Securities Act Secondary Distributions

Securities Act Secondary Distributions Insider resales - §2(a)(11) Broker as underwriter “offers or sells for issuer icw the distribution” "issuer" includes [control person] Section 4(1-1/2) – secondary private placement Relationship of 4(1) and 4(2) Application to Rule 144A (last updated 05 Mar 13)

Trading market Broker Purchaser Firm-commitmentunderwriting Best-effortsunderwriting Secondarydistribution Purchaser Underwriter Underwriter Insider Restricted securities Issuer

§ 4 Exempted transactions The provisions of section 5 shall not apply to-- (1) transactions by any person other than an issuer, underwriter, or dealer. (2) transactions by an issuer not involving any public offering. § 2(a)(11) Definitions The term "underwriter" means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security … As used in this paragraph the term "issuer" shall include, in addition to an issuer, any any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control with the issuer .

§ 4 Exempted transactions The provisions of section 5 shall not apply to-- (1) transactions by any person other than an issuer, underwriter, or dealer. (2) transactions by an issuer not involving any public offering. § 2(a)(11) Definitions The term "underwriter" means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security … As used in this paragraph the term "issuer" shall include, in addition to an issuer, any [control person].

Trading market Broker Insider Issuer

Some hypotheticals …(4 hypotheticals)

Hypothetical #1 Louis Wolfson is the CEO and largest shareholder of Continental Enterprises, a publicly-traded holding company. Wolfson becomes worried about the company's sagging fortunes and begins to dump his holdings in the company. Wolfson sells about half of his Continental stock on the over-the-counter trading market through six different (and unsuspecting) brokers. Wolfson bought his stock 10 years ago. He did not buy his stock intending to resell it. Is he an issuer, an underwriter, a dealer? Why is he liable? And the brokers? Justice Abe Fortas (brought down by Wolfson)

§ 4 Exempted transactions The provisions of section 5 shall not apply to-- (1) transactions by any person other than an issuer, underwriter, or dealer. (2) transactions by an issuer not involving any public offering. … (4) brokers' transactions executed upon customers' orders on any exchange or in the over-the-counter market but not the solicitation of such orders.

Insider dilemma Suppose Wolfson had sold his stock over sixteen months, always at the market price. Are these transactions in a “distribution”? Can he ever sell?

Hypothetical #2 Wolfson sold some of his stock not through a broker, but directly to Dilbert -- a self-impressed investor who has no idea what he has bought. Wolfson is not an “issuer” or “underwriter” or “dealer” – his transaction is exempt! Should he be exempt? How is this situation regulated?

Hypothetical #3A Wolfson's erstwhile first lieutenant Elkin Gerbert owns 3% of Continental Enterprises's stock. Gerbert is a vice president of Continental Enterprises, but has recently had a parting of the ways with Wolfson. Gerbert sells his stock through brokers. Are his transactions exempt? Is he a control person?

Hypothetical #3B Wolfson's erstwhile first lieutenant Elkin Gerbert owns 3% of Continental Enterprises's stock. Gerbert is a vice president of Continental Enterprises, but has recently had a parting of the ways with Wolfson. Gerbert obtained a contractual promise when he bought his 3% interest that allows him to demand the company register his shares at his request. Does this make him a control person?

Hypothetical #4 Johnson, the board chair and largest shareholder of Vertimag, Inc. receives a grant of 10,000 unregistered Vertimag common shares in lieu of salary. Four years later he asks his broker Piper, Jaffray & Hopwood to find a purchaser. PJH identifies Ackerberg, a sophisticated customer who holds a $500,000 investment account with PJH and who has an annual income above $200,000 and net worth exceeding $1 million. Johnson sells to Ackerberg. Any problems? Ackerberg (sophisticated investor)

Ackerberg v. Johnson (8th Cir. 1989): We begin by considering whether the securities were acquired by Johnson with a view to their distribution. ... That is, the courts look to whether the security holder has held the securities long enough to negate an inference .... Our second inquiry is whether the resale was "for an issuer in connection with" a distribution. Whether the sale was "for an issuer" can also be determined by whether the shares have come to rest. Judge C. Arlen Beam and law clerk (artist approximation) Would you hire this clerk?

Ackerberg v. Johnson (8th Cir. 1989) [footnote 4]: Nor can we agree that the exemption is not available to Johnson because PJH is an underwriter. ... Absent a distribution, no party to the transaction can be an underwriter. Judge C. Arlen Beam and law clerk (artist approximation)

What is a “Rule 144A offering” ….

Trading market Institutional Investor Broker Institutional Investor Broker Institutional Investor Broker Institutional Investor Firm-commitmentunderwriting Best-effortsunderwriting Institutional Investor Broker Underwriter Underwriter Purchaser Restricted securities Issuer

Rule 144A (b) Sales by persons other than issuers or dealers. Any person, other than the issuer or a dealer, who offers or sells securities in compliance with the conditions set forth in paragraph (d) of this section shall be deemed not to be engaged in a distribution of such securities and therefore not to be an underwriter of such securities … (c) Sales by Dealers. Any dealer who offers or sells securities in compliance with the conditions set forth in paragraph (d) of this section shall be deemed not to be a participant in a distribution of such securities within the meaning of section 4(3)(C) of the Act and not to be an underwriter …, and such securities shall be deemed not to have been offered to the public within the meaning of section 4(3)(A) of the Act [statute].

Rule 144A (d) Conditions to be met. • securities offered/sold only to QIB or reasonably believed to be QIB • seller (and broker) take reasonable steps to ensure that purchaser aware relying on Rule 144A • securities not of same class as securities listed on US stock exchange or Nasdaq • for non-reporting issuer, exempt foreign issuer, or foreign government, Rule 144A holders and prospective purchasers can obtain from issuer, upon request: • “very brief” statement about issuer and business • issuer's most recent balance sheet, P&L and retained earnings statements for last 2 fiscal years

The end

Securities Act Secondary Distributions