Selling Shares That Are Exempt from Registration

A private placement is, in principle, an issuance to a limited number of investors who are able to "defend themselves" and therefore do not require the protection afforded by the securities rules (except for the prohibition on the employment of manipulative and deceptive devices pursuant to Rule 10b-5, which applies in any case). Shares, the sale of which is exempt from registration, are "restricted" shares, and their sale is allowed pursuant to special rules fixed in Rule 144 of the U.S. securities rules. A private sale by a non-listed company (an issue discussed in the section on legal restrictions according to U.S. law) should be distinguished from the sale of shares within an exemption from registration during or after a public offering, on which this section focuses.

Rule 144

Rule 144 regulates the sale of restricted shares which were purchased from the company or from an affiliate of the company under an exemption from registration. The rule entirely prohibits the sale of the shares for a period of one year after they are bought, other than through a registration under the Securities Act or an exemption thereof; thereafter, a limited sale is allowed. The rule states that in the second year, the larger of the following two quantities may be sold every three months: 1% of the offered shares, and the average weekly trade volume in the four weeks preceding the sale. Once the two years are up, the shares are released for trade if their holder is a non-affiliate of the company, or continue to be subject to the sale restrictions if they are held by the company itself or by an affiliate. Additional restrictions on sales under Rule 144 pertain to the requirement of full information about the company (a requirement which is usually filled anyway when the company is subject to U.S. reporting regulations), a duty to report every sale, and technical restrictions on the manner of sale (broker transaction).

Regulation S

In theory, U.S. securities rules apply to any offering of securities in which any U.S. means of communications is used; for instance, a telephone conversation in the U.S. during the process of raising capital for a French company in France.

In order to avoid this paradoxical situation, the rules of Regulation S were enacted in 1990, according to which no registration is required in offerings outside the United States to non-U.S. investors, if the company meets several criteria. A full review of such criteria lies beyond the scope of this book, but in principle, the criteria distinguish between the sale of debentures (with which we are not concerned) and the sale of equity, and between a company which has a material interest in the U.S. market and a company which has no relation to the United States. The sale is subject to various offering restrictions, designed to prevent an abuse of the exemption by way of bogus sales to foreign investors ("parking"), who would then sell the shares immediately to U.S. residents. Underwriters and legal counsel should be consulted with respect to the manner of application of these regulations for the offerings to sell shares only to foreign investors outside the United States.

An offering to U.S. investors still needs to meet the rules for an exemption under U.S. law, whether they are the rules governing the exemption for "traditional" private placements or the rules set in Regulation D (which is why it is customary to ask investors for a declaration on their status as "Accredited Investors" see the section on legal restrictions according to U.S. law).

Regulation A

The rules of Regulation A provide an exemption from registration for offerings of up to $5 million per year. Although this is ostensibly an exemption from registration, such an offering involves fewer disclosure requirements and is known in practice as an abbreviated registration rather than a full exemption from registration. The main advantage in offering under Regulation A is that the financial statements are abridged and the costs are lower than in ordinary offerings. Foreign companies cannot use the Regulation A exemption. The main use made of this offering is for "testing the water" in terms of market demand for a full-fledged offering of the company.