New SEC Rules Impact Private Placements of Securities

by / Friday, 09 May 2008 / Published in General Business, Publications

by Jane G. Davis

The Securities and Exchange Commission (“SEC”) has enacted new rules that will impact companies that do not file reports with the SEC as well as those that do.

The sale of securities by a company requires that those securities be registered with the SEC and/or the state where the securities are sold (in Pennsylvania, the PA Securities Commission), unless there is an available exemption from registration. One exemption is found in the SEC’s Regulation D, which permits sales without either federal or state registration in certain dollar amounts and to certain types and numbers of investors. Because it provides a “safe harbor” if its provisions are followed, many non-reporting, as well as reporting, companies choose to utilize it when they look to raise capital. Although Regulation D exempts the securities from registration, it does require that the company file a Form D with the SEC providing certain information about the company and the offering; most states, including Pennsylvania, require that the Form D also be filed with the state.

The SEC has adopted changes to its Form D which are meant to simplify its requirements. Among the changes is the elimination of the requirement to disclose the intended use of the proceeds of the offering and the expenses involved. Additionally, companies will no longer be required to identify 10% or greater owners as “related persons.” These changes are welcome for non-reporting companies, who are often reluctant to disclose such information publicly.

The SEC is also mandating that, as of March 16, 2009, all Forms D be filed electronically. During a transition period beginning September 15, 2008, Form D may be filed either electronically or in paper form. Many reporting companies prefer electronic filing and the procedure will likely be viewed by them as an improvement. The drawback for non-reporting companies is that they will now be required to obtain EDGAR (the SEC’s electronic reporting system) codes, which they have not previously needed.

Although Regulation D and other exemptions allow companies, both reporting and non-reporting, to issue unregistered securities in various circumstances, when a purchaser of those securities wishes to resell them, there must also be an exemption from registration for that transaction. The SEC’s Rules 144 and 145 provide one form of “safe harbor” for resellers of unregistered securities that have been acquired from the issuer in a private placement or other exempt offering (Rule 144) or in connection with a merger, consolidation or transfer of assets (Rule 145). The requirements of the Rules include minimum holding periods, manner-of-sale conditions, limitations on the volume of sales and the filing of a Form 144 for transactions that exceed certain amounts.

The SEC amended Rules 144 and 145, effective February 15, 2008, to reduce the restrictions contained in them. As amended, the requirements contained in Rule 145 apply only to shell companies. Rule 144 has been modified to permit non-affiliates (generally, persons who are not 10% owners, directors or executive officers) of reporting companies to resell unlimited amounts of securities if a six-month holding period has been reached; non-affiliates of non-reporting companies may do so after a one-year holding period. Non-affiliates are no longer required to file a Form 144 in connection with a resale of unregistered securities.

Affiliates of an issuer will continue to be bound by the volume and manner-of-sale restrictions, but the holding period for affiliates of reporting companies will be reduced to six months and the threshold for filing a Form 144 will increase to sales of 5,000 shares or $50,000 in value within a three-month period. The holding period for affiliates of non-reporting companies remains one year because of the limited availability of public information about non-reporting companies.

The changes to Form D and to Rules 144 and 145 should make private placements a more attractive method of raising capital for both reporting and non-reporting companies.


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