Section 4(2) of the Securities Act of 1933, as Amended (“Securities Act”) provides the statutory basis for private placement offerings. In particular, Section 4(2) exempts “transactions by an issuer not involving any public offering.” The key components of this statutory exemption are that the offering must be by the Issuer, not an affiliate, agent or third party, and that the transactions must not involve a public offering. In order to determine if there is a public offering, practitioners must consider Section 2(11) of the Securities Act which defines an underwriter. The Securities and Exchange Commission (“SEC”) and courts limit the scope of Section 4(2) by preventing indirect public offerings by issuers and control persons through third parties. Accordingly, if an investor acts as a link in the chain of transactions resulting in securities being distributed to the public, they are an underwriter, and the exemption under Section 4(2) is not available.
The Ralston Purina Standard
The leading case interpreting Section 4(2), SEC v. Ralston Purina Corp., was decided in 1953 and still stands as the judicial framework for interpreting private placements today. In a nutshell, Ralston Purina holds that the availability of Section 4(2) turns on whether the particular class of persons affected need the protection of the Act, considering the totality of the circumstances. The Court goes on to provide guidance by setting forth four factors to be considered. To wit:
- Manner of offering – how the purchasers are found with general solicitation and general advertising being prohibited;
- Eligibility of purchasers – are they accredited and sophisticated?
- Information – whether each purchaser receives or has meaningful access to the same type of information that would be available from reporting issuers;
- Resales – must be prevented or strictly limited.
Regulation D and Section 4(2)
In Regulation D promulgated under the Securities Act, the SEC sets forth its interpretation of Section 4(2) and likewise under Rule 144, the SEC sets forth its interpretation of the underwriter definition found in Section 2(11).
Consistent with Regulation D, an issuer in a private placement may not sell securities through any manner of general solicitation or general advertising. Further SEC interpretative releases and courts have found that to meet this standard an Issuer may only approach potential investors to which it has a prior relationship. However, with that said, it is commonly agreed that an Issuer can approach as many institutional investors as it wants without violating this prohibition; presumably because institutional investors can fend for themselves and do not require the protection of the Securities Act.
Securities Attorney Laura Anthony
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!
