2008]

Section 226. Securities Act Section 3(a)(10)

226.01 Section 3(a)(10) does not exempt the issuance of shares in settlement of a suit by a creditor unless all of the requirements of Section 3(a)(10) are satisfied, including, among other things, the court holding a hearing as to the fairness of the issuance and expressly finding that it is fair. [Nov. 26, 2008]

Section 227. Securities Act Section 3(a)(11)

227.01 The intrastate offering exemption is not rendered unavailable solely because the proceeds of the offering will be temporarily invested in out-of-state CDs. [Nov. 26, 2008]

227.02 An issuer makes an offering of securities in reliance upon the Section 3(a)(11) exemption and permits purchasers to pay for their securities in installments. The question was raised whether such purchasers must satisfy the residency requirement of Section 3(a)(11) until the completion of their installment payments. If an installment payment represented a separate investment decision, the purchaser must be a resident at the time of that payment. On the other hand, if a purchaser was unconditionally committed to make the installment payment by the initial decision to invest, the purchaser need not remain a resident during the installment period. [Nov. 26, 2008]

227.03 An exchange offer would not be exempt under Section 3(a)(11) where it is necessary to make the offer to some joint holders of stock of the subject company who are non-residents of the state where the issuer is resident. [Nov. 26, 2008]

227.04 A new corporation would not be precluded from relying on Section 3(a)(11) for an offering simply because a significant part of its business would be interstate mail order. [Nov. 26, 2008]

227.05 A purchaser in an offering exempt from registration under Section 3(a)(11) intends to transfer the securities to the purchaser’s IRA less than nine months after the offering. The IRA is administered by an out-of-state trustee. The residence of the trustee would not affect the availability of the intrastate exemption for the offering. [Nov. 26, 2008]

227.06 Sales of stock to promoters pursuant to Section 4(2) generally are not integrated with a subsequent intrastate offering exempt from registration pursuant to Section 3(a)(11). [Nov. 26, 2008]

Section 228. Securities Act Section 3(a)(12)

228.01 Section 3(a)(12) provides an exemption from registration for securities issued in connection with the formation of a bank or savings association holding company where shareholders maintain the same proportional interest in the holding company as they had in the bank or savings association; the rights and interests of the shareholders are substantially the same after the transaction as before it; and the holding company has substantially the same assets and liabilities, on a consolidated basis, as the bank or savings association had before the transaction. The exemption would not be available if the new holding company’s corporate charter contained anti-takeover provisions that were not in the governing documents of the predecessor bank or thrift. [Nov. 26, 2008]

Sections 229 to 233. Securities Act Sections 3(a)(13) to 4(1) [Reserved]

Section 234. Securities Act Section 4(2)

234.01 A limited partnership that owns a building will advertise for leases through newspaper advertisements. It is anticipated that some lessees may negotiate for an interest in the limited partnership as a condition of leasing space in the building. The private offering exemption for the sale of such limited partnership interests is not lost because of the general advertisements relating only to the availability of space. [Nov. 26, 2008]

234.02 Rule 506 sanctions the use of a representative who advises unsophisticated participants in the offering and thus furnishes the business sophistication required by Section 4(2) that the participants lack personally. Because of the safe-harbor character of the rules and because no-action positions generally are unavailable under Section 4(2), the Division will not express a view whether the use of a purchaser or offeree representative outside Rule 506 is an acceptable method to provide the sophistication requirement of Section 4(2) as construed by the courts and the Commission. [Nov. 26, 2008]

234.03 Sales of stock to promoters pursuant to Section 4(2) generally are not integrated with a subsequent intrastate offering exempt from registration pursuant to Section 3(a)(11). [Nov. 26, 2008]

Section 235. Securities Act Section 4(3)

235.01 Securities issued by an affiliated issuer are not “securities issued by another person” within the meaning of “dealer” in Section 2(a)(12) of the Securities Act of 1933. See the Merrill Lynch & Co., Inc. no-action letter (Mar. 26, 1976) issued by the Division. Accordingly, the Section 4(3) exemption is not available to dealers for the offer and sale of securities of an affiliated issuer of the dealer. [Nov. 26, 2008]

235.02 The Section 4(3) exemption is not available to broker-dealers when engaged in market making activities with respect to the securities of affiliated issuers. When a broker-dealer makes a market in the securities of an affiliate, the broker-dealer must comply with the Securities Act’s registration and prospectus delivery requirements. Affiliated broker-dealers may rely on Securities Act Rule 172 to satisfy their obligation to deliver a “market-making” prospectus. [Nov. 26, 2008]

Section 236. Securities Act Section 4(4)

236.01 A company planning to conduct an initial public offering proposes to include in its prospectus a representation that its captive broker-dealer would maintain a list of persons who wished to buy or sell the company’s securities. Although Section 4(4) would exempt the execution of such orders, the solicitation of customer orders is specifically excepted from Section 4(4). Since maintaining such a list would be a form of solicitation, registration would be required to prevent offers from violating Section 5. [Nov. 26, 2008]

Sections 237 to 238. Securities Act Sections 4(5) to 4(6) [Reserved]

Section 239. Securities Act Section 5

239.01 A corporation may register shares for issuance pursuant to an employee plan (along with other securities to be offered by the issuer) even though the plan has not yet been approved by shareholders and will not become operative unless it is approved, provided that the prospectus makes the situation clear. A prospectus supplement should be filed when the shareholder approval is obtained. [Nov. 26, 2008]

239.02 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 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. [Nov. 26, 2008]

239.03 A typical non-qualified deferred compensation plan permits an employee to defer compensation over a set dollar amount. The employee will then either receive a fixed rate of return on the deferred monies or the employer may permit the employee to index the return on those monies off of a number of investment return alternatives. The debt owing to plan participants is analogous to investment notes, which typically are viewed as debt securities. The Division has not stated affirmatively, however, that all interest-only deferred compensation plans involve securities. Instead, the Division leaves that question for counsel’s analysis of the facts and circumstances. To the extent that interests in a non-qualified deferred compensation plan are securities, registration would be required unless the offerings under the plan would qualify for an exemption, e.g., Section 4(2). Form S-8 would be available when an employer registers the offer and sale of interests in the deferred compensation plan under the Securities Act. The filing fee should be based on the amount of compensation being deferred, not on the ultimate investment return. As the “deferred compensation obligations” to be registered are obligations of the issuer/employer, not interests in the plan, the registration of the “deferred compensation obligations” would not result in a requirement that a deferred compensation plan file a Form 11-K with respect to those securities. Further, based on the unique terms of the “deferred compensation obligations” (both with respect to interest and maturity), compliance with the Trust Indenture Act of 1939 has not been required. [Nov. 26, 2008]

239.04 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, the Division believes that 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]

239.05 If its warrants are out of the money, an issuer does not have to keep the prospectus for the exercise of those warrants current. Of course, the prospectus must be amended at such time as the exercise of the warrants becomes in the money. No warrants may be exercised until the registrant has brought its prospectus covering such exercise current. [Nov. 26, 2008]

239.06 A registrant inquired whether an offering of shares under a stock purchase plan could be made by switching back and forth between: (1) shares acquired from the issuer registered under the Securities Act; and (2) shares acquired on the open market not registered under the Securities Act in reliance on the limited issuer involvement/no registration positions in Securities Act Release No. 4790 (Jul. 13, 1965) and Securities Act Release No. 5515 (Jul. 22, 1974). Because switching back and forth indicated too much issuer involvement to qualify for the limited issuer involvement exemption from registration, registration of all shares offered under the plan was required. [Nov. 26, 2008]

239.07 Warrants, and the shares issuable on their exercise, were registered. Now the warrants are being exchanged for warrants with a new expiration date and exercise price in reliance on Section 3(a)(9). The Division will not object if the original registration statement (updated to reflect the new terms through a post-effective amendment) is used in connection with the exercise of the new warrants. [Nov. 26, 2008]

239.08 An issuer may extend the exercise period for warrants and/or reduce the warrant exercise price through the filing and issuance of an appropriate Rule 424(b) prospectus supplement prior to the initial expiration date of the warrants. The issuer may not permit the exercise of such modified warrants, however, unless a current prospectus under Section 10(a)(3) with respect to the shares underlying the warrants is delivered. [Nov. 26, 2008]

239.09 A parent and its majority-owned subsidiary both have classes of securities registered under Section 12 of the Exchange Act. The parent wishes to make a public offering of convertible, exchangeable debentures. The debentures are immediately convertible into common stock of the parent, and exchangeable at the option of the parent into common stock of the subsidiary. The offer and sale of all three securities must be registered. [Nov. 26, 2008]

239.10 An issuer filed a Form S-3 registration statement for a secondary offering of common stock which is not yet effective. One of the selling shareholders wanted to do a short sale of common stock “against the box” and cover the short sale with registered shares after the effective date. The issuer was advised that the short sale could not be made before the registration statement becomes effective, because the shares underlying the short sale are deemed to be sold at the time such sale is made. There would, therefore, be a violation of Section 5 if the shares were effectively sold prior to the effective date. [Nov. 26, 2008]

239.11 The Liability Risk Retention Act of 1986 contains exemptions from the registration provisions of Section 5 of the Securities Act and Section 12 of the Exchange Act for interests in a “risk retention group.” A risk retention group is a corporation the primary activity of which is to assume and spread all or a portion of the liability exposure of its members, if certain conditions are met. In the absence of a formal no-action request, the Division staff declined to express any view as to whether the exemptions for interests in a risk retention group would extend to interests in a holding company for such group. The question has arisen because the exemption written into the statute is silent on that point. Ownership interests in a “risk retention group” are considered to be “securities” for purposes of Section 17 of the Securities Act and Section 10 of the Exchange Act, under the terms of The Liability Risk Retention Act of 1986. [Nov. 26, 2008]

239.12 In the King & Spalding no-action letter (Nov. 17, 1992) issued by the Division, the Division identified the conditions under which Securities Act registration would not be required for an issuer and/or its affiliates to operate a matching service to facilitate secondary resales of limited partnership interests of such issuer, including conditions relating to the Exchange Act reporting status of the issuer and the ways in which the matching service would operate. Other finite-life entities whose securities do not have an organized secondary market, such as certain real estate investment trusts or other entities that fall within the definition of partnership in Item 901(b) of Regulation S-K, similarly may operate a matching service if the conditions in the King & Spalding letter are met. [Nov. 26, 2008]

239.13 An acquiring company may seek a commitment from management and principal security holders of a target company to vote in favor of a business combination transaction, frequently referred to as a “lock-up agreement.” The execution of a lock-up agreement may constitute an investment decision under the Securities Act. If so, the offer and sale of the acquiror’s securities would be made to persons who entered into those agreements before the business combination is presented to non-affiliated security holders for their vote.

Recognizing the legitimate business reasons for seeking lock-up agreements in the course of business combination transactions, the staff has not objected to the registration of offers and sales where lock-up agreements have been signed in the following circumstances:

the lock-up agreements involve only executive officers, directors, affiliates, founders and their family members, and holders of 5% or more of the voting equity securities of the company being acquired;

the persons signing the lock-up agreements collectively own less than 100% of the voting equity of the target; and

votes will be solicited from shareholders of the company being acquired who have not signed the agreements and would be ineligible to purchase in a private offering.

Where, however, the persons entering into the lock-up agreements also deliver written consents approving the business combination transaction, the staff has objected to the subsequent registration of the exchange on Form S-4 for any of the shareholders because offers and sales have already been made and completed privately, and once begun privately, the transaction must end privately. [Nov. 26, 2008]

239.14 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]

239.15 As a general matter, once an option becomes exercisable, an offer is made pursuant to Section 5. Further, if an option becomes exercisable within one year, it is deemed to be immediately exercisable. Therefore, a registration statement must be on file before the option is exercisable for the entire transaction to be a public offering. A later filing of the registration statement would convert a private offering into a public offering, which is inconsistent with Section 5. The only exception to this position is with respect to Form S-8, where shares underlying the options are permitted to be registered at any time before the option is exercised, without regard to when the option became exercisable. This departure from the analysis set forth above is based solely on a policy determination to treat Form S-8 issuances more liberally, based on the employer/employee relationship. [Nov. 26, 2008]

239.16 In the context of a 401(k) plan, employee payroll deductions could be used to buy company stock. As a result, the plan could not rely on the Securities Act Section 3(a)(2) exemption because such exemption is not available if an amount in excess of the employer’s contribution is allocated to the purchase of securities by the employer or an affiliated company. Counsel inquired whether the company instead could rely on Release 33-4790 (Jul. 13, 1965) to offer its employees company securities pursuant to the 401(k) plan if all the company’s securities purchases would be made in open market transactions with brokers. Release 33-4790 specifies limited ministerial activities that a company can perform regarding an open market employee stock purchase plan without the company or its affiliates being deemed to have solicited an offer to buy company stock. These activities do not, however, include offering company stock through a company-sponsored 401(k) retirement savings plan. Because company sponsorship of a 401(k) retirement savings plan is sufficient issuer participation to constitute a solicitation of an offer to buy company stock, registration under the Securities Act of the company stock and plan interests is required, absent another valid exemption. [Nov. 26, 2008]

Section 240. Securities Act Section 6

240.01 A company filed a registration statement covering $12,500,000 of debentures, 12,500 warrants to purchase common stock and the common stock underlying such warrants. The registrant paid a filing fee of $8,620, $4,310 of which was attributable to the debentures (fee was then at 1/29th of 1% of the aggregate). Prior to the effective date, the registrant decided to change the offering and filed an amendment withdrawing all the original securities, and substituting $17,500,000 principal amount of convertible debentures with a delayed conversion feature. The filing fee for the new offering would amount to $6,034. Since the registrant had paid only $4,310 with respect to the debt portion of the initial offering, it was concerned that it might owe an additional fee of $1,724 attributable to the increased debt offering. The registrant was informed that no additional fee was required, and that the fee table should indicate by footnote that a $8,620 fee had already been paid. [Nov. 26, 2008]

240.02 A Delaware limited partnership, with a foreign general partner, must provide the signature of an authorized U.S. representative of the general partner to satisfy the signature requirements for a Securities Act registration statement. [Nov. 26, 2008]

Section 241. Securities Act Section 7

None

Sections 242 to 243. Securities Act Sections 8 to 9 [Reserved]

Section 244. Securities Act Section 10

None

Sections 245 to 250. Securities Act Sections 11 to 16 [Reserved]

Section 251. Securities Act Section 17

251.01 The Liability Risk Retention Act of 1986 contains exemptions from the registration provisions of Section 5 of the Securities Act and Section 12 of the Exchange Act for interests in a “risk retention group.” A risk retention group is a corporation the primary activity of which is to assume and spread all or a portion of the liability exposure of its members, if certain conditions are met. In the absence of a formal no-action request, the Division staff declined to express any view as to whether the exemptions for interests in a risk retention group would extend to interests in a holding company for such group. The question has arisen because the exemption written into the statute is silent on that point. Ownership interests in a “risk retention group” are considered to be “securities” for purposes of Section 17 of the Securities Act and Section 10 of the Exchange Act, under the terms of The Liability Risk Retention Act of 1986. [Nov. 26, 2008]

Sections 252 to 263. Securities Act Sections 18 to 28 [Reserved]

Section 264. Schedules A and B [Reserved]

http://www.sec.gov/divisions/corpfin/guidance/sasinterp.htm