Federal and Blue Sky Securities Law Issues in Negotiated Business Acquisitions

• Publication year: 2002
• Pages: 77

31 Colo.Law. 77 Colorado Lawyer 2002.

2002, January, Pg. 77. Federal and Blue Sky Securities Law Issues in Negotiated Business Acquisitions

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77

Vol. 31, No. 1, Pg. 77

The Colorado Lawyer
January 2002
Vol. 31, No. 1 [Page 77]

Specialty Law Columns
Business Law Newsletter
Federal and Blue Sky Securities Law Issues in Negotiated Business Acquisitions
by Bradford J. Lam

Merger and acquisition specialists are presented with a comprehensive review of the federal and state securities law statutes applicable to the offer and sale of securities tendered in negotiated acquisitions

Early in an acquisition, acquirer and target counsel should identify federal and state securities law issues. If no federal exemption is available, the issuer must register the distributable securities under federal law. Because registration can be time-consuming, the issuer should start the process as early in the transaction as possible. In completing the registration or exemption analysis, counsel for the issuer of the securities should carefully consider the application of individual state securities laws ("Blue Sky laws"),1 including Colorado's especially if the buyer and seller are located in different states

This article is intended to alert the merger and acquisition attorney of the practical securities law questions that must be addressed in every negotiated business transaction. Specialists practicing within this area may find useful the concise but comprehensive list of the available methods to issue securities (if acting as the buyer's counsel), or to acquire and distribute securities (if acting as counsel for the seller).

This month's article was written by Bradford J. Lam, Denver, Special Counsel at Hall & Evans, LLC, and a member of the firm's securities regulation and corporate practice group—(303) 628-3300.

Identifying Securities
Issues

It is often easy to identify the securities issues in an acquisition. For example, a stock-for-stock exchange involves both an issuance and a sale of stock: the buyer issues its stock to the seller, and in exchange the seller sells its stock to the buyer.2 The issuer and its counsel should evaluate both the issuance by the buyer and the sale by the seller for compliance with federal and state securities laws. Similarly, in a "C" reorganization that involves a stock for assets exchange under Internal Revenue Code § 368(a)(1)(c), the issuance of stock by the buyer to the seller must be evaluated for securities law compliance.

Other securities law issues in an acquisition are less obvious. For example, there may be an earn-out provision, which allows for delayed payment of a portion of the stock price, payable based on the future performance of the target company or on the occurrence of a certain specified event. Comparably, a provision for the delayed payment of a portion of the purchase price may exist. In cases such as these, counsel should consider whether the earn-out or deferred purchase price provision constitutes a security for federal and state securities law purposes.

Securities and Exchange Commission ("SEC") Rule 145 states that an event triggering the jurisdiction of the federal securities laws occurs whenever an "offer," "offer to sell," offer for sale," or "sale" is submitted to shareholders for approval as part of a plan or agreement for, among other things, a merger or consolidation or a stock for assets exchange, with the seller dissolving or otherwise distributing the stock received to its shareholders.

The ability to immediately resell the stock received from a buyer may be important to the seller or its shareholders, so counsel should evaluate any applicable limits on resales early in the transaction. These limits may be in the form of resale restrictions under applicable securities laws or in the form of a contractual lock-up provision.3

Registration Exemptions For the Buyer

A number of registration exemptions for securities issued by the buyer in an acquisition may be available, depending on the parties' investment sophistication and the circumstances of the transaction. Among these exemptions are: SEC Regulation D,4 §§ 4(2) and 4(6) of the Securities Act of 1933 ("1933 Act"),5 §§ 3(a)(10) and 3(a)(11) of the 1933 Act, Rule 147 under the 1933 Act, other § 3(a) exemptions in the 1933 Act, and SEC Regulation A.6 Each of these exemptions is covered below.

Even if an exemption from registration is available, the issuance of securities will be subject to anti-fraud provisions of federal and state securities laws.7 Accordingly, counsel should consider the adequacy of disclosure materials provided by the securities issuer in connection with the acquisition.

SEC Regulation D

SEC Regulation D, generally referred to as the "limited offering exemption," provides a safe harbor for certain limited, non-public offerings and sales of securities. There are three categories of sales covered by Regulation D, each with its own requirements: Rule 504 applies to offers of securities in an aggregate amount not exceeding $1 million (it cannot be used by "public" companies that are reporting under §§ 13 or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act"));8 Rule 505 applies to an issuance of securities in an aggregate amount not exceeding $5 million; and Rule 506 applies to an issuance without a maximum dollar amount limitation. Rules 504 and 505 may not be used by investment companies, such as mutual fund companies.

Each of these rules incorporates by reference certain provisions contained in Rules 501 and 502. These rules set forth, among other requirements: the type of written disclosure that must be provided to offerees, limitations on the manner in which the offering may be made to prospective investors, resale limitations, method of calculating the maximum number of permissible purchasers, and requirements that a notice of issuance be filed with the SEC.

Sections 4(2) and 4(6)
Of the 1933 Act

Section 4(2) of the 1933 Act provides an exemption similar to, but more flexible than, the safe harbor afforded by Regulation D. Section 4(2), known commonly as the private placement exemption, exempts from registration requirements of the 1933 Act those "transactions by an issuer not involving any public offering." The leading case defining the scope of § 4(2) remains SEC v. Ralston Purina Co.,9 in which the U.S. Supreme Court held that the availability of § 4(2) turns on whether the purchasers of the securities are able to "fend for themselves,"10 and whether they have "access to the kind of information which registration would disclose."11 Factors that may be relevant in evaluating the availability of this exemption include: number of offerees; relationship of the offerees to the issuer; relationship of the offerees to each other; sophistication of the offerees; value of the offering; number of securities offered; manner in which the offer to purchase is conveyed; and whether the securities purchased have come to rest with the purchaser, as opposed to their further distribution.

Section 4(6) of the 1933 Act exempts "transactions involving offerings or sales by an issuer solely to one or more accredited investors" if three conditions are met: (1) the offering amount does not exceed $5 million; (2) there is no advertising or public solicitation in connection with the transaction by the issuer or anyone acting on the issuer's behalf; and (3) a notice of the offering on Form D is filed with the SEC.

An issuer wishing to rely on § 4(6) must make a direct effort to ensure that no offer is extended to any unaccredited investor. A single offer or sale to an unaccredited investor will make the § 4(6) exemption unavailable, even if the issuer believes that an offeree or purchaser is an accredited investor and the...