The integration doctrine prevents issuers from circumventing the registration requirements of the Securities Act of 1934 by determining whether two or more securities offerings are really one offering that does not qualify as an exempt offering, or an exempt offering is really part of a registered public offering.

Securities Act Release No. 33-4552 (November 6, 1962) sets forth a five factor test that is used as a guideline in determining whether the separate offerings of an issuer that occur within a short time of one another will be integrated. These same factors are set forth in the Note to Rule 502(a) of Regulation D, which factors address whether the offerings:

1. are part of a single plan of financing;
2. involve the issuance of the same class of securities (convertible securities, warrants, and other
3. derivative instruments generally are deemed to be the same class as the underlying security unless the terms of the primary security prohibit exercises until at least the one year anniversary date);
4. are made at or about the same time;
5. involve the same type of consideration is to be received; and
6. are made for the same general purpose.

Rule 502(a) provides for a six-month (soon to be 90 days) safe harbor wherein multiple private offerings that are conducted at least six (6) months apart will not be integrated. In addition, a private offering that is conducted at least six (6) months before or after a registered or exempt public offering will not be integrated with the public offering. Fortunately, effective February 4, 2008, the SEC changed the length of integration safe harbor from six (6) months to ninety (90) days.

In addition, Rule 155 sets forth a safe harbor for abandoned private and public offerings (Release No. 33-7943, effective March 7, 2001). Generally, the rule creates safe harbors to allow: (i) a public offering immediately following an abandoned private offering and (ii) a private offering thirty (30) days after an abandoned public offering, without integrating the public and private offerings in either situation. These safe harbors provide issuers with more flexibility to react to volatile capital market conditions.

Rule 155 does not replace, but rather supplements, the five factor test that will be used whenever the safe harbor is inapplicable. For example, the five-factor test, rather than Rule 155, would apply when evaluating whether two or more private offerings should be integrated with each other. Moreover, Rule 155 recognizes only Sections 4(2) and 4(6) and Rule 506 offerings as exempt offerings. Finally, Rule 155 is not available for shelf registration statements.

Concurrent Private and Registered Offerings in PIPE Transactions

The primary legal consideration in any PIPE (private investment in public entity) investment is ensuring that the issuer takes all steps necessary to make the investment a valid private placement. The issuer must conduct the PIPE offering in a manner that does not involve any general solicitation or advertisement. In this context, an issuer that had considered a public offering and filed a registration statement with the SEC may be deemed to have engaged in a general solicitation for the offering, and the issuer would have to completely abandon that offering by withdrawing the registration statement for a period of time before engaging in the PIPE transaction.

SEC Rule 155

Rule 155 does not alter the position taken by the SEC staff in its no-action letters to Black Box Inc. and Squadron, Ellenoff, Pleasant & Lehrer. In these letters, the staff indicated that it would not integrate a registered offering and a concurrent unregistered offering made only to Qualified Institutional Buyers (as defined by Rule 144A under the 1933 Act) and no more than two or three large accredited institutional investors.

Given that a PIPE transaction inherently involves a private placement of securities and a subsequent public offering, the PIPE transaction has higher integration risks. To ensure that the PIPE transaction is respected as two separate transactions, the initial private placement must be “complete” prior to filing of any registration statement for the underlying securities. In the standard PIPE transaction, meeting this requirement normally does not pose a problem since the registration statement is filed following the closing of the PIPE transaction.

Private Placement Completion

The SEC will consider a private placement complete if: (a) all of the purchasers have fully paid the purchase price for the securities in the private offering, or (b ) each purchaser is irrevocably obligated to purchase a set number of securities, the purchase price is fixed and the transaction cannot be renegotiated.

The SEC has permitted concurrent registered and private offerings to be made under the conditions set forth in its Black Box and other related “no action” letters (described above). A “Black Box PIPE” would be undertaken, for example, during a period when the company has on file an effective resale or shelf registration statement. In such situations, the SEC requires that the private offering be made only to: (a) persons who are qualified institutional buyers (QIBs) as defined in Rule 144A(a) under the Securities Act, and/or (b) no more than two or three large institutional accredited investors.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

Section 3(a)(11) of the Securities Act of 1933, as amended (Securities Act) provides an exemption from the registration requirements of Section 5 of the Securities Act for “[A]ny security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.” (“Intrastate Exemption”) Rule 147 promulgated under the Securities Act provides for further application of the Intrastate Exemption.

Rule 147, Issuers and Corporate Counsel

In addition to complying with Rule 147, Issuers and their counsel need to be cognizant of and comply with applicable state securities laws regulating intrastate offerings. The Intrastate Exemption is only available for bona fide local offerings. That is, the Issuer must be a resident of, and doing business, within the state in which all offers and sales are made and no part of the offering may be offered or sold to nonresidents. Because of the strict rules against any sales or offers to non-residents, Issuers conducting concurrent or consecutive offerings, need to be extra careful to avoid the integration of any non-intrastate transactions with the Intrastate Exemption. Integration occurs when two or more offerings are considered a single offering such that all requirements for the exemption relied on in each offering must be present for each and every sale in all of the integrated offerings.

Rule 502(a) and Securities and Exchange Commission (SEC) release 33-4434 set forth the factors to be considered in determining whether two or more offerings may be integrated. In particular, the following factors need to be considered in determining whether multiple offerings are integrated: (i) are the offerings part of a single plan of financing; (ii) do the offerings involve issuance of the same class of securities; (iii) are the offerings made at or about the same time; (iv) is the same type of consideration to be received; and (v) are the offerings made for the same general purpose.

Safe Harbor Provisions

In addition, Rule 147(b)(2) provides an integration safe harbor. That is, offerings made under Section 3 or Section 4(2) of the Securities Act or pursuant to a registration statement will not be integrated with an Intrastate Exemption offering if such offerings take place six month prior to the beginning or six month following the end of the Intrastate Exemption offering. To rely on this safe harbor, during the six month periods, an Issuer may not make any offers or sales of securities of the same class as those offering in the intrastate offering. Rule 147(b)(2) is merely a safe harbor. Issuers and practitioners may still conduct their own analysis in accordance with the five factor test enumerated above.

For purposes of the Intrastate Exemption, an Issuer shall be deemed to be a resident of the state in which: (i) it is incorporation or organized if it is an entity requiring incorporation or organization; (ii) its principal office is located if it is an entity not requiring incorporation or organization; or (iii) his or her principal residence is located, if an individual.

Earmarks of Intrastate Exemptions

For purposes of the Intrastate Exemption, an Issuer shall be deemed to be doing business within a state if: (i) the Issuer derived at least 80% of its gross revenues in the past six months from that state; (ii) the Issuer had 80% of its assets located in that state in the most recent semi-annual fiscal year; (iii) the Issuer intends to use and uses at least 80% of the net proceeds from the Intrastate offering in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services in that state; and (iv) the principal office of the Issuer is located within that state.

For the purpose of determining the residence of an offeree or Purchaser: (i) a corporation, partnership, trust or other form of business organization shall be deemed to be a resident of a state if, at the time of the offer and sale, it has its principal office within such state; (ii) an individual shall be deemed to be a resident of a state if, at the time of the offer and sale, his or her principal residence is within that state; and (iii) a corporation partnership, trust or other form of business organization formed specifically to take part in an Intrastate offering, will not be resident of the state unless all of its beneficial owners are resident of that state.

Resale Prohibitions

Even though securities issued relying on the Intrastate Exemption are not restricted securities for purposes of Rule 144, Rule 147(e) prohibits the resales of any such securities for a period of nine months except for resales made in the same state as the Intrastate Offering. Moreover, market makers or dealers desiring to quote such securities after the nine month period must comply with all the requirements of Rule 15c2-11 regarding current public information.

There is no prohibition in Rule 147 regarding general advertising or general solicitation as long as such general advertising or solicitation complies with applicable state law and does not result in an offer or sale to non-residents of such state.

Although the Intrastate Exemption is available for sales by Issuers only, and not for resales, the SEC has interpreted the rule to permit offers and sales by control persons of the Issuer as well. The Intrastate Exemption rule is not available to any person with respect to any offering which, although in technical compliance with the rules, is part of a plan or scheme to make interstate offers or sales of securities.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!