Re: Look at all the phony garbage on this board. -- Finance, Currency & Metal Message Board

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Date Posted: 22:46:39 07/30/03 Wed
Author: Johnny La Chingas
Subject: Re: Look at all the phony garbage on this board.
In reply to: Slappy 's message, "Look at all the phony garbage on this board." on 11:13:39 06/25/03 Wed

Hello again!

I've seen a lot reference on this board by promoters of HYIP schemes who claim their programs are "private placements" and therefore not subject to SEC rules. This is a complete misrepresentation. All Private Placements are subject to certain rules and/or regulations. The most often used is Regulation D. I found a very well-written article about Reg D offerings that I share here.

19 Feb 2003
Entrepreneurial companies often seek to fund their growth by selling common or preferred stock. When doing so, they must comply with the federal securities laws, namely the Securities Act of 1933, which requires that offers and sales of securities be made pursuant to a registration statement or an exemption from registration. The vast majority of growth company offerings are structured as private placements, which are exempt from registration. The most commonly relied on private placement exemption is Regulation D, which is a "safe harbor" exemption under the Securities Act, meaning that an issuer that complies with the requirements of Regulation D will have a bright line valid private placement exemption.

Regulation D consists of three separate exemptions from registration: Rules 504, 505 and 506. Each of these serves a particular offering size niche and is discussed in this article.

Rule 504
Rule 504 provides an exemption from registration for offers and sales of securities that do not exceed $1,000,000 during any 12- month period. In calculating this dollar limit, the issuer must include proceeds from all offerings made by it that were exempt under Section 3(b) of the Securities Act, which includes offerings under Rules 504, 505 and Regulation A. Offerings made in violation of Section 5(a) of the Securities Act also must be included; these consist of unregistered offerings that do not satisfy any of the private placement exemptions from registration. For purposes of the dollar limit calculation, the issuer must include all cash and non-cash consideration received by it for the issuance of the securities, including services, property, notes and cancellation of indebtedness. If securities are not offered for cash, the offering price is determined based on comparable sales or fair market value.

In order to rely on the Rule 504 exemption, the issuer cannot be a public company, an investment company or a "blank check company." A "blank check company" is a development stage company without a business plan or a company with the sole purpose of engaging in mergers or acquisitions.
For small offerings that can come within its dollar ceiling, Rule 504 offers a great deal more flexibility than either Rule 505 or 506. Rule 504 does not limit the number of offerees or purchasers of securities. Under certain circumstances, it also allows general solicitation and advertising (these concepts are discussed later in this article). In addition, there is no restriction on resales of securities issued pursuant to Rule 504, as long as the issuer has satisfied state law registration and disclosure requirements or state law exemptions from registration.

Rule 504 also does not require the issuer to provide offerees or purchasers with a private placement memorandum and, in fact, does not impose any mandatory disclosure obligations on the issuer relating to either the issuer's business or the securities being offered. However, the anti-fraud provisions of the federal securities laws, which impose liability for material misstatements or omissions in connection with securities offerings, still apply. Therefore, in most cases, the issuer should, at the very least, consider providing prospective investors with a copy of a business plan and a written summary of the principal risks relating to the business and an investment in the issuer's securities. In some states, state securities laws also will require disclosure of specific information in connection with a Rule 504 offering.

Rule 505
Under Rule 505, an issuer may offer and sell up to $5,000,000 of securities during any 12- month period. The method for calculating the dollar ceiling is the same as that used under Rule 504.

Unlike Rule 504, Rule 505 imposes limitations on the number of purchasers that may purchase securities in an offering made in reliance on the exemption. There cannot be more than 35 non-accredited purchasers (this concept is discussed later in this article) of securities in any Rule 505 offering, or the issuer must reasonably believe that to be the case. In calculating the number of purchasers in a Rule 505 offering, the following are excluded:
�h relatives, spouses and relatives of spouses of a purchaser with the same principal address as the purchaser;
�h a trust or an estate where the purchaser and the relatives listed above collectively have more than 50% of the beneficial interest; and
�h a corporation or other entity of which the purchaser and the relatives listed above collectively beneficially own more than 50% of its equity securities or equity interests.
Also, in most circumstances, for a corporation, partnership or other entity, unless the entity was organized for the purpose of acquiring the securities, there is no "look through" to its owners and each such entity will only count as one purchaser.

Disclosure Requirements
If a Rule 505 offering includes purchasers that are not accredited investors, the issuer must disclose certain mandated financial and non-financial information to them, to the extent material to an understanding of the issuer, its business and the securities being offered. If an offering includes purchasers that are both accredited and non-accredited, even though not specifically required to do so, the issuer often will provide the accredited investors with the same information that it is required to provide to the non-accredited investors to better insulate itself from liability under the anti-fraud provisions of the Securities Act.

Private Companies
If the issuer is not a public company, i.e., a company that does not file quarterly and annual reports with the Securities and Exchange Commission pursuant to the Securities Exchange Act, it must furnish to all non-accredited investors the nonfinancial information required by one of the following:
�h Part II of Form 1-A, if it is eligible to use Regulation A, which is a small issues exemption; or
�h if not eligible to use Regulation A, Part I of a registration statement that the issuer would be eligible to file.

In either case, this information includes, among other things, the number and type of securities being offered, the offering price and the total proceeds of the offering, as well as general information about the issuer, such as a description of the issuer's business, information about the issuer's property, legal proceedings, officers and directors and their compensation and related party transactions, as well as risk factors relating to the issuer and the proposed offering.
The financial information required to be disclosed by a non-reporting company depends on the size of the offering. For offerings greater than $2,000,000 but less than $7,500,000, the issuer generally must furnish the financial statement information required by Regulation S-B. The issuer must provide investors with an audited balance sheet as of the end of its most recent fiscal year, or as of a date within 135 days if the issuer has been in existence for less than a full fiscal year. The issuer also must furnish audited statements of income, cash flows and changes in stockholders' equity for each of its two most recent fiscal years (or shorter period of time that it has been in business). An unaudited balance sheet and unaudited statements of income, cash flows and changes in stockholders' equity also must be provided for completed quarterly periods in the issuer's current fiscal year. For offerings up to $2,000,000, the issuer must furnish the same financial statement information, except that only the balance sheet, which must be dated within 120 days of the start of the offering, is required to be audited.

Public Companies
If the issuer is a public company, it has two disclosure alternatives. If the issuer's annual report for its most recent fiscal year was prepared in compliance with the SEC's proxy rules, it may provide that annual report and the definitive proxy statement filed in connection with the annual report. In addition, if requested by an investor, the issuer must provide a copy of its most recently filed Form 10- K or Form 10-KSB. Alternatively, the issuer must provide the information contained in its most recently filed Form 10-K, 10- KSB, S-1, SB-1, SB-2, SB-11, 10 or 10-SB, whichever was the last to be filed.

In addition, in either case, the issuer must provide the information contained in any periodic filing under the Securities Exchange Act made since the date of the last registration statement or annual report filed by the issuer, as well as a brief description of the securities being offered, the proposed use of proceeds of the offering and any material changes in the issuer or its business not otherwise disclosed.

General Solicitation and Advertising
Rule 505 prohibits general solicitation or advertising. Whether a particular course of conduct constitutes a general solicitation or general advertising is highly fact specific. However, Regulation D and guidance from the SEC make it clear that cold calls, advertisements in newspapers or magazines or on television or radio, mass mailings, seminars open to the public to sell securities and open web site offerings cross the line.

In contrast, notices that comply with Rule 135c under the Securities Act, which usually take the form of a press release, are not considered to involve a general solicitation or general advertising and are allowed. A Rule 135c notice only may include the name of the issuer, certain basic information concerning the securities to be offered, a Securities Act legend and any required state law legends. A Rule 135c notice may not, however, be used to condition the market for the securities being offered.

When a private placement includes investors that are not well known to the issuer, i.e., there is no prior substantive relationship, general solicitation concerns will arise. A prior substantive relationship will exist if (1) there is a preexisting business relationship between the issuer and the proposed investor or (2) an issuer has suffic ient information to evaluate a proposed investor's sophistication and financial circumstances. However, there must be sufficient time, a "cooling off" period, between the establishment of a relationship and an offer so that the offer is not deemed made by general solicitation or advertising. If an issuer hires an investment banker or broker to sell securities on its behalf or hires a placement agent or registered investment advisor to introduce the issuer to potential investors, it is sufficient for that intermediary, rather than the issuer, to have the prior substantive relationship with the proposed investors.

Resales of Securities
Securities issued pursuant to Rule 505 are subject to resale limitations. They cannot be resold without registration under the Securities Act or an exemption from registration (such as the Rule 144 resale exemption, which is beyond the scope of this article).

At the time of a Rule 505 sale, the issuer must exercise reasonable care to assure that each of the purchasers is not an underwriter, which, generally speaking, is any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security. In other words, the purchaser must have a bona fide investment intent.

An issuer will be deemed to have exercised reasonable care in determining that an investor is not an underwriter if it (1) inquires whether the investor is acquiring the securities for itself or for others, which typically is satisfied by obtaining a representation from the investor in a purchase or subscription agreement, (2) discloses to each investor that the securities have not been registered under the Securities Act and cannot be resold unless registered or resold pursuant to an exemption, which also typically is done in writing by way of the purchase or subscription agreement, and (3) places a legend on the certificate evidencing the securities, such as a stock certificate, or other document stating that the securities have not been registered under the Securities Act and that the transferability of the securities may be limited.

Rule 506
Rule 506 is the most utilized exemption under Regulation D because it has no dollar limit. Companies issuing securities in institutional venture rounds typic ally try to fit within the Rule 506 exemption.

As is the case with Rule 505, there cannot be more than 35 non-accredited purchasers of securities in a Rule 506 offering, or the issuer must reasonably believe that to be the case. The number of purchasers is determined in the same manner as under Rule 505. To the extent that the offering includes non-accredited purchasers, Rule 506 also requires that each non-accredited purchaser be financially sophisticated, having enough knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment, or the issuer must reasonably believe that to be the case. If a purchaser is not sufficiently sophisticated, a purchaser representative, with sufficient knowledge and experience, such as an investment adviser, can assist the purchaser in evaluating the merits and risks of the prospective investment. In contrast, Rule 505 does not impose a sophisticated purchaser requirement for non-accredited investors.

Except for somewhat different financial statement disclosure requirements for offerings of more than $7,500,000, the Rule 505 and 506 exemptions have the same disclosure requirements, and the same restrictions on general solicitation, general advertising and resales. For offerings of more than $7,500,000, issuers generally must provide to non-accredited investors the same financial statements that would be required to be included in a public offering registration statement that the issuer is eligible to file.

Other Regulation D Considerations
Accredited Investor Status
Rules 505 and 506 differentiate between accredited and non-accredited investors. As indicated above, there is a numerical limit on non-accredited investors, while there is no limit on accredited investors. In addition, certain specified information must be provided to non-accredited investors before they invest, while that information need not be provided to accredited investors. For purposes of Rule 506, accredited investors also are deemed to be sophisticated, to have the knowledge and experience necessary to evaluate the benefits and risks of an investment and the ability to bear the economic risk of loss of the investment, regardless of their actual knowledge, experience, sophistication or risk tolerance.
The definition of "accredited investor" is in Rule 501 of Regulation D. Accredited investors generally include the following:
�h banks, savings and loan associations or other similar institutions, registered brokers or dealers, insurance companies, investment companies, licensed Small Business Investment Companies or business development companies;
�h governmental employee plans or ERISA plans with assets in excess of $5,000,000;
�h tax-exempt organizations with assets in excess of $5,000,000;
�h directors, executive officers or general partners of the issuer of the securities or directors, executive officers or general partners of the general partner of the issuer of the securities;
�h natural persons with a net worth in excess of $1,000,000, individually or together with their spouse;
�h natural persons with $200,000 of annual income in the past two years or $300,000 together with their spouse, with a reasonable expectation of reaching the same level in the current year;
�h corporations, partnerships and trusts with assets in excess of $5,000,000 that are not formed for the specific purpose of acquiring the securities; and
�h entities whose equity owners are all accredited investors.

Integration
When structuring private placements to comply with Regulation D, it is important to be mindful of integration issues. Put simply, integration means that, under certain circumstances, two or more private placements may be treated as component parts of a single offering. If private placements are integrated, the issuer may retroactively be deemed to have violated the registration requirements of the Securities Act for a completed offering, i.e., it may find after the fact that it did not have a valid private placement exemption, or it may not be able to satisfy a private placement exemption for a proposed offering. For example, an integrated offering may exceed dollar or purchaser limitations under Regulation D. The consequences of violating the registration provisions of the Securities Act can include a recission right for investors in the tainted private placement, as well as personal liability for directors and officers.
Whether multiple offerings will be integrated for purposes of Regulation D is based upon a five factor test that is outlined in Rule 502(a). The five factors of the test are as follows:
�h whether the sales are part of a single plan of financing;
�h whether the sales involve the issuance of the same class of securities;
�h whether the sales have been made at or about the same time;
�h whether the same type of consideration is being received; and
�h whether the sales are made for the same general purpose.
Each of the prongs of the test has been fleshed out somewhat by the SEC over the years. The analysis, however, remains highly subjective and fact specific. Rule 502, however, contains an integration safe harbor that eliminates the subjectivity and uncertainty of the five factor test. Under this safe harbor, for purposes of Regulation D, offers and sales that are made more than six months apart will not be integrated.

Form D
Once an issuer completes a Regulation D offering, within 15 days after the first sale, it must file a Form D with the SEC. Among other things, the Form D requires the issuer to indicate the specific exemption upon which it is relying (i.e., Rule 504, 505 or 506), the price for the securities being offered, the number of investors (accredited and non-accredited), the proposed use of proceeds and the expenses incurred for the offering. Form D also requires certain basic information about the issuer, as well as its beneficial owners, promoters, executive officers and directors.

State Blue Sky Laws
Private placements must comply not only with the federal securities laws, but often also with state securities or "blue sky" laws. Blue sky laws differ from state to state and must be examined separately in each state where offers and sales will be made. A detailed state-by-state discussion of blue sky laws is beyond the scope of this article; however, a few general observations are worth making.

Blue sky requirements fall into two categories: (1) registration and qualification; and (2) notice filings. Registration and qualification involves the affirmative approval of a state securities regulator before securities may be offered and/or sold in that state. Notice filings typically are required to be made with a state after completion of a Regulation D private placement in that state. When state law exemptions are not available, Rule 504 offerings generally are subject to registration and qualification requirements, while Rule 505 and 506 offerings generally are subject to notice filing requirements.

Registration and Qualification
For Rule 504 offerings, registration requirements vary from state to state. Most states require registration of Rule 504 offerings. In addition, some states subject all Rule 504 offerings to substantive review, which can be expensive and time consuming. However, New York does not engage in substantive review of Rule 504 offerings.

Because of the compliance costs associated with conducting a Rule 504 offering in a state that engages in substantive review, issuers typically attempt to structure their private offerings to comply with Rule 506. State registration and qualification requirements are preempted for all Rule 506 offerings, although, in most states, notice filings still are required.

So, as you can see, "Slappy", not every reader of this bulletin board is as stupid as you may think.

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