1975, October, Pg. 1913. Rule 240 A New Norioublic Offering Exemption.

• Author: by Rich ard F. Mauro

4 Colo.Law. 1913

Colorado Lawyer

1975.

1975, October, Pg. 1913.

Rule 240 A New Norioublic Offering Exemption

1913Vol. 4, No. 10, Pg. 1913Rule 240 A New Norioublic Offering Exemptionby Rich ard F. MauroThe promulgation of a new rule by the Securities and Exchange Commission is frequently of interest to only a handful of securities law practitioners. The newly promulgated Rule 240,(fn1) however, could, and more importantly should, be utilized by nonspecialist practitioners who represent small corporations.

The specific purpose of the rule is to govern offers and sales of securities by an issuer which "are of such limited character and of such small amount that enforcement of the registration provisions of the Act with respect to such transactions is not necessary in the public interest or for the protection of investors."

Actually, the rule is a continuation in a series of rules promulgated by the SEC, commencing with Rule 144, which arose out of a report to the SEC commonly known as the "Wheat Report." The Wheat Report suggested that certain areas of the securities law, especially the nonpublic or "private" offering, be made subject to more specific and objective criteria than had been the practice theretofore. In line with its desire to promulgate more specific and objective rules, in the past three years the SEC has promulgated Rules 144, 145, 147 and 237, as well as Rule 146 which deals with the nonpublic offering exemption.(fn2) All of these rules are of great interest to securities law practitioners but not of as much concern to general practitioners.

It is a different story in the case of Rule 240. Almost every attorney, no matter what his field of concentration in private practice, represents a small corporation which at times has a need for additional capital to be garnered through the issuance of its securities. It is this type of corporation and transaction to which Rule 240 applies, and the rule provides a "safe harbor" for transactions conducted in compliance with it so that an attorney can feel more secure in connection with advising a client on these matters.

OPERATION OF THE RULE

The rule became effective on March 15, 1975, and applies only prospectively. That is, the rule will only apply to offers and sales of securities conducted after the effective date of the rule. In its comments on the rule, the SEC has made two time-honored statements which are typical in such circumstances.

First, in view of the objectives and policies underlying the Securities Act of 1933 ("Securities Act" or "Act"), the rule is not available to an issuer with respect to any transaction which, although in technical compliance with the provisions of the rule, is part of a plan or scheme to evade the registration provisions of the Act. In such cases registration is required. What the SEC is really saying here is that if you conduct a transaction with the specific design of complying with the provisions of

1914Rule 240 but in so doing you seek to avoid the disclosure provisions of the Act to the detriment of the persons intended to be protected by the Act (i.e. purchasers of the securities), you will find yourself without an exemption from registration.

In line with the foregoing caveat the SEC has made a second caveat, namely that there is never an exemption from the antifraud provisions of the Securities Act or the Securities Exchange Act of 1934, and, therefore, a transaction which complies with the conditions of Rule 240 but is fraudulent under the provisions of those acts will not protect the issuer in any way from the constraints of those antifraud provisions.

Of utmost importance in considering the operation of Rule 240 is the fact that its provisions are for the benefit of issuers of securities only and not affiliates or others. Therefore, if your client has purchased stock from an issuer (no matter how he has acquired such stock and whether or not such stock is "restricted" as defined in the securities laws), he cannot avail himself of the provisions of Rule 240. Further, the rule provides that certain issuers, namely investment companies registered or required to be registered under the Investment Company Act of 1940, cannot avail themselves of the provisions of Rule 240 either. This limitation, of course, will not affect most clients of an attorney.

The SEC states in its release regarding Rule 240 that the rule is a transaction exemption under § 4(2) of the Securities Act only (even though it is promulgated under § 3(b) of the Act) and is not a "securities exemption" under that Act. This means that securities acquired in a Rule 240 transaction can only be reoffered or resold if they are registered or, if available, pursuant to an exemption from the registration provisions of the Act (such as § 4(1) of the Act, Rule 237 or Rule 144).

It should be noted there is no "access" requirement under Rule 240 as there is in Rule 146 or under the general law prior. Investors do not have to be "sophisticated" or have the information available which a prospectus would reveal. Nevertheless, one must be cognizant of the antifraud provisions of the securities laws which provide that all material disclosures must be made to investors to assure compliance with said provisions.

Finally, in considering the operation of the...