Under federal law, the securities registration requirements set forth in 15 U.S.C. § 77e do not apply to the following accredited investor exemption:
[T]ransactions involving offers or sales by an issuer solely to one or more accredited investors, if the aggregate offering price of an issue of securities offered in reliance on this paragraph does not exceed the amount allowed under section 3(b) of this title [$5 million], if there is no advertising or public solicitation in connection with the transaction by the issuer or anyone acting on the issuer’s behalf, and if the issuer files such notice with the Commission as the Commission shall prescribe.
15 USC § 77d(5) (emphasis added).
Accordingly, the accredited investor exemption under federal law allows an issuer to offer and sell unregistered securities to accredited investors if the aggregate offering price is less than $5 million, the issuer does not use any advertising of public solicitation to execute its transactions, and the issuer files any required notice with the SEC.
An “accredited investor” is defined as any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person: (1) bank, insurance company, investment company, business development company, small business investment company, and employee benefit plan; or (2) any person who, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial matters, or amount of assets under management qualifies as an accredited investor under rules and regulations which the Commission shall prescribe. 15 U.S.C. § 77b(a)(15). See also 17 C.F.R. § 230.501(a).
The “aggregate offering price” (which cannot exceed $5 million) is defined as “the sum of all cash, services, property, notes, cancellation of debt, or other consideration to be received by an issuer for issuance of its securities.” 17 C.F.R. § 230.501(c). “Where securities are being offered for both cash and non-cash consideration, the aggregate offering price shall be based on the price at which the securities are offered for cash.” Id.
“If securities are not offered for cash, the aggregate offering price shall be based on the value of the consideration as established by bona fide sales of that consideration made within a reasonable time, or, in the absence of sales, on the fair value as determined by an accepted standard,” which must be reasonable at the time made. Id.
There is no statutory definition given for “advertising” or “public solicitation.”
Arizona Administrative Code (“A.A.C.”) § 14-4-140 (“Rule 140”) provides for an accredited investor exemption, which exempts a security from the registration requirements of A.R.S. §§ 44-1841 and 44-1842. A.A.C. § 14-4-140(B). However, the exemption from A.R.S. § 44-1842 is only available for the issuer’s employees, officers, and directors who make offers or sales on the issuer’s behalf if they were not retained for the primary purpose of making such offers or sales; it is not available for third parties or dealers. Id.
An issuer’s offer and sale of securities in compliance with Rule 504 of Regulation D (17 C.F.R. § 230.504), and subject to satisfaction of the provisions of Rule 140, are exempt from Arizona securities registration requirements. Id.
§ 14-4-140(A)(2)-(3), (5), (B).
A. Rule 504 Requirements. Rule 504 requires the following: (1) the issuer’s offers and sales must satisfy the terms and conditions in Rule 501 and Rule 502(a), (c) and (d); and (2) the aggregate offering price must not exceed $1 million in any twelve (12) month period. 17 C.F.R. § 230.504(b). Notably, there is no limitation on the number of purchasers under Rule 504. See Id.
These requirements are discussed in turn in detail below.
1. Rules 501 and 502. Rule 501 defines or explains key terms under Regulation D, including accredited investor, affiliate, aggregate offering price, business combinations, calculation of number of purchasers, executive officer, issuer, and purchaser representative. Id.
Rule 502 sets forth the general conditions under Regulation D, including integration, information requirements, and limitations on the manner of the securities offering and resale of the securities. Id.
§ 230.502. Under Rule 502(a), offers and sales that are made more than six months before the start of a Regulation D offering or six months after completion of a Regulation D offering are not part of that Regulation D offering, so long as during those six month periods there are no offers or sales of securities by or for the issuer that are of the same or a similar class as those offered or sold under Regulation D, other than those offers or sales of securities under an employee benefit plan. Id.
§ 230.502(a). Whether offers and sales within six months of each other should be integrated for purposes of the exemptions under Regulation D depends on the following factors: (1) whether the sales are part of a single plan of financing; (2) whether the sales involve issuance of the same class of securities; (3) whether the sales have been made at or about the same time; (4) whether the same type of consideration is being received; and (5) whether the sales are made for the same general purpose. Id.
Rule 502(c) limits the manner of the offering by prohibiting general solicitation and general advertising as follows:
Except as provided in § 230.504(b)(1), neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:
(1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and
(2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising; Provided, however, that publication by an issuer of a notice in accordance with § 230.135c or filing with the Commission by an issuer of a notice of sales on Form D (17 CFR 239.500) in which the issuer has made a good faith and reasonable attempt to comply with the requirements of such form, shall not be deemed to constitute general solicitation or general advertising for purposes of this section; Provided further, that, if the requirements of § 230.135e are satisfied, providing any journalist with access to press conferences held outside of the United States, to meetings with issuer or selling security holder representatives conducted outside of the United States, or to written press-related materials released outside the United States, at or in which a present or proposed offering of securities is discussed, will not be deemed to constitute general solicitation or general advertising for purposes of this section.
Rule 502(d) limits resale of the securities as follows:
Except as provided in § 230.504(b)(1), securities acquired in a transaction under Regulation D shall have the status of securities acquired in a transaction under section 4(2) of the Act and cannot be resold without registration under the Act or an exemption therefrom. The issuer shall exercise reasonable care to assure that the purchasers of the securities are not underwriters within the meaning of section 2(11) of the Act, which reasonable care may be demonstrated by the following:
(1) Reasonable inquiry to determine if the purchaser is acquiring the securities for himself or for other persons;
(2) Written disclosure to each purchaser prior to sale that the securities have not been registered under the Act and, therefore, cannot be resold unless they are registered under the Act or unless an exemption from registration is available; and
(3) Placement of a legend on the certificate or other document that evidences the securities stating that the securities have not been registered under the Act and setting forth or referring to the restrictions on transferability and sale of the securities.
While taking these actions will establish the requisite reasonable care, it is not the exclusive method to demonstrate such care. Other actions by the issuer may satisfy this provision.
However, the provisions in Rules 502(c) and 502(d), limiting the manner of offering and resale, do not apply to Rule 504 offers and sales of securities that are already subject to state disclosure requirements or made exclusively according to state law exemptions, as follows:
[T]he provisions of § 230.502 (c) and (d) will not apply to offers and sales of securities under this § 230.504 that are made:
(i) Exclusively in one or more states that provide for the registration of the securities, and require the public filing and delivery to investors of a substantive disclosure document before sale, and are made in accordance with those state provisions;
(ii) In one or more states that have no provision for the registration of the securities or the public filing or delivery of a disclosure document before sale, if the securities have been registered in at least one state that provides for such registration, public filing and delivery before sale, offers and sales are made in that state in accordance with such provisions, and the disclosure document is delivered before sale to all purchasers (including those in the states that have no such procedure); or
(iii) Exclusively according to state law exemptions from registration that permit general solicitation and general advertising so long as sales are made only to “accredited investors” as defined in § 230.501(a).
2. Offerings and Sales Not Exceeding $1 Million. The “aggregate offering price” is defined as “the sum of all cash, services, property, notes, cancellation of debt, or other consideration to be received by an issuer for issuance of its securities.” Id.
§§ 230.501(c), 230.504(b)(2). “Where securities are being offered for both cash and non-cash consideration, the aggregate offering price shall be based on the price at which the securities are offered for cash.” Id.
§ 230.501(c). “If securities are not offered for cash, the aggregate offering price shall be based on the value of the consideration as established by bona fide sales of that consideration made within a reasonable time, or, in the absence of sales, on the fair value as determined by an accepted standard,” which must be reasonable at the time made. Id.
The aggregate offering price of the security being offered cannot exceed $1 million, less the aggregate offering price for all securities sold within the twelve months before the start of and during the offering of the securities under Rule 504 in reliance on any exemption under 15 U.S.C. § 77c(b), or in violation of 15 U.S.C. § 77e(a). Id.
3. Disqualification Provisions. Rule 504 is not available to an issuer that is subject to the reporting requirements under the Securities Exchange Act, an investment company, or a development stage company that either has no specific business plan or purpose, or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company, other entity, or person. Id.
B. Rule 140 Requirements.
1. Sales to Accredited Investors Only. Rule 140 requires that the offers of securities specify that sales shall be made only to accredited investors, and that the sales of securities are made exclusively to accredited investors. Id.
§ 14-4-140(D). See also 17 C.F.R. § 230.504(b)(1)(iii) (holding offers and sales of securities under Rule 504 are not subject to limitations on the manner of the offering or resale, including prohibiting against general advertising and solicitation, where they are made “[e]xclusively according to state law exemptions from registration that permit general solicitation and general advertising so long as sales are made only to ‘accredited investors’ as defined in § 230.501(a).”).
An “accredited investor” is defined as any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person: (1) bank, savings and loan association, registered broker or dealer, insurance company, investment company, business development company, small business investment company, state employee benefit plan with total assets in excess of $5 million, or employee benefit plan; (2) private business development company; (3) charitable organization or educational institution with total assets in excess of $5 million; (4) director, executive officer or general partner of the issuer or of that general partner; (5) person whose individual net worth, or joint net worth with that person’s spouse, at the time of purchase exceeds $1 million; (6) person with an annual individual income of more than $200,000 for the past two years (or, together with that person’s spouse, an annual joint income of more than $300,000) and has a reasonable expectation of reaching the same income level in the current year; (7) trust with more than $5 million in assets which is managed by a sophisticated person and not formed for the specific purpose of acquiring the securities offered; and (8) entity in which all of the equity owners are accredited investors. Id.
§ 14-4-140(A); A.A.C. § 14-4-126(B)(1). See also 17 C.F.R. § 230.501(a).
2. Resale Prohibited and Presumed Unless to Accredited Investor or Registered By Qualification. The issuer must reasonably believe, after inquiry, that each purchaser is buying the security for the purchaser’s own account and not with the view to distribute, or for sale in connection with a distribution of, the security. Id.
Any resale of a security within 12 months of the initial purchase from the issuer, except a resale to an accredited investor or pursuant to a registration statement effective under A.R.S. § 44-1891, et seq. (registration of securities by qualification), is presumed to be with a view to distribution and not for investment.
Securities exempt under Rule 140 may only be resold pursuant to a registration or an exemption under the Arizona Securities Act. Id.
§ 14-4-140(A)(4), (E).
3. No Information Requirements; General Advertising and Solicitation Permitted Under Certain Circumstances. There are no information requirements for Rule 140.
While a general announcement of the proposed offering may be made by any means, it must include the following information and only this information: (1) the name, address, and telephone number of the securities issuer; (2) the name, a brief description, and price (if known) of the security to be issued; (3) a brief description of the issuer’s business; (4) the type, number, and aggregate amount of securities being offered; (5) the name, address, and telephone number of the person to contact for additional information; and (6) a statement that discloses all of the following terms and conditions: (a) sales will only be made to accredited investors; (b) no money or other consideration is being solicited or will be accepted in connection with the general announcement; and (c) the securities have not been registered with or approved by any state securities agency or the SEC and are being offered and sold under an exemption from registration. Id.
§ 14-4-140(F). Disseminating the general announcement of the proposed offering to persons who are not accredited investors does not disqualify the issuer from claiming the exemption under Rule 140. Id.
In offering a security under Rule 140, the issuer may provide information in addition to the general announcement if such information meets one of the two following conditions: (1) is delivered through an electronic database that is restricted to persons who have been identified as accredited investors; or (2) is delivered after the issuer reasonably believes, after inquiry, that the prospective purchaser is an accredited investor. Id.
No telephone solicitations are permitted unless prior to placing the call the issuer reasonably believes, after inquiry, that the prospective purchaser to be solicited is an accredited investor. Id.
The cover page of any offering documents, or any subscription documents if there are no other offering documents, must include a conspicuous legend that states that: (1) the securities may be sold only to accredited investors for investment and not in connection with a distribution; (2) investors may not resell the securities unless the securities are first registered or qualify for an exemption from registration; and (3) the securities have not been approved or disapproved by the SEC or the Arizona Corporation Commission nor have they passed upon the merits of or otherwise approved the offering. Id.
§ 14-4-140(J). A legend regarding resale restrictions must be conspicuously placed on the front of any certificate that represents a security issued or resold in accordance with Rule 140. Id.
§ 14-4-140(K). Any certificate legend is no longer required on the termination of any resale restrictions in accordance with Rule 140 or 12 months after the initial purchase from the issuer, whichever occurs first. Id.
4. Filing Requirements: Form D, Consent to Service of Process, General Announcement, and $100 Filing Fee. For Rule 140, the issuer must file with the Commission a copy of Form D within 15 calendar days after the first sale within or from Arizona, a consent to service of process, a copy of the general announcement, and the $100.00 filing fee set forth in A.R.S. § 44-1861(G). Id.
5. Disqualification Provisions. Rule 140 is not available to: (1) a blind pool offering; (2) an issuer that either has no specific business plan or purpose or whose business plan is to engage in a merger or acquisition with an unidentified entity or person; or (3) an issuer that is excluded from the exemption pursuant to subsection (M). Id.
Under section 14-4-140(M), the exemption is not available to an issuer if it, or any of its predecessors, affiliates, directors, officers, general partners, beneficial owners of 10% or more of any class of its equity securities, promoters, or any underwriter of the securities or any partner, director, or officer of the underwriter: (1) has been convicted within the 10 years preceding the filing of the required notice, or at any time thereafter prior to the termination of the offering, of a felony or misdemeanor involving racketeering or a transaction in securities, or of which fraud is an essential element; (2) is the subject of an order, judgment, or decree of any court of competent jurisdiction entered within five years of the date of filing of the required notice, temporarily, preliminarily, or permanently enjoining or restraining any conduct or practice in connection with the sale or purchase of securities, or involving fraud, deceit, or racketeering; (3) has been subject to any state or federal administrative order or judgment in connection with the purchase or sale of securities entered within five years preceding the filing of the required notice, or at any time thereafter prior to the termination of the offering; or (4) is subject to an order of any state or federal agency denying or revoking registration or licensure as a broker or dealer in securities or as an investment adviser or investment adviser representative, or is subject to an order denying or revoking membership in a national securities association registered under the Securities Exchange Act of 1934, or has been suspended for a prior exceeding six months or expelled from membership in a national securities exchanged registered under the Securities Exchange Act of 1934. Id.
Any disqualification under section 14-4-140(M) ceases to exist if any of the following occurs: (1) the basis for the disqualification has been removed by the jurisdiction creating it; (2) the jurisdiction in which the disqualifying event occurred issues a written waiver of disqualification; or (3) the jurisdiction in which the disqualifying event occurred declines in writing to enforce the disqualification. Id.