Secondary Mkt Trxn

4/15/2013 1:27:00 PM

Chinese Benevolent Association Unregistered bonds by the Chinese government Court called to interpret the phrase foreign issuer o Looks to whether there is a benefit to the issuer as a result of the organizations efforts as opposed to whether there is any formal relationship o 4(1) applies to trxn rather than individuals; the fact that the issuer was the one selling the shares made this unavailable to the trxn Different from 4(4) which is focused on brokers Hypothetical: Scenario 3: Director and call broker to sell shares o Even if she didnt purchase with a view to distribution and thus not an underwriter; if I am a control person of GM I might not be able to rely on 4(1) because it may be that someone else is acting as an underwriter for me o 2(a)11: categorizes control persons as issuers o Issuer (sale)control person (sale) Y If not we will treat them as two separate trxn; and the second sale involves a broker (may be able to have 4(1) exemption) Ask if someone is acting as an underwriter for the control person Could be the broker because they are assisting in the sale trxn Another possibility is that the person I am reselling to is acting as an underwriter for me (issuer control person y z); if this happens we look at as one trxn through y as a conduit and ask who is z o 4(1) wont apply: If I am a control person and the broker who assists me or the person I have sold to is an underwriter; 4(1) is unavailable regardless of whether I purchase the shares

in a registered offering or not, and regardless of how long Ive held the shares Why make it harder for them to resell; why treat them different? They probably have access to more info than the purchasers theyre selling to in that trxn Rule 405 definition Why was Wolfson considered a control person? He owned 40% of the shares and has an informational advantage over the other SH He is the guiding spirit of the firm and has active involvement The brokers provided outlets for the stock of issuers and thus were underwriters They could rely on 4(4) if they were unsolicited trxn; but they werent Only designed to shiled te brokers part in security trxn; Control persons are difficult The control people here kept info from the brokers; and thus are ineligible for the exemption Issuer for purposes of an underwriter; but not for the purpose of under 4(1); it is because there are underwriters involved in the trxn What if no third party was involved? He would probably still be a control person Wolfson himself can always be the underwriter himself (view towards

distribution?) Third parties? If he sells to Buffet, can he rely just on 4(2)- if it isnt considered a distribution o 4(2) exempts trxn by an ISSUER; not an underwriter or CONTROL PEOPLE 4(1 ) Exemption o Wolfson

o We have 4(1); depends on the absence of an underwriter o And then we have definition of underwriter in 2(a)11 to include those working on behalf of control people with respect to distributions o Distribution: concept of public offering as defined in 4(2) o So therefore: if investors can fend for themselves there is no public offering and no distribution; so if there is no distribution then any intermediary will not be deemed to be an underwriter freeing them up to rely on 4(1) Warren is y in our slide Hypothetical Three Does it matter if Skipper is an underwriter o He flipped the shares within a month (View towards distribution) He has the shares for four years and then there is probably not intent to distribute o Holding on for three years it is conclusively establish o But since were dealing with a control person; is anyone acting as an underwriter for Skipper (Minnow Financial probably is) Did they know they were selling for a control person under section 5; then they cant rely on 4(4); but it is just a judicial gloss on the exemption Skipper isnt an underwriter Bill Gates o He might be able to seek the exemption because Bill Gates is a sophisticated investor under 4 (1 ) o Is it a distribution, is someone helping him? o Bill Gates purchasing from an issuer with a view towards distribution (the purchasers that purchase from Bill can say they were sold in violation of 5 because the trxn involves an underwriter; but who can they sue: directly pass title, or solicited you; they could only sue Bill Gates and not skipper; must use Pinter analysis) We dont care about skipper being an underwriter; because it is purchasing post IPO; they wont ever be deemed underwriters so

they can always rely on 4(1); here we have a control person using a third party to effect the distribution; so he cant rely on it. o Rule 144 A SAFEHARBOR From 4(1) and being considered an underwriter within its meaning o Rule 144(a) o Cant rely on Reg D (he isnt an issuer) o Cant rely on 137 (he isnt an issuer) o 3(a)11 o Rule 94 Rule 144 (b): deeming people who meet the conditions set forth as not engaged in a distribution and therefore not underwriters Works to protect both investors reselling restricted securities for their own acct from being considered underwriters for the issuer as well as to protect people assisting retail trxn by control people (affiliates) wont be underwriters for the control person 1) A non affiliate investor wants to resell unrestricted securities that she purchased yesterday on Nasdaq back through Nasdaq in an unsolicited brokers trxn o 4(1) OBVIOUSLY applies here 2) an affiliate wants to resell unrestricted securities that she purchased yesterday on Nasdaq back through Nasdaq in an unsolicited brokers trxn o Underwriter o Problem So 144 steps in

Motivations;: Protect investors by requiring adequate information concerning the issuer o Current public information (144 (c )) o Reporting issuer: current on reports for the past year

Can rely on a statement from the issuer that they have done so; or a statement in the issuers most current periodic report o Nonreporting issuer Rule 15c2-11 info publically available A bunch of basic information Ensure that persons reselling are not acting as conduits for sales to the public of unregistered securities o Holding period for restricted securities (144(d)) o (d)(1): Only restricted securities: if you have a situation with an affiliate who is reselling unrestricted securities; they dont need to hold them for any period of time so long as the other conditions of the rule are met Arent worried as the seller acting as an underwriter; more about info asymmetry When the clock starts ticking it runs from the LATER of the date that shares are acquired from the issuer or an affiliate of the issuer Tacking: until the resale of the securities by the acquirer or any subsequent holder (means that subsequent purchasers can tack onto the holder of the original share) Two months after purchasing securities in a 506 offering, a non affiliate resells to sophisticated investor x (secondary private placement) Two months after purchasing securities in 506 offering, an affiliate resells to Sophisticated investor x (4(1.5)) His clock starts ticking when he purchases them from me A year and a half after purchasing securities in 506 offering, an affiliate resells to investor y in compliance with rule 144 and they resell in two months

Once the securities have been sold in compliance with 144 they are no longer restricted securities Ensure that resales dont negatively impact the trading markets o Limitation on the amt of securities sold (144(e)) Reduce the risk of a shock to the mkt and a huge dumping of stock causing a downward spiral in stock price Might also be motivated by a concern that if you have one person selling a large volume, that they are more likely that there will be an incentive to engage in mkt wide selling efforts, solicitations, cold calling and causing speculative frenzy o Equity securities: for any three month period, sales of equity cannot exceed the greater of 1% outstanding shares in same class or Average weekly reported volume of trading in that class of securities In calculating the above, focus (1) only on the same class and (2) on ALL outstanding shares Exclude anything pursuant to an effective registration statement under the act Exclude any pursuant to Reg A (resales) Pursuant to 4 of the act not involving any public offering Securities sold offshore pursuant to Reg S (904 allows resale) which resale can be conducted

Manner in

o Designed to prevent public like offering But it also captures sales of unrestricted securities o Manner of sale (144(f)) Unsolicited brokers trxn or in trxns directly with market makers Requires in addition; that the person who is relying on the rule to sell securities not solicit or arrange for the solicitation of orders to buy them; or make any

payment n connection to any person other than the broker they are paying a commission to effect the trxn Cannot solicit customers; but a broker can inquire of other broker/dealers if they have inquired in the past 2 mos, if customers have within the past 10 days told their broker they wanted to buy, Wolfson scienter requirement: did they know they were selling shares for a control person that knows they are violating 5 144 (g)(4): reasonable inquiry and not be aware

of any circumstances that the person theyre selling for is acting as an underwriter or that the sale is part of a distribution Notice of shares (144(h)) Restricted Securities: Securities acquired directly or indirectly from an issuer or affiliate of the issuer in a trxn or chain of trxns not involving any public offering Securities sold through Reg D (504 caveat; not restricted if complied with) Equity securities of domestic issuers sold through Reg S

Hypothetical Four: 1) not an affiliate, restricted shares (Reg D), reporting issuer (so you can only do it after six months!) o What about 4(1): she would face the problem of being an underwriter Changed circumstances 3) nonaffiliated, reporting issuer, sold in less than six months o Tack on: resales allowed, but information requirement must be complied with 4) reporting issuer, resales are allowed, but they always have to satisfy the info requirements o Unless there is a statement on which you reasonably rely; NO 5) cant tack because he is an affiliate; so it is just within the period of normal resales

o Once youve sold it on 144 then it is no longer a restricted security so you can resell 6)Unrestricted at this point; but is it greater than 1% of the equity o Why would this be problematic without 144 and how does 144 help? 4(1) wont apply because we probably have an underwriter in the trxn (broker); he is an underwriter because he is working on behalf of a control person (theyre considered an issuer in cxn with a distribution)

144(a): foreign issuers to sell securities in the US in a manner that would allow for immediate resales in an a limited sense Permits resales of restricted securities to entities that meet the definition of a qualified institutional buyer (144 (a)(1)) Sales only to QIBs (reasonable belief std) Purchaser awareness (of reliance on 144a) Non-fungibility (Cant sell with securities that are fungible and listed on an exchange; prevents a dual mkt for the same securities) Information Non-integration (144A(e)) o Dont want to destroy the ability of the issuer to rely on Reg D safe harbors These securities are still deemed restricted securities; which means that QIBs purchasing, have to either comply with section 5 or they need to find another exemption if they want to resell

Hypothetical Seven 1) No, because it doesnt apply to issuers o They can rely on Reg D Post JOBS Act o 4(2) Cold calls? General solicitation? Sophisticated? But no relationship? 2) Yes o 506 offering

 o Sales

No problem for Island Tours to QIBs So long as notices is given to purchasers Non-fungibility is met: it is preferred stock, not already the common stock that is traded on Nasdaq Non-Integration requirement; so we dont need to worry about the two trxns falling into one

3) NO o QIBs are ALL institutions NO individuals can participate in an 144A trxn

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4/15/2013 1:27:00 PM