Reporting Company

A reporting company sells newly issued common stock at a negotiated discount to a small group of institutions and agrees to file a resale registration statement afterwards. What is this transaction, and what is the buyers position before that registration is effective?

1. A.A secondary offering, and the buyers receive freely tradeable shares because the class is already registered.Wrong. Registration of a class does not register newly issued shares, and a secondary offering sells existing holders shares.
2. B.A PIPE, and the buyers hold restricted securities until the resale registration statement is effective.Correct. The issuer is public but these particular shares were sold unregistered.
3. C.A Regulation A offering, and the buyers may resell as soon as the offering statement is qualified.Wrong. Regulation A is a qualified public offering route, not a negotiated private sale to selected institutions.
4. D.A shelf takedown, and the buyers receive registered shares priced off the existing shelf.Wrong. A shelf takedown is a registered sale, which is the very thing this transaction avoids.

Why: This is a private investment in public equity, a PIPE: an unregistered sale by an issuer whose shares already trade, usually priced below the market and usually accompanied by a contractual promise to register the shares for resale. Until that resale registration is effective the buyers hold restricted securities and cannot sell them into the public market except under registration or a resale exemption. The discount is compensation for exactly that illiquidity and for the price risk of holding while the registration is prepared. Were the issuer to fail to get the registration declared effective, the buyers exit would fall back on Rule 144.

Ashgrove Robotics is raising money under Rule 506(b). Twenty-nine of its purchasers are accredited; two are not, though both are sophisticated. Ashgrove is not an Exchange Act reporting company. Which statement about the disclosure it must deliver is correct?

1. A.It must furnish the information to all 31 purchasers, because the exemption is offering-wide.Wrong. Rule 502(b) states expressly that the information need not be furnished to accredited investors.
2. B.It need furnish the information to nobody, since every purchaser is accredited or sophisticated.Wrong. Sophistication qualifies a purchaser to buy; only accreditation switches off the information requirement.
3. C.It must furnish the information to the two non-accredited purchasers once their subscriptions are accepted.Wrong. The rule requires delivery a reasonable time prior to sale, so that the purchaser can use it to decide.
4. D.It must furnish the information to the two non-accredited purchasers a reasonable time before their sale.Correct. The duty is triggered by the presence of a non-accredited purchaser and is owed only to that purchaser.

Why: Rule 502(b) switches the disclosure duty on and off by purchaser rather than by offering. If an issuer relying on Rule 506(b) sells to any purchaser who is not accredited, it must furnish that purchaser the specified non-financial and financial information a reasonable time prior to sale; it is not required to furnish that information to accredited investors, although the antifraud provisions make doing so sensible. Sophistication does not switch the duty off, because sophistication is the separate condition that lets a non-accredited person buy at all. Had Ashgrove sold to accredited investors only, the Rule 502(b) package would not have been required of it.

An investor bought restricted stock from a company that had no operations and no assets beyond cash. Two years later the company has acquired a real business, become a reporting company and filed the required information reflecting that change. Can the investor now use Rule 144?

1. A.Yes, because more than one year has passed since he acquired the securities.Wrong. For former shell company securities the period runs from the filing of the status information.
2. B.No, because Rule 144 is permanently unavailable to securities first issued by a shell company.Wrong. The rule provides an express route back once the issuer has changed and filed.
3. C.Yes, but only once a year has elapsed from the filing of the information reflecting the changed status.Correct. The one-year clock restarts at that filing rather than at his purchase.
4. D.Yes, immediately, because the issuer is now a reporting company with current public information.Wrong. Current public information is a separate condition and does not remove the waiting period.

Why: Rule 144 is unavailable for the resale of securities initially issued by an issuer with no or nominal operations and no or nominal non-cash assets. The rule then provides a route back: where such an issuer has ceased to be one, is subject to the Exchange Act reporting requirements, has filed all required reports other than current reports for the preceding twelve months, and has filed the specified information reflecting its changed status, the securities may be sold under the rule after one year has elapsed from the date that information was filed. The clock therefore runs from the filing, not from the original purchase. Time held before the company acquired a business does not count toward it.