Control Person

For purposes of the "affiliate" or "control person" concept relevant to resale of control securities, does a person need to be an officer or director of the issuer to qualify as an affiliate, or can affiliate status arise in other ways?

1. A.Yes, only a person formally elected or appointed as an officer or director of the issuer can ever qualify as an affiliate; no other basis exists.Wrong. This limits affiliate status to formal titles only.
2. B.No, affiliate status is determined exclusively by whether a person owns any amount of the issuer's stock, regardless of whether that ownership confers actual control.Wrong. Mere stock ownership alone, without an actual control relationship, does not by itself establish affiliate status.
3. C.No, affiliate status can only be established by a formal, written designation from the issuer's board of directors identifying specific individuals as affiliates.Wrong. There is no such formal board-designation requirement.
4. D.Affiliate status arises from directly or indirectly controlling, being controlled by, or being under common control with the issuer, which can include an influential large shareholder without any formal title.Correct. The test looks at the substantive control relationship, not formal titles.

Why: Affiliate status is not limited to officers and directors. A person qualifies as an affiliate if they directly or indirectly control, are controlled by, or are under common control with the issuer, which can include a large shareholder who exercises significant influence over the issuer's management even without holding any formal officer or director title.

An investor holds two blocks of the same issuer's common stock: Block A, acquired in a Rule 506(b) private placement two years ago, and Block B, acquired through ordinary open-market purchases of registered, freely tradable shares. The investor recently became a director of the issuer. How does her new status as an affiliate (a control person) affect the resale analysis for each block?

1. A.Becoming an affiliate has no effect on either block, since resale limitations are determined entirely by how the securities were originally acquired.Wrong. Affiliate status is an independent, holder-based basis for resale limitation.
2. B.Block B becomes restricted securities because of her new affiliate status, while Block A automatically loses its restricted status after two years regardless of her affiliate status.Wrong. Affiliate status creates control-securities limitations, not restricted-securities status, and restricted status is not automatically lost simply due to time passing.
3. C.Only Block A is affected by her new affiliate status, since control-securities limitations apply exclusively to securities originally acquired in exempt transactions.Wrong. Control-securities limitations apply to an affiliate's holdings generally, including registered shares acquired on the open market.
4. D.Block A remains restricted regardless of her affiliate status, while Block B newly becomes subject to control-securities limitations because she is now an affiliate.Correct. Restricted status and control status are independent bases for resale limitation.

Why: Block A remains restricted securities because of how it was acquired, regardless of her affiliate status. Block B, though not restricted, now becomes subject to control-securities resale limitations because she is an affiliate. Restricted status and control status are two independent bases for resale limitation.