[Federal Register Volume 61, Number 91 (Thursday, May 9, 1996)]
[Rules and Regulations]
[Pages 21356-21359]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-11626]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 230
[Release No. 33-7285; File No. S7-15-95]
RIN 3235-AG51
Exemption for Certain California Limited Issues
AGENCY: Securities and Exchange Commission.
ACTION: Final rules.
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SUMMARY: In order to reduce regulatory burdens associated with certain
offers and sales of securities, the Securities and Exchange Commission
(``Commission'') today is adopting a new exemption from its
registration requirements for limited offerings of up to $5 million
that are exempt from qualification under a 1994 California state
securities law.
EFFECTIVE DATE: The effective date of Rule 1001 and the amendment to
Rule 144 will be effective June 10, 1996.
FOR FURTHER INFORMATION CONTACT: Richard K. Wulff, Office of Small
Business Policy, Division of Corporation Finance, at (202) 942-2950 or
James R. Budge, Office of Disclosure Policy, Division of Corporation
Finance, at (202) 942-2910, 450 Fifth Street, N.W., Washington, D.C.
20549.
SUPPLEMENTARY INFORMATION: The Commission today is adopting, as
proposed, new Rule 1001 1 under Section 3(b) 2 of the
Securities Act of 1933 (``Securities Act''). 3 The new rule
exempts from the registration requirements of the Securities Act offers
and sales up to $5 million that are exempt from state qualification
under paragraph (n) of Section 25102 of the California Corporations
Code. 4 Securities Act Rule 144 5 also has been amended to
include securities issued in reliance upon Rule 1001 in the definition
of ``restricted securities.''
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\1\ The rule is being added as Regulation CE (for coordinated
exemptions), 17 CFR 230.1001, rather than as Regulation CA, as
proposed.
\2\ 15 U.S.C. 77c(b).
\3\ 15 U.S.C. 77a et seq.
\4\ Cal. Corporations Code Section 25102(n).
\5\ 17 CFR 230.144.
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I. Introduction
In June 1995, pursuant to its authority to provide exemptions for
small offerings under Section 3(b) of the Securities Act, the
Commission proposed a new rule 6 designed to assist small
businesses' capital raising ability by creating a federal exemption for
offerings of up to $5 million 7 that meet the qualifications of a
California exemption. The California law provides an exemption from
state law registration for offerings made to specified classes of
qualified purchasers that are similar, but not the same as, accredited
investors under Regulation D.8 Certain methods of general
solicitation are permitted under the California law.
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\6\ Release No. 33-7185 (June 27, 1995) [60 FR 35638]
(``proposing release'').
\7\ This is the maximum dollar amount permitted under the
Commission's Section 3(b) exemptive authority.
\8\ 17 CFR 230.501-230.508.
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The Commission received ten comment letters, which generally were
supportive of the proposals.9 The Commission believes that the
California exemption has the potential to facilitate small business
capital raising. It is anticipated that the new rule will result in
compliance cost savings for small businesses and others because
qualifying issuers will be exempt from both state qualification and
federal registration. At the same time, the exemption assures adequate
protections to investors. Therefore, the Commission is exercising its
exemptive authority in Section 3(b) to provide a parallel federal
exemption for the California exemption by adopting new Rule 1001.
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\9\ The letters and comment summary are available for inspection
and copying in the Commission's public reference room. Refer to File
No. S7-15-95.
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II. The California Exemption
On September 26, 1994, an exemption from the issuer transactions
qualification provisions of the California Corporations Code became
effective.10 The provision was specifically designed ``to
facilitate the ability of small companies to raise capital to finance
their growth.'' 11
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\10\ Chapter 828, Statutes of 1994 (Senate Bill 1951--Killea),
adding subdivision (n) to Corporations Code Section 25102.
\11\ Section 3, Senate Bill 1951.
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The exemption generally is limited to issuers that are California
corporations or any other form of business entity organized in that
state, including partnerships and trusts. In addition, non-California
organized businesses may use the exemption if they can attribute more
than 50 percent of property, payroll and sales to California and if
more than 50 percent of outstanding voting securities of the issuer are
held of record by persons having addresses in California. It is not
available for offerings relating to a rollup transaction, nor may it be
used by ``blind pool'' issuers or investment companies subject to the
Investment Company Act of 1940 (the ``Investment Company Act'').
12
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\12\ 15 U.S.C. 80a-1 et seq.
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Sales under the exemption must be effected only to qualified
purchasers who buy for investment purposes and not for redistribution.
A qualified purchaser is defined as:
Designated professional or institutional purchasers or
persons affiliated with the issuer; 13
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\13\ Officers and directors of corporate issuers (or persons
performing similar duties); general partners and trustees, where the
issuer is a partnership or a trust; small business investment
companies; business development companies subject to the Investment
Company Act; private venture capital companies exempted from the
Investment Advisers Act of 1940 [15 U.S.C. 80b-1 et seq.]; entities
comprised of accredited investors; banks; savings and loan
associations; insurance companies; Investment Company Act companies;
non-issuer pension or profit-sharing trusts; and, organizations
(corporations, business trusts or partnerships) described in Section
501(c)(3) of the Internal Revenue Code [26 U.S.C. 501(c)(3)] with
assets of more than $5 million. Individuals with a net worth of $1
million or annual income of more than $200,000 also are qualified
purchasers under the California exemption. All these persons would
qualify as ``accredited investors'' under Rule 501(a) [17 CFR
230.501(a)].
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Certain relatives residing with qualified purchasers;
Promoters;
Any person purchasing more than $150,000 of securities in
the offering; 14
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\14\ These persons must also satisfy one of the following
additional suitability standards: (1) They must have, alone or with
the assistance of a professional advisor, the capacity to protect
their own interests; (2) they must have the ability to bear the
economic risk of the investment; or (3) the investment must not
exceed 10 percent of the person's net worth. These criteria also
apply to individuals who have a net worth of over $1 million or
annual income exceeding $200,000.
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Entities whose equity owners are limited to officers,
directors and any affiliate of the issuer;
Reporting companies under the Securities Exchange Act of
1934 (the ``Exchange Act''), 15 if the transaction
[[Page 21357]]
involves the acquisition of all of an issuer's capital stock for
investment;
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\15\ 15 U.S.C. 78a et seq.
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A natural person whose net worth exceeds $500,000, or a
natural person whose net worth exceeds $250,000 if such purchaser's
annual income exceeds $100,000--in either case the transaction must
involve:
(a) Only a one-class voting stock (or preferred establishing the
same voting rights),
(b) An amount limited to no more than 10 percent of the purchaser's
net worth, and
(c) A purchaser able to protect his or her own interests (alone or
with the help of a professional advisor); 16
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\16\ This provision states that each such natural person, by
reason of his or her business or financial experience, or the
business or financial experience of his or her professional advisor
(who is unaffiliated with and who is not compensated, directly or
indirectly, by the issuer), can be reasonably assumed to have the
capacity to protect his or her interests in connection with the
transaction. The California Department of Corporations has indicated
that qualified investors under this rubric must have business or
financial experience or rely on a professional advisor. Release No.
94-C (September 27, 1994).
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Pension and profit sharing trusts, as well as 401(k) plans
17 and Individual Retirement Accounts of individual qualified
purchasers.
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\17\ 26 U.S.C 401(k).
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Issuers must provide certain purchasers who are natural persons
18 a disclosure document as specified in Rule 502 of Regulation D
19 five days prior to any sale or commitment to purchase.
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\18\ This delivery requirement is limited to those natural
persons designated as qualified purchasers because their net worth
exceeds $500,000, or whose net worth exceeds $250,000 where there is
an annual income of $100,000.
\19\ 17 CFR 230.502(b)(2).
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Offers, oral or written, are generally limited to qualified
purchasers. However, the law does permit general announcements of a
proposed offering to be widely published and circulated, so long as
they contain only specified information. 20 This general
announcement process is modeled on the ``test the waters'' concept
being used by several of the states 21 and by the Commission in
connection with Regulation A.
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\20\ The California provision limits the content of the general
announcement to the following items: the issuer's identity; the full
title of the securities being offered; the suitability standards of
prospective investors; a statement that no money is being sought or
will be accepted, that an indication of interest involves no
commitment to purchase and that under certain circumstances a
disclosure document will be provided prior to purchase; and the
name, address and telephone number of a person who can provide
further information about the offering. Only the following
additional information may be included at the issuer's option: a
brief description of the business, its geographical location and the
offering price or method of determination.
\21\ See CCH NASAA Reports Sec. 7036. Arizona, Colorado, Kansas,
Massachusetts, Oregon, Pennsylvania, Vermont, Virginia and
Washington currently are participating in a pilot program in this
regard, and Indiana has proposed entering this pilot program as
well.
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A notice must be filed with the California Corporations
Commissioner at the initial offer of securities or with the publication
of a general announcement of proposed offering, whichever comes first,
accompanied by a $600 filing fee. A second filing is required within 10
business days after the close or abandonment of the offering, and in no
case later than 210 days after the filing of the initial notice.
III. Regulation CE and Rule 1001
A. Need for a New Exemption
The California exemption combines a form of general solicitation
using a ``test the waters'' concept with a qualified purchaser concept
derived in part from the Uniform Limited Offering Exemption (``ULOE''),
22 an official policy guideline of the North American Securities
Administrators Association, Inc. (``NASAA'') 23 that was adopted
in coordination with the Commission's adoption of Regulation D. 24
California's exemption does not fit well within any current federal
exemption, other than Rule 504, 25 which is limited to $1 million,
or potentially the intrastate offering exemption. 26 Rules 505 and
506 of Regulation D prohibit general solicitations; moreover,
California's definition of qualified purchasers is broader than
Regulation D's. The intrastate offering exemption is available only for
those offerings by issuers incorporated and doing business in
California.
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\22\ See CCH NASAA Reports Sec. 6201.
\23\ NASAA is an association of securities commissioners from
each of the 50 states, the District of Columbia, Puerto Rico, Mexico
and several of the Canadian provinces.
\24\ State statutes and rules based on NASAA's ULOE exempt
offers or sales of securities made in compliance with Rules 501-503,
505 and/or 506 of Regulation D [17 CFR 230.501-230.503, 230.505 and
230.506 respectively], including the prohibition of general
solicitations found in Rule 502(c).
\25\ 17 CFR 230.504.
\26\ Securities Act Section 3(a)(11) [15 U.S.C. 77c(a)(11)] and
Rule 147 [17 CFR 230.147].
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The Commission does not believe that these differences need to be
an impediment to the ability of small businesses to take full advantage
of the California exemption. While the qualified purchaser definition
differs somewhat from the accredited investor definition for
individuals, the California law includes additional suitability
standards. Moreover, the general announcement of proposed offering is
subject to significant limitation, thereby protecting against abuse of
the procedure. The provisions of the California law are consistent with
investor protection and the public interest, and therefore warrant the
Commission's full exercise of its exemptive authority under Section
3(b).
B. The Exemption
New Rule 1001 provides that offers and sales of securities, in
amounts of up to $5 million, that are exempt from registration under
the California securities law pursuant to paragraph (n) of section
25102 of the California Corporations Code 27 are exempt from the
registration requirements of Section 5 of the Securities Act, pursuant
to Section 3(b) of that Act.28 All issuers that qualify for the
state exemption can rely on the Rule 1001 exemption.29 Issuers
should look to the state of California for interpretations relating to
who qualifies for the exemption, since any person who lawfully relies
on the state exemption also could rely on its federal counterpart.
Commenters who spoke to the issue supported the Commission's proposal
not to impose additional qualifying standards.
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\27\ One commenter expressed the view that the Commission should
key the exemption to section 25102(n) as it existed at the time it
originally became effective. The Commission has determined to adopt
Rule 1001 as proposed in order to allow California flexibility to
address concerns relating to its exemption without fear of losing
the federal counterpart. Nevertheless, the Commission will monitor
future changes to the California exemption to assure that the
investor protections are not diminished in a fashion that would
warrant modification of the federal exemption.
\28\ Rule 1001(a). While the transactions would not be subject
to registration under Section 5, the antifraud provisions of the
federal securities laws would continue to be applicable to all
exempt transactions. See preliminary note 1 to Rule 1001. Rule 1001
would provide an exemption only for the transactions in which the
securities are offered or sold by the issuer; it is not an exemption
for the securities themselves.
\29\ As noted above, California law precludes reliance on the
exemption in connection with investment company, blind pool or roll-
up offerings; thus, the Rule 1001 exemption also would be
unavailable in those cases.
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As in the proposal, the final rule does not require issuers to
notify the Commission when they rely on the California exemption in
view of the notification provisions of the California law.
C. Computation of $5 million amount
Rule 1001 exempts offerings up to $5 million, the maximum allowed
under Section 3(b).30 The $5 million limit will apply on an
offering-by-offering basis.31
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Commenters supported this approach, which differs from that applied in
other Section 3(b) rules, where an annual dollar limit for the
aggregate of various Section 3(b) offers has been used.32
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\30\ Where a transaction involves non-cash consideration, the
amount of the offering would be calculated as provided under
California law.
\31\ Standard integration analysis concepts would apply. See
Release No. 33-4552 (November 7, 1962) [27 FR 11316]. These concepts
are currently under review in connection with the work of the Task
Force on Disclosure Simplification and the Advisory Committee on the
Capital Formation and Regulatory Processes. See notes 37 and 37,
below.
\32\ See, e.g., Rule 251(b) [17 CFR 230.251(b)], Rule 504(b)(2)
[17 CFR 230.504(b)(2)] and Rule 505(b)(2)(i) [17 CFR
230.505(b)(2)(i)].
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D. Resale limitations
The new exemption provides that purchasers in the exempt
transaction receive ``restricted securities.'' 33 Consequently,
purchasers must either register subsequent resales of the securities or
have an exemption for such sales. Categorizing the securities offered
and sold pursuant to Rule 1001 as ``restricted'' is consistent with the
California exemption, since the latter requires an investment intent on
the part of purchasers in the offering, and such shares could not be
resold under California law without qualification or some other
exemption under such law. In addition, the treatment is consistent with
other federal exemptions, the availability of which depends on the
sophistication, wealth or institutional character of the
investor.34
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\33\ Rule 1001(c) and amendment to Rule 144.
\34\ See, e.g., Section 4(6) of the Exchange Act [15 U.S.C.
78d(6)] and Securities Act Rule 506.
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IV. Other Matters Addressed in the Proposing Release
A. Exemptions for Other States
The Commission proposed to provide the same exemption for each
state that enacts a transaction exemption incorporating the same
standards used by California. To date, the Commission has not received
any request from a state other than California seeking its own
exemption. The Commission reiterates its desire to cooperate with the
states and repeats its position that it will create an exemption for
any state that adopts an exemption incorporating the same standards
used by California. Separate consideration for a federal exemption will
be given to states that adopt other similar exemptions that protect the
public interest.35
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\35\ Three commenters supported this approach. Two commenters,
however, believed that the Commission should not proceed on a state-
by-state basis; rather, it should take a broader approach by
creating a federal exemption that the individual states could then
use to fashion their own coordinated exemptions. The Commission will
consider this suggestion, together with others put forward by
commenters with respect to facilitating small business capital
formation, in connection with future rulemaking projects.
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B. General Solicitation under Regulation D and ULOE
While not included as a rule proposal, the Commission indicated in
the proposing release that it was considering whether amendments to
Regulation D should be proposed that would facilitate better use of the
exemptions by revising or eliminating the prohibition against general
solicitation for Rule 505 and 506 offerings. This question was prompted
in part by the approach in the California exemption that allows a form
of general solicitation followed by sales only to qualified purchasers.
Comment also was sought as to whether the Commission should consult
with the states and NASAA about modifying ULOE, which also prohibits
general solicitations in these offerings.
A number of commenters supported relaxing the general solicitation
prohibition, believing that it would enhance the utility of Rule 505
and 506 offerings. The Commission has determined to proceed with
adoption of the California exemption at this time while deferring
action on the general solicitation question with respect to other
exemptions, since Section 3(b) does not prohibit general solicitation
for offerings exempt thereunder. However, these comments will be
considered in connection with future initiatives undertaken by the
Commission as it evaluates the reports of the Task Force on Disclosure
Simplification 36 and the Advisory Committee on the Capital
Formation and Regulatory Processes.37 The work of both of these
groups has been dedicated to reassessing and reforming the federal
securities disclosure regime where necessary and appropriate in the
public interest and consistent with investor protection.
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\36\ The Task Force on Disclosure Simplification was organized
in August 1995 to review forms and rules relating to capital-raising
transactions, periodic reporting pursuant to the Exchange Act, proxy
solicitations, and tender offers and beneficial ownership reports
under the Williams Act. Its goal was to identify where the
disclosure process could be simplified and, consistent with investor
protection, to make regulation of capital formation more efficient.
Following a seven-month review, the Task Force completed its report,
including a number of recommendations, which the Commission
authorized for publication on March 5, 1996. This report is
available for inspection and copying at the Commission's public
reference room. It also is available through the Commission's
Internet web site [http://www.sec.gov].
\37\ The Securities and Exchange Commission Advisory Committee
on the Capital Formation and Regulatory Processes was established in
February 1995. See Release No. 33-7135 (February 17, 1995) [60 FR
9415]. The objective of the Committee is to assist the Commission in
evaluating the efficiency of the regulatory process relating to
public offerings of securities, secondary market trading and
corporate reporting. The Committee's focus has been the development
of a company registration system for adoption by the Commission,
which would allow eligible companies to offer and sell securities
relying on a more company-focused, as opposed to transaction-
focused, system. The Committee plans to issue a report containing
its recommendations in the near future.
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V. Cost-Benefit Analysis
The Commission solicited comments to aid in its evaluation of the
costs and benefits that would result from the proposed exemption. It
was expected that compliance burdens would decrease with respect to
issuers who qualify for the proposed exemption, inasmuch as they would
be able to raise up to $5 million in capital without the burden and
expense of compliance with the registration and reporting requirements
of the federal securities laws. Commenters supported that view,
indicating that the exemption would be beneficial to small business by
reducing their capital raising expenses without reducing investor
protection. Consequently, the Commission has determined to adopt the
rule as proposed.
VI. Final Regulatory Flexibility Analysis
A final regulatory flexibility analysis has been prepared in
accordance with 5 U.S.C. 604 concerning the adoption of Rule 1001
exemption and the amendment to Rule 144. A copy of the analysis may be
obtained by contacting James R. Budge, Office of Disclosure Policy,
Division of Corporation Finance, at (202) 942-2910, U.S. Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
VII. Statutory Basis for the Rules
Regulation CE, Rule 1001 and the amendment to Rule 144 are adopted
pursuant to Sections 3(b) and 19 of the Securities Act.
List of Subjects in 17 CFR Part 230
Registration requirements, Securities.
Text of the Amendments
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is amended as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
1. The authority citation for Part 230 continues to read in part as
follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c,
78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 89a-29, 80a-30, and
80a-37, unless otherwise noted.
* * * * *
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2. By amending Sec. 230.144 by removing the period at the end of
paragraph (a)(3)(iv) and adding ``; or'' in its place and by adding
paragraph (a)(3)(v), to read as follows:
Sec. 230.144 Persons deemed not to be engaged in a distribution and
therefore not underwriters.
* * * * *
(a) * * *
(3) * * *
(v) Securities acquired from the issuer that are subject to the
resale limitations of Regulation CE (Sec. 230.1001).
* * * * *
3. By adding a new undesignated center heading and Sec. 230.1001,
to read as follows:
Regulation CE--Coordinated Exemptions for Certain Issues of Securities
Exempt Under State Law
Sec. 230.1001 Exemption for transactions exempt from qualification
under Sec. 25102(n) of the California Corporations Code.
Preliminary Notes: (1) Nothing in this section is intended to be
or should be construed as in any way relieving issuers or persons
acting on behalf of issuers from providing disclosure to prospective
investors necessary to satisfy the antifraud provisions of the
federal securities laws. This section only provides an exemption
from the registration requirements of the Securities Act of 1933
(``the Act'') [15 U.S.C. 77a et seq.].
(2) Nothing in this section obviates the need to comply with any
applicable state law relating to the offer and sales of securities.
(3) Attempted compliance with this section does not act as an
exclusive election; the issuer also can claim the availability of
any other applicable exemption.
(4) This exemption is not available to any issuer for any
transaction which, while in technical compliance with the provision
of this section, is part of a plan or scheme to evade the
registration provisions of the Act. In such cases, registration
under the Act is required.
(a) Exemption. Offers and sales of securities that satisfy the
conditions of paragraph (n) of Sec. 25102 of the California
Corporations Code, and paragraph (b) of this section, shall be exempt
from the provisions of Section 5 of the Securities Act of 1933 by
virtue of Section 3(b) of that Act.
(b) Limitation on and computation of offering price. The sum of all
cash and other consideration to be received for the securities shall
not exceed $5,000,000, less the aggregate offering price for all other
securities sold in the same offering of securities, whether pursuant to
this or another exemption.
(c) Resale limitations. Securities issued pursuant to this
Sec. 230.1001 are deemed to be ``restricted securities'' as defined in
Securities Act Rule 144 [Sec. 230.144]. Resales of such securities must
be made in compliance with the registration requirements of the Act or
an exemption therefrom.
Dated: May 1, 1996.
By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-11626 Filed 5-8-96; 8:45 am]
BILLING CODE 8010-01-P
