O n April 5, 1999, the Securities and that their securities could - PDF document

G Corporate Finance Alert May 1999 New SEC Rules: The SEC Giveth and the SEC Taketh Away By: Peter H. Ehrenberg, Esq. and John D. Hogoboom, Esq. O n April 5, 1999, the Securities and that their securities could be immediately Exchange Commission announced the transferable, avoiding the discounts typically promulgation of a number of final rules associated with the sale of “restricted securities”. with broad-based effect on both public and private companies. Many of the rule amendments are Unfortunately, Rule 504 has resulted in targeted at curbing specific abusive practices certain abuses in the micro-cap market. identified by the SEC in the micro-cap market. In Responding to those abuses, the SEC has now addition, the rule changes expand the exemptions modified Rule 504 to make it more difficult for a available for the sale of securities by private public market to develop in Rule 504 securities. companies under employee benefit plans and allow Under amended Rule 504, private offerings (i.e., for simplified registration of securities issuable to offerings subject to prohibitions on general certain holders of transferable options. solicitation and general advertising) may be made in amounts of up to $1,000,000. Under the Rule as Restrictions on Limited Offerings revised, such securities will be deemed to be Previously, Rule 504 (which is a part of “restricted securities” and thus generally will not Regulation D -- the SEC’s principal private be transferable for a period of one year after the placement exemption) allowed small private issuers sale. Public offerings under Rule 504 of up to to offer and sell up to $1 million in securities to an $1,000,000 in unrestricted securities can now be unlimited number of persons without regard to made only if either (a) the issuer registers the their sophistication or experience and without offering under a state law that requires public filing delivery of any specified disclosure in a public of a disclosure document and delivery of a offering in which general advertising and general solicitation were permitted. In adopting Rule 504, the SEC intended to rely primarily upon state blue CFOs & Analysts Roundtable: “Managing the Information ...the SEC announced the promulgation of a TUG-OF-WAR” number of final rules with broad-based effect On June 10th, our M&A and Corporate Finance Group will host on both public and private companies. a breakfast roundtable focusing on the dialog between analysts and CFOs. The roundtable, consisting primarily of CFOs and analysts, will be chaired by Peter Ehrenberg. Chief Financial sky bureaus to regulate 504 exempt offerings. Officers from public companies are invited to participate. The event will be held from 8:00 a.m.-10:00 a.m. at our offices in As a result, subject to state law Roseland, New Jersey. For more information, or to register, requirements, under Rule 504 issuers had the ability please call Cheryl Derites at 973.597.2500 ext. 2886 or email her at cderites@lowenstein.com. to sell a limited amount of securities to a broad-base of potential investors and to assure those investors This document is published by Lowenstein Sandler PC to keep clients and friends informed about current issues. It is intended to provide general information only. L Roseland, New Jersey Telephone 973.597.2500 65 Livingston Avenue www.lowenstein.com 07068-1791 Fax 973.597.2400

G disclosure document to investors prior to sale or $1,000,000. Thus, regardless of the size (b) the offering is made under state law of an issuer, at least $1,000,000 of exemptions that permit general solicitation and securities may be offered in general advertising, provided that such offerings compensatory arrangements during a are made only to accredited investors. For New given year in conforming with Rule 701. Jersey offerings, the two primary private placement exemptions set forth in the state’s � Third, these dollar limits will now be Uniform Securities Law (N.J.S.A. 49:3-50(b)(9) based on the amount of securities and (12)) prohibit general solicitation and actually sold, thereby providing clearer general advertising. limits and more certainty to issuers seeking to rely on the exemption. Since state registration is often extremely cumbersome and since state laws are likely (as in The elimination of the $5,000,000 cap will New Jersey) to prohibit general solicitation and especially benefit relatively large private general advertising for unregistered offerings, it is companies. Issuers that exceed the $5,000,000 likely that the modifications of Rule 504 will lead annual amount will, however, be subject to a new most issuers relying upon Rule 504 to utilize Rule regulatory restriction. If the $5,000,000 threshold 504 only for private offerings that treat the offered is exceeded, issuers will be required to provide securities as “restricted securities”. Accordingly, specific disclosures to all investors before sales are private offerings under Rule 504 will not be made. The disclosures consist primarily of a copy significantly different than other Regulation D of the compensatory benefit plan or contract offerings, although greater disclosure obligations together with a summary thereof, a description of will continue to exist under the other provisions of risk factors associated with the investment and Regulation D. certain financial statements. Since issuers remain subject to the anti-fraud provisions of federal and Additional Flexibility under Rule 701 state securities law, the imposition of this The SEC’s Rule 701 provides an disclosure obligation may not, in practice, add exemption from registration for securities issued by substantially to an issuer’s disclosure burden. non-reporting companies pursuant to compensatory arrangements. The Rule previously For issuers providing New Jersey residents limited the aggregate offering price of securities with compensatory benefits, the added flexibility that could be sold in any twelve-month period to permitted by the revisions to Rule 701 should be the greatest of (a) $500,000, (b) 15% of the issuer’s read in conjunction with enhanced flexibility total assets or (c) 15% of the outstanding securities afforded to issuers under the New Jersey Uniform of the class being offered, provided that in no event Securities Law. In 1997, that law was amended to could more than $5,000,000 in securities be exempt from registration all securities issued offered. pursuant to employee benefit plans. Prior to that date, cumbersome prerequisites made it far more The revised rule adds flexibility in three difficult for stock compensation to be afforded to important respects. employees by private issuers. � First, the $5,000,000 cap has been Private issuers wishing to use Rule 701 to eliminated. offer securities to their employees also should be mindful of the requirements of the Securities � Second, the minimum ceiling of Exchange Act of 1934, which subjects issuers with $500,000 has been increased to more than 500 shareholders and $10 million or