Federal Register / Vol. 48, No. 48 / Thursday, March 10, 1983 / Rules and Regulations

report on Form 10-K. In all cases,however, information with respect tononperforming loans and loan lossexperience, or reasonably comparabledata, must be furnished for at least thetwo latest fiscal years in the initial 10-K.Thereafter, for subsequent years inreports on Form 10-K, all of the Guide 3information is required; Guide 3information which had been omitted inthe initial 10-K in accordancewith theabove procedure can be excluded in anysubsequent 10-K's.

Question 3: Can organiza tion costsincurred to register securities issued forthe formation of one-bank holdingcompanies be capitalized?

Interpretive Response: The staff willnot object if organizational costs such aslegal, printing and other related costsare capitalized and amortized againstincome over a period not to exceed 5years. Any such organization costsshould be shown in the balmce sheet asan asset, and not as a reduction ofshareholders' equity.

Audit fees incurred would not bedeemed to be organizational costs andshould be expensed. -JFR Do(. 83-187 Piled 3-9-83: 8:45 am i

BILNI CODE 8010-01-M

.17 CFR Part 231

[Release No. 33-64551

Interpretive Release on Regulation D

AGENCY: Securities and ExchangeComnission.ACTION: Publication of StaffInterpretations.

SUMMARY: The Commission hasauthorized the issuance of this releasesetting forth the views of its Division ofCorporation Finance on var.iousinterpretive questions regarding therules contained in Regulation D underthe Securities Act of 1933. These viewsare being published to answerfrequently raised questions with respectto the regulation.FOR FURTHER INFORMATION, CONTACT:David B. H. Martin, Jr., Office of ChiefCounsel, Division of CorporationFinance, Securities and ExchangeCommission, Washington, D.C. 20549,(202) 272-2573.SUPPLEMENTARY INFORMATION: InRelease No. 33-6389 (March 8, 1982) (47FR 11251), the Commission adoptedRegulation D (17 CFR 230.501-.506)which provides three exemptions fromthe registration requirements of theSecur:ities Act of 1933 (the "SecuritiesAct" or the "Act") (15 U.S.C. 77a-77bbbb (1976 & Supp. IV 1980), as

amended by the Bus Regulatory ReformAct of 1982, Pub. L. No. 97-261 section19(d). 96 Stat. 1121 (1982)).1 Regulation Dbecame effective on April 15, 1982.

In the course of administering theregulation, the staff of the Division ofCorporation Finance has answerednumerous oral and written requests forinterpretation of the new provisions.This release is intended to assist thosepersons who wish to make offerings inreliance on the exemptions in RegulationD by presenting the staff's views onfrequently raised questions. Asindicated in Preliminary Note 3 to theregulation, Regulation D is intended tobe a basic element in a uniform systemof federal-state exemptions. As such,aspects of Regulation D have beenincorporated in many state statutes andregulations. The interpretations set forthin this release relate only to the federalprovisions.

Regulation D is composed of six rules,Rules 501-506. The first three rules setforth general terms and conditions thatapply in whole or in part to theexemptions. The questions arising underRules 501-503 fall into four generalcategories: definitions, disclosurerequirements, operational conditions,and notice of sale requirements. Theexemptions of Regulation D are set forthin Rules 504:-506. Questions concerningthose rules usually raise issuespertaining to more than one exemption.This release, an outline of whichfollows, is organized so as to reflect thispattern of inquiries.

I. Definitions--Rule 501A. Accredited Investor-Rule 501(a)

(Questions 1-30)1. General2. Certain Institutional Investors-Rules

501(a)(1)-{3)3. Insiders-Rule 501(a)(4)4. $150,000 Purchasers-Rule 501(a)(5)a. $150,000 Purchaseb. 20 Percent of Net Worth Limitation5. Natural Persons-Rules 501(a)(6)-(7)6. Entities Owned By Accredited

Investors-Rule 501(a)(8)7. Trusts as Accredited InvestorsB. Aggregate Offering Price-Rule 501(c)

(Questions 31-36)C. Executive Officer-Rule 501(f) (Question

37)D. Purchaser Representative-Rule 501(h)

(Questions 38-39)II. Disclosure Requirements-Rule 502(b)

A. When Required (Questions 40-41)B. What Required (Questions 42-51)

Prior releases leading to the adoption ofRegulation D included Release No. 33-6274(December 23, 1980) (46 FR 2631) in which theCommission considered and requested commentson various exemptions under the Securities Act andRelease No. 33-6339 (August 7. 19811 (46 FR 41791)in which the Commission published proposed.Regulation D for comment.

1. Non-reporting Issuers--Rule 502(b)(2)(i)2. Reporting Issuers-Rule 502(b)(2)(ii)C. General (Question 52)

Ill. Operational Conditions

A. Integration-Rule 502(a) (Question 53)B. Calculation of Number of Purchasers-

Rule 501(e) (Questions 54-59)'C. Manner of Offering-Rule 502(c)

(Question.60)D. Limitations on Resale-Rule 502(d)

(Question 61)IV. ExemptionsA. Rule 504 (Questions 62-65)B. Rule 505 (Question 66)C. Questions Relating to Rules 504 and 505

(Questions 67-71)D. Rule 506 (Questions 72-73)E. Questions Relating to Rules 504-506

(Questions 74-80)V. Notice of Sale-Form D (Questions 81-

92)

I. Definitions-Rule 501

A. Accredited Investor-Rule 501(a)

Defined in Rule 501(a), the term"accredited investor" is significant tothe operation of Regulation D. 2 UnderRule 501(e), for instance, accreditedinvestors are not included in computingthe number of purchasers in offeringsconducted in reliance on Rules 505 and506. Also, if accredited investors are theonly purchasers in offerings under Rules505 and 506, Regulation D does notrequire delivery of specific disclosure asa condition of the exemptions. Finally,in an offering under Rule 506, theissuer's obligation to ensure thesophistication of purchasers applies toinvestors that are not accredited. SeeRule 506(b)(2)(ii).

The definition sets forth eigthcategories of investor that may beaccredited. The following questions andanswers cover certain issues undervarious of those categories. Given thefrequency of questions regarding theapplication of the definition to trusts,however, there is a separate section

- addressing that area.1. General. The definition of

"accredited investor" includes anyperson who comes within or "who theissuer reasonably believes" comeswithin one of the enumerated categories"at the time of the sale of the securitiesto that person." What constitutes"reasonable" belief will depend on thefacts of each particular case. For thisreason, the stqff generally will not be in

-The term also is essential to the operation ofsection 4(6) of the Securities Act which exemptscertain transactions involving sales solely toaccredited investors. The definition of accreditedinvestor for section 4(6) is found at section 2(15) ofthe Securities Act and Rule 215 (17 CFR 230.321).Rule 501(a) combines and repeats those provisions.As a result, interpretations regarding the definitionof "accredited investor" in Regulation D also applyto the definition of that term under section 4(6).

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a position to express views or otherwiseendorse any one method for ascertainingwhether an investor is accredited.

(1) Question: A director of a corporateissuer purchases securities offeredunder Rule 505. Two weeks after thepurchase, and lirior to completion of theoffering, the director resigns due to asudden illness. Is the former director anaccredited investor?

Answer: Yes. The preliminarylanguage to Rule 501(a) provides that aninvestor is accredited if he falls into oneof the enumerated categories "at thetime of the sale of securities to thatperson." One such category includesdirectors of the issuer. See Rule501(a)(4). The investor in this case hadthat status at the time of the sale tohim.

3

2. Certain Institutional Investors-Rules 501(a)(1H3). (2] Question: Anational bank purchases $100,000 ofsecurities from a Regulation D issuerand distributes the securities equallyamong ten trust accounts for which itacts as trustee. Is the bank anaccredited investor?

Answer: Yes. Rule 501(a)(1) accreditsa bank acting in a fiduciary capacity. 4

(3) Question: An ERISA employeebenefit plan will purchase $200,000 ofthe securities being offered. The planhas less than $5,000,000 in total assetsand its investment decisions are madeby a plan trustee who is not a bank,insurance company, or registeredinvestment adviser. Does the planqualify as an accredited investor?

Answer: Not under Rule 501(a)(1).Rule 501(a)(1) accredits an ERISA planthat has a plan fiduciary which is abank, insurance company, or registeredinvestment adviser or that has totalassets in excess of $5,000,000. The plan,however, may be an accredited investorunder Rule 501(a)(5), which accreditscertain persons who purchase at least$150,000 of the securities being offered.

(4] Question: A state run, not-for-profit hospital has total assets in excessof $5,000,000. Because it is a stateagency, the hospital is exempt fromfederal income taxation. Rule 501(a)(3)accredits any organization described in

'Preliminary Note 6 to Regulation D wouldsupport a different analysis if it could be shown thatthe director's appointment or resignation was "partof a plan or scheme to evade the registrationprovisions of the Act."

4 Rule 501(a)(1) refers to "[alny bank as defined insection 3(a)(2) of the Act." Section 3(a)(2) providesthat the term "bank" includes "any national bank."Section 3(a)(2) also provides that where a commonor collective trust fund is involved, the term "bank"has the same meaning as in the investmentCompany Act of 1940 (the "investment CompanyAct") (15 U.S.C. 80a-1-80a-65 (1976 & Supp. IV1980). Section 2(a)(5) of the Investment CompanyAct defines "bank."

section 501(c(3) of the Internal RevenueCode that has total assets in excess of$5,000,000. Is the hospital accreditedunder Rule 501(a)(3)?

Answer: Yes. This category does notrequire that the investor has received aruling on tax status under section501(c)(3) of the Internal Revenue Code.Rather, Rule 501(a)(3) accredits aninvestor that falls within the substantivedescription in that section.5

(5) Question: A not-for-profit, taxexempt hospital with total assets of$3,000,000 is purchasing $100,000 ofsecurities in a Regulation D offering. Thehospital controls a subsidiary with totalassets of $3,000,000. Under generallyaccepted accounting principles, thehospital may combine its financialstatements with that of its subsidiary. Isthe hospital accredited?

Answer: Yes, under Rule 501(a)(3).Where the financial statements of thesubsidiary may be combined with thoseof the investor, the assets of thesubsidiary may be added to those of theInvestor in computing total assets forpurposes of Rule 501(a)(3).6

3. Insiders-Rule 501(a)(4). (6)Question: The executive officer of aparent of the corporate general partnerof the issuer is investing in theRegulation D offering. Is that individualan accredited investor?

Answer: Rule 501(a)(4) accredits onlythe directors and executive officers ofthe general partner itself. Unless theexecutive officer of the parent can bedeemed an executive officer of thesubsidiary, 7 that individual is not anaccredited investor.

4. $150,000 Purchasers-Rule501(a)(5). This provision accredits anyperson 6 who satisfies two separatetests. To be accredited under Rule501(a)(5), an investor must purchase atleast $150,000 of the securities beingoffered, by one or a combination of fourspecific methods: cash, marketablesecurities, an unconditional obligation topay cash or marketable securities overnot more than five years, andcancellation of indebtedness. The rulealso requires that "the total purchaseprice" may not exceed 20 percent of thepurchaser's net worth. The two testsunder Rule 501(a)(5) must be consideredseparately. Thus, for instance, incomputing the "total purchase price" forthe 20 percent of net worth limitation,the investor may have to include

'See letter re Voluntary Hospitals of America,Inc. dated November 30, 1982.

' See letter re Voluntary Hospitals of America,Inc. dated-September 10, 1982.

7See Question 37.'Section 2(2) of the Securities Act includes

corporations and partnerships within the definitionof "person."

amounts that could not be includedtoward the $150,000 purchase test.

a. $150,000 Purchase. (7) Question:Two issuers, a general partner and itslimited partnership, are selling theirsecurities simultaneously as unitsconsisting of common stock and limitedpartnership interests. The issues arepart of a plan of financing made for thesame'general purpose. If an investorpurchases $150,000 of these units, wouldit satisfy the $150,000 purchase elementof Rule 501(a)(5)?

Answer: Yes. The issuers are affiliatedand the simultaneous sale of theirseparate securities as units for a singleplan of financing would be deemed oneintegrated offering. Rule 501(a)[5)applies to a purchase "of the securitiesbeing offered." The rule thus applies notto the securites of a particular issuer,but to the securities of a particularoffering9

(8) Question: An investor willpurchase securities in cash installments.Each installment payment will includeamounts due on the principal as well asinterest. If the total of all payments is$150,000, will the investor havepurchased "at least $150,000 of thesecurities being offered" for purposes ofRule 501(a)(5)?

Answer: No. Under Rule 501(a)(5), anyamount constituting interest due on theunpaid purchase price is not paymentfor the "securities being offered."

(9) Question: The installmentpayments for interests in a limitedpartnership that will developcommercial real estate will beconditioned upon completion of certainphases of the project. Will the obligationto make those payments be deemed "anunconditional obligation to pay" forpurposes of Rule 501(a)(5)?

Answer: Yes, as long as the onlyconditions relate to completion ofsuccessive stages of the developmentproject.

(10) Question: An investor willpurchase securities in a Regulation Doffering by delivering $75,000 in cashand a letter of credit for $75,000. Willsuch a purchase satisfy the $150,000element of Rule 501(a)(5)?

Answer: No. Because there is noassurance that the letter of credit willever be drawn against, the staff does notdeem it to be an unconditionalobligation to pay.

(11) Question: In connection with thesale of limited partnership interests inan oil and gas drilling program, aninvestor in a Regulation D offeringcommits to pay subsequent assessments

'See letter re Intuit Telecom Inc. dated March 24,1982.

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that are mandatory, non-contingent, andfor which the investor will be personallyliable. Will the commitment to pay theassessments constitute an"unconditional obligation to pay" underRule 501(a)(5)?

Answer: Yes. The assessments areessentially installment payments forwhich the investor makes theinvestment decision at the time thelimited partnership interest originally ispurchased. 10

(12) Question: If the assessments inQuestion 11 are voluntary, contingentand non-recourse, can they be includedin determining whether or not theinvestor has purchased $150,000 of thesecurities being offered?

Answer: No. Voluntary assessmentsof this nature are not deemed toconstitute an unconditional obligation topay."

(13) Question: A purchaser of interestsin a limited partnership makes a partialdown payment and commitsunconditionally to pay the balance overfive years. Formation of the partnershipis conditioned upon the sale of aspecified number of interests. UnderRule 501(a)(5) when must the five yearperiod for installment payments begin torun?

Answer: Rule 501(a)(5) provides thatthe unconditional obligation is to bedischarged "within five years of the saleof the securities to the purchaser." Forease in the administration of an offeringthat is conditioned on a certainminimum level of sales, the staffbelieves it is reasonable to compute thelength of installment obligations fromthe same date for the investors involvedin reaching that minimum. Therefore,without any bearing on when the sale ofthe security actually occurs, the five-year time period of the investor'sobligation may be measured from thedate such minimum level of sales hasbeen reached. 12

b. 20 Percent of Net Worth Limitation(14) Question: Where an investor

makes installment payments composedof principal and interest, must theinterest payments be included incomputing the "total purchase price" forpurposes of meeting the 20 percent ofnet worth limitation?

Answer: No. The interest is not part ofthe total purchase price but rather is anexpense associated with financing thetotal purchase price.

(15) Question: A corporate investorwill purchase $200,000 of the securities

"OSee letter to Kim R1 Clark, Esq. datedNovember 8, 1982.

"See letter to Kim R. Clark, Esq. datedNovember 8, 1982.

"See letter re Winthrop Financial Co., Inc.,datedMay 25, 1982.

being offered for cash. Additionally, theinvestor will deliver an irrevocableletter of credit for $50,000 which theissuer will use as collateral inconnection with a line of credit it willestablish with a lending institution.Must the issuer include the $50,000 letterof credit when determining whether ornot the purchaser's-total purchase priceexceeds 20 percent of its net worthunder Rule 501(a)(5)?

Answer: Yes. Since the investor hascommitted to pay the $50,000 at theelection of the issuer, that amount mustbe included with other forms ofconsideration in order to measure whatpercentage of the investor's net worthhas been committed in the investment. 13

(16) Question: As part of the purchaseof an interest in a sale and lease-backprogram, the purchaser will deliver"non-recourse" debt where the source ofpayment for the debt is limitedexclusively to the income generated bythe security being purchased or theassets of the entity in which the securityis being purchased. Must the non-recourse debt be included in the totalpurchase price for purposes of the 20percent of net worth limitation underRule 501(a)(5)?

Answer: No. Because the investor-hasno personal liability for the non-recourse debt, and because no part ofthe investor's assets at the time ofpurchase is available as a source ofpayment for the debt, the debt shouldnot be included as part of the purchaseprice. 14

(17) Question: Where the purchaser isa natural person, Rule 501(a)(5) providesthat the total purchase price may bemeasured against the purchaser's networth combined with that of a spouse.Would property held solely by onespouse be available for calculating thenet worth of the other spouse who ismaking the $150,000 investment?

Answer Yes.(18) Question: An investment general

partnership is purchasing securities in aRegulation D offering. The partnershipwas not formed for the specific purposeof acquiring the securities being offered.May the issuer consider the aggregatenet worth of the general partners incalculating the net worth of thepartnership?

Answer: Yes. An investment generalpartnership is functionally a vehicle inwhich profits and losses are passedthrough to general partners and in which

"Note that this $50,00D is not deemed to be "anunconditional obligation to pay" and cannot beincluded in calculating whether or not the investormeets the $150,000 purchase test of Rule 501(a)(5).See Question 10.

"See letter t6 Lola M. Hale, Esq. dated July 1,1982.

the net worths of the general partners -are exposed to the risk of partnershipinvestments. ' 5

(19) Question: A totally heldsubsidiary 16 makes a cash investment of$200,000 in a Regulation D offering. Maythat subsidiary use the consolidated networth of its parent in determiningwhether or not its total purchase priceexceeds 20 percent of its net worth?

Answer: Yes. '5. Natural Persons-Rules 501(o) (6)-

(7). Rules 501(a) (6) and (7) apply only tonatural persons. Paragraph (6) accreditsany natural person with a net worth atthe time of purchase in excess of$1,000,000. If the investor is married, therule permits the use of joint net worth ofthe couple. Paragraph (7) accredits anynatural person whose income hasexceeded $200,000 in each of the twomost recent years and is reasonablyexpected to exceed $200,000 in the yearof the investment.

(20) Question: A corporation with anet worth of $2,000,000 purchasessecurities in a Regulation D offering. Isthe corporation an accredited investorunder Rule 501(a)(6)?

Answer: No.Rule 501(a)(6) is limitedto "natural" persons.

(21) Question" In calculating net worthfor purposes of Rule 501(a)(6), may theinvestor include the estimated fairmarket value of his principal residenceas an asset?

Answer: Yes. Rule 501(a)(6) does notexclude any of the purchaser's assetsfroin the net worth needed to qualify asan accredited investor.

(22) Question: May a purchaser takeinto account income of a spouse indetermining possible accreditationunder Rule 501(a)(7)?

Answer: No. Rule 501(a)(7) requires"individual income" over $200,000 inorder to qualify as an accreditedinvestor.

(23] Question: May a purchaserinclude unrealized capital appreciationin calculating income for purposes ofRule 501(a)(7)?

Answer: Generally, no.6. Entities Owned by Accredited

Investors-Rule 501(a)(8). Any entity in.which each equity owner is anaccredited investor under any of thequalifying categories, except that of the$150,000 purchaser, is accredited underRule 501(a)(8).. (24) Question: All but one of theshareholders of a corporation are

"See letter re Smith Barney, Harris Upham & Co.dated luly 14, 1982.

"5See CFR 230.405 for the difinition of "totally

held subsidiary."" See letler re Federated Financial Corporation

dated May 13, 1982.

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accredited investors by virtue of networth or income. The unaccreditedshareholder is a director who boughtone share of stock in order to complywith a requirement that all directors beshareholders of the corporation. Is thecorporation an accredited investorunder Rule 501(a)(8)?

Answer: No. Rule 501(a)(8) requires"all of the equity owners" to beaccredited investors. The director is anequity owner and is not accredited. Notethat the director cannot be accreditedunder Rule 501(a)(4). That provisionextends accreditation to a director of theissuer, not of the investor.

(25) Question: Who are the equityowners of a limited partnership?

Answer: The limited partners.7. Trusts as Accredited Investors.(26) Question: May a trust qualify as

an accredited investor under Rule501(a)(1)?

Answer: Only in directly. Although atrust standing alone cannot beaccredited under Rule 501(a)(1), if abank is its trustee and makes theinvestment on behalf of the trust, thetrust will in effect be accredited byvirtue of the provision in Rule 501(a)(1)that accredits a bank acting in afiduciary capacity.

(27) Question: May a trust qualify asan accredited investor under Rule501(a)(5)?

Answer: Yes. The Division interprets"person" in Rule 501(a)(5) to include anytrust.Is

(28) Question: In qualifying a trust asan accredited investor under Rule501(a)(5), whose net worth hhould beconsidered in determining whether thetotal purchase price meets the 20percent of net worth limitation test?

Answer: The net worth of the trust.(29) Question: A trustee of a trust has

a net worth of $1,500,000. Is the trustee'spurchase of securities for the trust thatof an accredited investor under Rule501(a)(6)?

Answer: No. Except where a bank is atrustee, the trust is deemed thepurchaser, not the trustee. The trust isnot a "natural" person.

(30) Question: May a trust beaccredited under Rule 501(a)(8) if all ofits beneficiaries are accreditedinvestors?

Answer. Generally, no. Rule 501(a)(8)accredits any entity if all of its "equityowners" are accredited investors. The

"Section 2(2) of the' Securities Act includes "atrust" within the definition of "person" but limitsthat inclusion to "a trust where the interest orinterests of the beneficiary or beneficiaries areevidenced by a security." The Division does notview that limitation as being necessary in thecontext of a trust as a purchaser of securities underRule 501(a)(5).

staff does not interpret this provision toapply to the beneficiaries of aconventional trust. The result may bedifferent, however, in the case of certainnon-conventional trusts where, as aresult of powers retained by thegrantors, a trust as a legal entity wouldbe deemed not to exist. 9 Thus, wherethe grantors of a revocable trust areaccredited investors under Rule501(a)(6) (i.e. net worth exceeds$1,000,000) and the trust may beamended or revoked at any time by thegrantors, the trust is accredited becausethe grantors will be deemed the equityowners of the trust's assets. 20 Similarly,where the purchase of Regulation Dsecurities is made by an IndividualRetirement Account and the participantis an accredited investor, the accountwould be accredited under Rule501(a)(8).

B. Aggregate Offering Price-Rule501(c)

The "aggregate offering price,"defined in Rule 501(c),is the sum of allproceeds received by the issuer forissuance of its securities. The term isimportant to the operation of Rules 504and 505, both of which impose alimitation on the aggregate offering priceas a specific condition to the availabilityof the exemption.2

1

(31) Question: The sole generalpartner of a real estate limitedpartnership contributes property to theprogram. Must that property be valuedand included in the overall proceeds ofthe offering as part of the aggregateoffering price?

Answer: No, assuming the property iscontributed in exchange for a generalpartnership interest.

(32) Question: An owner of a miningor oil and gas property is sellinginterests in the property. to investors forcash. The owner will retain a royaltyinterest in the property. Must anysubsequent royalty payments beincluded in the aggregate offering priceof the property interests?

Answer: No. Royalty payments to theseller of the property are treated as

"The result would also be different in the case ofa business trust, a real estate investment trust, orother similar entities.

2°See letter re Rule 501(a)(8) of Regulation Ddated July 1, 1982.

21 The basis for a limitation on the aggregateoffering price derives from section 3(b) of theSecurities Act. Section 3(b) accords authority to theCommission to adopt rules exempting any class ofsecurities as long as no issue of securities isexempted "where the aggregate amount at whichsuch issue is offered to the public exceeds$5,000,000." See also section 4(6) which exempts atransaction involving offers and sales solely to oneor more accredited investors "if the aggregateoffering price of an issue" does not exceed theamount allowed under section 3(b).

operating expenses, rather thancapitalized costs for the property. Assuch, the royalty payments are not partof the consideration received by theissuer for issuance of the securities.

(33) Question: Where the investorspay for their securities in installmentsand these payments include an interestcomponent, must the issuer includeinterest payments in the "aggregateoffering price?"

Answer: No. The interest paymentsare not deemed to be consideration forthe issuance of the securities."

(34) Question: An offering of interestsin an oil and gas limited partnershipprovides for additional voluntary •assessments. These assessments,undermined at the time of the offering,may be called at the general partner'sdiscretion for developmental drillingactivities. Must the assessments beincluded in the aggregate offering price,and if so, in what amount?

Answer: Because it is unclear that theassessments will ever be called, andbecause if they are called, it is unclearat what level, the issuer is not requiredto include the assessments in theaggregate offering price. In fact, theassessments will be considerationreceived for the issuance of additionalsecurities in the limited partnership.This issuance will need to be consideredalong with the original issuance forpossible integration, or, if not integrated,must find its own exemption fromregistration.

(35) Question: In purchasing interestsin an oil and gas partnership, investorsagree to pay mandatory assessments.The assessments, essentially installmentpayments, are non-contingent andinvestors will be personally liable fortheir payment. Must the issuer includethe assessments in the aggregateoffering price?

Answer: Yes. 23

(36) Question: As part of theirpurchase of securities, investors deliverirrevocable letters of credit. Must theletters of credit be included in theaggregate offering price?

Answer: If these letters of credit weredrawn against, the amounts involvedwould be considered part of theaggregate offering price. For this reason,in planning the transaction, the issuershould consider the full amount of theletters of credit in calculating theaggregate offering'price.

2 2This presumes that the payments are in fact for

interest. See Preliminary Note 6 to Regulation D."' See letter to Kim R. Clark, Esq. dated

November 8. 1982.

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C. Executive Officer-Rule 501(f)

The definition of executive officer inRule 501(f) is the same as that in Rule405 of Regulation C (17 CFR 230.405).

(37) Question: The executive officer ofthe parent of the Regulation D issuerperforms a policy making function for itssubsidiary. May that individual bedeemed an "executive officer" of thesubsidiary?

Answer: Yes.

D. Purchaser Representative--Rule501(h)

A purchaser representative is anyperson who satisfies, or who the issuerreasonably believes statisfies, fourconditions enumerated in Rule 501(h).Beyond the obligations imposed by thatrule, any person acting as a purchaserrepresentative must consider whether ornot he is required to register as a broker-dealer under section 15 of the SecuritiesExchange Act of 1934 (the "ExchangeAct") (15 U.S.C. 78a-78kk (1970 & Supp.[V 1980)) or as an investment adviserunder section 203 of the InvestmentAdvisers Act of 1940 (15 U.S.C. 80b-1--BOb-21 (1976 & Supp. IV 1980)),24

(38) Question: May the officer of acorporate general partner of the issuerqualify as a purchaser representativeunder Rule 501(h)?

Answer: Rule 501(h) provides that "anaffiliate, director, officer or otheramployee of the issuer" may not be apurchaser representative unless thepurchaser has one of three enumeratedrelationships with the-representative.The staff is of the view that an officer or:lirector of a corporate general partner --omes within the scope of "affiliate,firector, officer or other employee of theissuer."

(39) Question: May the issuer in aRegulation D offering pay the fees of the)urchaser representative?

Answer: Yes. Nothing in Regulation D)rohibits the payment by the issuer ofhe purchaser representative's fees. Rule501(h)(4), however, requires disclosureAf this fact.25

See letters to Winstead, McGuire, Sechrestrrimble dated February 21 and 25. 1975 and reenisa Oi' Company dated April 0, 1982. Questions

egarding registration as a broker-dealer should be

H. Disclosure Requirements-Rule502(b)

A. When Required

Rule 502(b)(1) sets forth thecircumstances when disclosure of thekind specified in the regulation must bedelivered to investors. The regulationrequires the delivery of certaininformation "during the course of theoffering and prior to sale" if the offeringis conducted in reliance on Rule 505 or506 and if there are unaccreditedinvestors. If the offering is conducted incompliance with Rule 504 or if securitiesare sold only to accredited investors,Regulation D does not specify theinformation that must be disclosed toinvestors. 26

(40) Question: An issuer furnishespotential investors a short form offeringmemorandum in anticipation of actualselling activities and the delivery of anexpanded disclosure document. DoesRegulation D permit the delivery ofdisclosure in two installments?

Answer: So long as all the informationis delivered prior to sale, the use of afair and adequate summary followed bya complete disclosure document is notprohibited under Regulation D.Disclosure in such a manner, however,should not obscure material information.-

(41) Question: An issuer commencesan offering in reliance on Rule 505 inwhich the issuer intends to make salesonly to accredited investors. The issuerdelivers those investors an abbreviateddisclosure document. Before thecompletion of the offering, the issuerchanges its intentions and proposes tomake sales to non-accredited investors.Would the requirement that the issuerdeliver the specified information to allpurchasers prior to sale if any sales aremade to non-accredited investorspreclude application of Rule 506 to theearlier sales to the accredited investors?

Answer: No. If the issuer delivers acomplete disclosure document to theaccredited investors and agrees toreturn their funds promptly unless theyshould elect to remain in the program,the issuer would not be precluded fromrelying on Rule 505.

B. What Required

Regulation D divides disclosure intotwo categories: that to be furnished bynon-reporting companies and thatrequired for reporting companies. In

irected to the Ulice of Chief Counsel, Divison ofdarket Regulation. (202) 272-2844. Que.3tions "As noted in Preliminary Note 1, Regulation Degarding registration as an investment adviser transactions are exempt from the registrationhould be directed to the Office of Chief Counsel, requirements of the Securities Act, not the antifraud)ivision of Investment Management, (202) 272-2030. provisions. Thus, nothing in Regulation D states that

"Note 3 to Rule 501(h) points out that disclosure an issuer need not give disclosure to an investor.)f a material relationship between the purchaser Rather, the regulation provides that n certainepresentative and the issuer will not relieve the instances the exemptions from registration will notiurchaser representative of the obligation to act in - be conditioned on a particular content, format orhe interest of the purchaser. method of disclosure.

either case, the specified disclosure isrequired to the extent material to anunderstanding of the issuer, its businessand the securities being offered.

1. Non-Reporting Issuers-Rule502(b)(2)(i). If the issuer is not subject tothe reporting requirements of section 13or 15(d) of the Exchange Act, 27 it mustfurnish the specified information "to theextent material to an understanding ofthe issuer, its business and the securitiesbeing offered." For offerings up to$5,000,000, the issuer should furnish the."same kind of information" as would becontained in Part I of Form S-18, 28except that only the most recent year'sfinancial statements need be certified.For offerings over $5,000,000, the issuershould furnish "the same kind ofinformation" as would be required inPart I of an available registrationstatement. 29

(42) Question: When an issuer isrequired to deliver specific disclosure,must that disclosure be in written form?

Answer:. Yes.(43) Question: Form S-18 requires the

issuer's audited balance sheet as of theend of its most recently completed fiscalyear or within 135 days if the issuer hasbeen in existence for a shorter time.With a limited partnership that has beenformed with minimal capitalizationimmediately prior to a Regulation Doffering, must the Regulation Ddisclosure document contain an auditedbalance sheet for the issuer?

Answer: In analyzing this or any otherdisclosure question under Regulation D,the issuer starts with the general rulethat it is obligated to furnish thespecified information "to the extentmaterial to an understanding of theissuer, its business, and the aecuritiesbeing offered." Thus, in this particularcase, if an audited balance sheet is notmaterial to the investor's understanding,

"An issuer is subject to section 13 reportingobligations if it has a class of securities registeredunder section 12 of the Exchange Act. An issuer issubject to section 15[d) reporting obligations If ithas had a Securities Act registration statement goeffective, or if in any year after the year ofeffectiveness, it has at least 300 holders of the classof securities to which the registration statementapplied. In the latter instance, however, even if theissuer has 300 or more shareholders, it may not besubject to section 15(d) reporting obligations if ithas had less than 500 shareholders and leap than$3,000,000 in assets during the last three years. SeeRule 15d-6 (17 CFR 240.15d-6) under the ExchangeAct.

"SSee 17 CFR 239.28. Form S-18 is an abbreviatedregistration form for certain offerings not exceeding$5,000,000. The form is not available to issuers thatreport under the Exchange Act.

2Rules 502(b)(2)(i)(C) and 502(b)(2)(ii)(D) containspecial provisions for foreign issuers recentlyadopted by the Commission. See Release No. 33-6437 (November 19, 1982) (47 FR 54764).

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then the issuer may elect to present analternative to its audited balance sheet.

(44) Question: Is Securities ActIndustry Guide 5 "oapplicable in a$4,000,000 Regulation D offering ofinterests in a real estate limitedpartnership?

Answer: Rule 502(b)(2)(i)(A) requiresthe issuer to provide the same kind ofinformation as that required in Part I ofForm S--8. 1

Form S-18 directs the issuer'sattention to the Industry Guides notingthat such guides "represent Divisionpractices with respect to the disclosureto be provided by the affected industriesin registration statements." In preparingits Regulation D offering material,therefore, an issuer of interests in a realestate limited partnership shouldconsider Guide 5 in determining thedisclosure that will be.material to theinvestor's understanding of the issuer,its business and the securities beingoffered.

(45) Question: In a $4,000,000Regulation D offering of interests in anoil and gas limited partnership, what arethe issuer's disclosure obligations withrespect to financial statements of thegeneral partner?

Answer: Item 21(h) of Form S-18provides that the issuer should furnishthe audited balance sheet as of the endof the most recent fiscal year of anycorporation or partnership that is ageneral partner of the issuer. For anygeneral partner that is a natural person,in lieu of an audited balance sheet, theissuer may furnish a statement of thatindividual's net worth in the text of thedisclosure document, where assets andliabilities are estimated at fair marketvalue with provisions for estimatedincome taxes on unrealized gains. 3 2

(46) Question: The issuer in a$3,000,000 Regulation D offering is alimited partnership that will acquire

'The Commission adopted 53 Securities ActGuides in 1968 (Release No. 33-4936 (December 9.1968) (33 FR 18617)] and 10 additional onessubsequently. The Guides served as an expressionof the policies and practices of the Division ofCorporation Finance. Most of those Guides have,been incorporated into Regulation C (17 CFR230.400-.494) and Regulation S-K (17 CFR 229.10-.802) (see Release No. 33-6383 (March 3, 1982] (47FR 11380)) and thus were rescinded (see ReleaseNo. 33-6384 (March 3, 1982) (47 FR 11476)). Five ofthe Guides applicable to specific industries werenot rescinded, however, and were redesignated.Guide 5. which was Guide 60. applies to thepreparation of registration statements relating tointerests in real estate limited partnerships. Guide 5was revised in Release No. 33-8405 (June 3,1982) (47FR 25140).

", Form S-18 has been amended recently to permitits use by limited partnerships. Release No. 33-8406(June 4, 1982),(47 FR 25126).

"2The same general rule would be applicable toan offering in excess of $5,000,000. See Release No.SAB-40. Topic O.D.3.d. (January 23,1981).

certain real estate operations with theoffering proceeds. What is theappropriate consideration for disclosureof the operating history of theseoperations?

Answer: Item 21(g) of Form S-18,which provides special guidance forsuch disclosure, calls for the auditedincome statements of the operations,with certain exclusions, for the two mostrecent fiscal years. If the issuer can meetcertain conditions, however, theinstruction reduces that requirement toonly one year of audited incomestatements."

Under Regulation D, Rule502(b)(2)(i)(A) provides that only thefinancial statements for the issuer'smost recent fiscal year must be certifiedin an offering not in excess of $5,000,000.The staff is of the view that thisprovision applies to all financialstatements in the disclosure document.Thus, in the Regulation D offeringdescribed, the following considerationsapply. If the issuer can meet theconditions in Item 21(g) of Form S-18, itmay present one year of audited incomestatements on the operations to beacquired. If the issuer cannot meet theconditions in Form S-18, then it shouldpresent two years of income statements,only one of which must be audited.

(47) Question: If the issuer in Question46 cannot obtain the financialstatements on the operations to beacquired without unreasonable effort orexpense, what further considerationsareapplicable under Regulation D?

Answer: Rule 502(b)(2)(i)(A) providesthat "[i]f the issuer is a limitedpartnership and cannot obtain therequired financial statements withoutunreasonable effort or expense, it mayfurnish financial statements that havebeen prepared on the basis of federalincome tax requiiements and examinedand reported on in accordance withgenerally accepted auditing standardsby an independent public or certifiedaccountant." The staff interprets thisprovision to apply to all financialstatements that the issuer presents inthe offering document. Thus, the issuerdescribed above may present tax basisoperating statements on the operationsto be acquired.

s4

3The parallel to this instruction under otherforms of registration is Rule 3-14 of Regulation S-X(17 CFR 210.3-14). Rule 3-14 requires incomestatements for the three most recent fiscal years,unless the issuer meets certain conditions, in whichcase the issuer need present only one year ofaudited income statements.4 See letter re Winthrop Financial Co., Inc. datedMay 25, 1982. In response to inquiries regarding theappropriateness of tax basis financial statements.issuers should refer to Statement on AuditingStandards No. 14, Special Reports, American

(48) Question: Has the Commissiondefined or will the staff issueinterpretations on the term"unreasonable effort or expense?"

Answer: No; The meaning of"unreasonable effort or expense"depends on the particular facts andcircumstances attending each case. Onlythe issuer will know the facts andcircumstances and be able to evaluatethem with respect to the requirements ofthe rule.

(49) Question: The issuer in aRegulation D offering of $7,000,000 is acorporation. That corporation isacquiring a business. The issuer isunable to obtain the financialstatements for that business withoutunreasonable effort or expense.3 5 Whatare the relevant considerations underRegulation D?

Answer: Rule 502(b)(2)(i)(B) providesthat if the issuer is not a limitedpartnership and "cannot obtain auditedfinancial statements withoutunreasonable effort or expense, thenonly the issuer's balance sheet, whichshall be dated within 120 days of thestart of the offering, must be audited."The staff has interpreted this provisionin the context of Rule 3-05 of RegulationS-X to apply to the financial statementsof the business being acquired. Thus, ifthe business being acquired is otherthan a limited partnership, and if theissuer cannot obtain audited financialstatements of that business withoutunreasonable effort or expense, then theissuer may provide the relevantfinancial statements for the businessbeing acquired on and unaudited basisso long as it also provides an auditedbalance sheet for that business datedwithin 120 days of the start of theoffering, or, if appropriate, as of the dateof acquisition of the business.36

2. Reporting Issuers-Rule502(b)(2)(ii). If the issuer is subject tothe reporting requirements of section 13or 15(d) of the Exchange Act, RegulationD sets forth two alternatives fordisclosure: the issuer may delivercertain recent Exchange Act reports (theannual report, the definitive proxystatement, and, if requested, the Form10-K (17 CFR 249.310)) or it may providea document containing the sameinformation as in the Form 10-K or Form

I

Institute of Certified Public Accountants, December1976.

'*The issuer should refer to Rule 3-05 ofRegulation S-X (17 CFR 210.3-05) for the disclosureguidelines on businesses to be acquired. If theoffering were for less than $5,000,000 and the issuerwere thus referring to Form S-18, Item 21(d) of thatform provides a parallel rule on businesses to beacquired.

m See letter re Walnut Valley Special Cable TVFund dated May 13, 1982.

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10 (17 CFR 249.210) under the ExchangeAct or in a registration statement underthe Securities Act. In either case the rulealso calls for the delivery of certainsupplemental information.

(50) Question: Rule 502(b)(2)(ii)(B)refers to the information contained "in aregistration statement on Form S-1."Does this requirement envision deliveryof Paris I and II of the Form S-1?

Answer: No. Rule 502(b)(2](ii)(B)should construed to mean Part I of FormS-1..

(51) Question: A reporting companywith a fiscal year ending on December31 is making a Regulation D offering inFebruary. It dbes not have an annualreport to shareholders, an associateddefinitive proxy statement, or a Form10-K for its most recently completedfiscal year. The issuer's last registrationstatement was filed more than twoyears ago. What is the appropriatedisclosure under Regulation 13?

Answer: The issuer may base itsdisclosure on the most recenlycompleted fiscal year for which anannuall report to shareholders on Form10-K was timely distributed or friled. Theissuer should supplement theinformation in the report used with theinformation contained in any reports ordocuments required to be filed undersections 13(a), 14(a), 14(c) and 15(d) ofthe Exchange Act since the distributionor filing of that report'and with a briefdescription of the securities beingoffered, the use of the proceeds from theoffering, and any material changes inthe issuer's affairs that are not disclosedin the documents furnished. S'ee Rule502(b)(2)(ii})C).

C. General

Rule 502(b)[2) also contains fourgeneral provisions applicable to allclasses of issuer in all offerings wherespecified disclosure is required.Theseprovisions govern exhibits, disclosure ofadditional information to non-accreditedinvestors, the opportunity for furtherinvestor inquiries, and disclosure ofcertain additional information inbusiness combinations.

(52) Question: In a Rule 505 or 506offering of interests in a limitedpartnership where certain purchasersare not accredited investors, must theissuer obtain an opinion of counselregarding the legality of the securitiesbeing issued or an opinion regarding thetax consequences of an investment inthe offering?

Answer: Rule 502(b)(2){iii) -providesthat the issuer is not required to furnishthe exhibits that would accompany theform of registration or report governingthe issuer's disclosure document if theissuer identifies the contents of those

exhibits and makes them available topurchasers upon written request prior topurchase.3 7 Any form of registration towhich the issuer refers in preparing itsdisclosure document under Regulation Drequires that the issuer furnish theexhibits required by Item 601 ofRegulation S-K. Item 601 requires thatthe issuer furnish, among other exhibits,an opinion of counsel as to the legalityof the securities being issued. Thus,under Rule 502(b)(2)(iii), the issuershould identify the contents of thisopinion of counsel and make it availableto purchasers upon written request. Item601 also sets forth certain requirementsfor an opinion as to tax matters. Such anopinion is required to support anyrepresentations in a prospectus as tomaterial tax consequences. Thus,assuming the Regulation D issuer willmake representations in the disclosuredocument as to material taxconsequences of investing in a limitedpartnership, the issuer should identifythe contents of and make available uponrequest an opinion supporting thatdiscussion

38

Ill. Operational Conditions

A. Integration-Rule 502(a)

Rule 502(a) achieves two purposes.First, it explicitly incorporates thedoctrine of integration into RegulationD. Second, it establishes an exception tothe operation of that doctrine.

Integration operates to identify thescope of a particular offering byconsidering the relationship betweenmultiple transactions. it is premised onthe concept that the Securities Actaddresses discrete offerings and on therecognition that not every offering is infact a discrete transaction. Theintegration doctrine prevents an issuerfrom circumventing the registrationrequirements of the Securities Act byclaiming a separate exemption for eachpart of a series of transactions thatcomprises a single offering. Because thedetermination of whether transactionsshould be integrated into one offering isso dependent on particular facts andcircumstances, the staff does not issueinterpretations in this area.3 9 The Noteto Rule 502(a), however, does set forth anumber of factors that should beconsidered in making an integrationdetermination.

= This -provision is simlar to that found in formerRule 146 at paragrapb (eJl)[liij[cJ.

" See letters to H-cker & Phillips dated December22, 1982 and Hopper, Kanouff, Smith and Peryamdated September 10, 1982.

"5See Release No. 33-6253 (October 28.1980 (45

FR 72644); letters re Security Bancorp, Inc. datedJanuary 21, 1980 and Kearney Plaza Company datedMarch 8, 1979.

Rule 502(a) also sets forth anexception to the integration doctrine. Itprovides that a Regulation D offeringwill not be integrated with offers orsales that occur more than six monthsbefore or after the Regulation D offering.This six month safe harbor rule onlyapplies, however, where there havebeen no offers or sales (except under anemployee benefit plan) of securitiessimilar to those in the Regulation Doffering within the applicable sixmonths. 40

(53) Question: An issuer conductsoffering (A) under Rule 504 of RegulationD that concludes in January. Sevenmonths later the issuer commencesoffering (B) under Rule 506. During thatseven month period the issuer's onlyoffers or sales of securities are under anemployee benefit plan (C). Must theissuer integrate (A) and (B)?

Answer: No. Rule 502(a) specificallyprovides that (A) and (B) will not beintegrated.41

B. Calculation of the Number ofPurchasers-Rule 501(e)

Rule 501(e) governs the calculation ofthe number of purchasers in offeringsthat rely either on Rule 505 or 506. Bothof these rules limit the number of non-accredited investors to 35. Rule 501(e)has two parts. The first excludes certainpurchasers from the calculation, Thesecond establishes basic principles for.counting of corporations, partnerships,or other entities.

(54) Question: One purchaser in aRule 506 offering is an accreditedinvestor. Another is a first cousin of thatinvestor sharing the same principalresidence. Each purchaser is making hisown investment decision. How must theissuer count these purchasers forpurposes of meeting the 35 purchaserlimitation?

Answer The issuer is not required tocount either investor. The accreditedinvestor may be excluded under Rule501(e)(1)(iv), and the first cousin maythen be excluded under Rule501(e)(1)(i). 2

"0The Note to Rule 502(a) also points out thatcertain foreign offerings-are not integrated withdomestic exempt offerings.

41 Rule 502(a), however ,does not provide a safeharbor to the possible integration of offering (C)with eitheroffering (A) or (B).In resolving thatquestion, the issuer should consider the factorslisted in the Note to Rule 5021a).

12The Note to Rule -501(a) provides that the issuermust satisfy all other conditions of Regulation Dwith respect to purchasers that have been excludedfrom the count. Thus, for instance, the issuer wouldhave to ensure the sophistication of the first cousinunder Rule 506(b)(2)(ii).

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(55) Question: An accredited investorin a Rule 506 offering will have thesecurities she acquires placed in hername and that of her spouse. The spousewill not make an Investment decisionwith respect to the acquisition. Howmany purchasers will be involved?

Answer: The accredited investor maybe excluded from the count under Rule501(e)(1)(iv) and the spouse may beexcluded under Rule 501(e)(1)(i). Theissuer may also take the position,l owever, that the spouse should not bedeemed a purchaser at all because hedid not make any investment decision,and because the placement of thesecurities in joint name may simply be atax or estate planning technique.

(56) Question: An offering isconducted in the United States underRule 505. At the same time certain salesare made overseas. Must the foreigninvestors be included in calculating thenumber of purchasers?

Answer: Offers and sales of securitiesto foreign persons made outside theUnited States in such a way that thesecurities come to rest aboard generallydo not need to be registered under theAct. This basis for non-registration isseparate from Regulation D and offersand sales relying on this interpretationare not required to be integrated with acoincident domestic offering.' 3 Thus,assuming the sales in this question relyon this interpretation, foreign investorswould not be counted.

(57) Question: An investor in a Rule506 offering is a general partnership thatwas not organized for the specificpurpose of acquiring the securitiesoffered. The partnership has tenpartners, five of whom do not qualify asaccredited investors. The partnershipwill make an investment of $100,000.How is the partnership counted andmust the issuer make any findings as tothe sophistication of the individualpartners?

Answer: Rule 501(e)(2) provides thatthe partnership shall be counted as onepurchaser. The issuer is not obligated toconsider the sophistication of eachindividual partner.

(58) Question: If the partnership inQuestion 57 purchases $200,000 of thesecurities being offered and if thatamount does not exceed 20 percent ofthe partnership's net worth, how shouldthe partnership be counted?

Answer: Rule 501(e)(2), whichprovides that the partnership shall becounted as one purchaser, operates intandem with Rule 501(e)(1). Thus,,because the partnership is an accredited

4See Release No. 33-4708 (July 9, 1964) (29 FR828), Preliminary Note 7 to Regulation D and Note toRule 502(a).

Investor (in this case under Rule501(a)(5)), the partnership may beexluded from the count under Rule501(e)(2)(iv).

(59) Question: An investor in a Rule506 offering is an investment partnershipthat is not accredited under Rule501(a)(8). Although the partnership wasorganized two years earlier and hasmade investments In a number ofofferings, not all the partners haveparticipated in each investment. Witheach proposed investment by thepartnership, individual partners havereceived a copy of the disclosuredocument and have made a decisionwhether or not to participate. How dothe provisions of Regulation D apply tothe partnership as an investor?

Answer: The partnership may not betreated as a single purchaser. Rule501(e)(2) provides that if the partnershipis organized for the specific purpose ofacquiring the securities offered, theneach beneficial owner of equity interestsshould be counted as a separatepurchaser. Because the individualpartners elect whether or not toparticpate in each investment, thepartnership is deemed to be reorganizedfor the specific purpose of acquiring thesecurities in each investment." Thus,the issuer must look through thepartnership to the partners participatingin the investment. The issuermustsatisfy the conditions of Rule 506 as toeach partner.

C. Manner of Offering-Rule 502(c)Rule 502(c) prohibits the issuer or any

person acting on the issuer's behalf fromoffering or selling securities by any formof general solicitation or generaladvertising. The analysis of facts underRule 502(c) can be divided into twoseparate inquiries. First, is thecommunication in question a generalsolicitation or general advertisement?Second, if it is, is it being used by theissuer or by someone on the issuer'sbehalf to offer or sell the securities? Ifeither question can be answered in thenegative, then the issuer will not be inviolation of Rule 502(c). Questions underRule 502(c) typically present issues offact and circumstance that the staff isnot in a position to resolve. In severalinstances, however, the staff has belen -

able to address questions under the rule.In analyzing what constitutes a

general solicitation, the staff considereda solicitation by the general partner of alimited partnership to limited partners inother active programs sponsored by thesame general partner. In determining

"See letter re Madison Partners Ltd. 1982-1dated January 18, 1982. See also letter re Kenai Oil& Gas, Inc. dated April 27, 1979.

that this did not constitute a generalsolicitation the Division underscored theexistence and substance of the pre-existing business relationship betweenthe general partner and those beingsolicited. The general partnerrepresented that it believed each of thesolicitees had such knowledge andexperience in financial and businessmatters that he or she was capable ofevaluating the merits and risks of theprospective investment. See letter reWoodtrails-Seattle, Ltd. dated July 8,1982.

In analyzing whether or not an issuerwas using a geneal advertisement tooffer or sell securities, the staff declinedto express an opinion on a proposedtombstone advertisement that wouldannounce the completion of an offering.See letter re Alma SecuritiesCorporation dated July 2, 1982. Becausethe requesting letter did not describe theproposed use of the tombstoneannouncement and because theannouncement of the completion of oneoffering could be an indirect solicitationfor a new offering, the staff did notexpress a view. In a letter re TaxInvestment Information Corporationdated January 7, 1983, the staffconsidered whether the publication of acircular analyzing private placementofferings, where the publisher wasindependent from the issuers and theofferings being analyzed, would violateRule 502(c). Although Regulation D doesnot directly prohibit such a third partypublication, the staff refused to agreethat such a publication would bepermitted under Regulation D becauseof its susceptability to use byparticipants in an offering. Finally, in theletter re Aspen Grove dated November8, 1982 the staff expressed the view thatthe proposed distribution of apromotional brochure to the members ofthe "Thoroughbred Owners andBreeders Association" and at an annualsale for horse owners and the proposeduse of a magazine advertisement for anoffering of interests in a limitedpartnership would not comply with Rule502(c).

(60) Question: If a solicitation werelimited to accredited investors, would itbe deemed in compliance with Rule502(c)?

Answer: The mere fact that asolicitation is directed only toaccredited investors will not mean thatthe solicitation is in compliance withRule 502(c). Rule 502(c) relates to thenature of the offering not the nature ofthe offerees.

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D. Limitations on Resale-Rule 502(d)

Rule 502(d) makes it clear thatRegulation D securities have limitationson transferability and requires that theissuer take certain precautions torestrict the transferability oFthesecurities.

(61) Question: An investor in aRegulation D offering wishes to resellhis securities within a year after theoffering. The issuer has agreed toregister the securites for resale. Will theproposed resale under the registrationstatement violate Rule 502(d)?

Answer: No. The function of Rule502(d4 is to restrict the unrelisteredresale of securities. Where the resalewill be registered, however, suchrestrictions are unnecessary.

IV. Exemptions

A. Rule 504

Rule 504 is an exemption undersection 3(b) of the Securities Actavailable to non-reporting and non-invesftment 5 companies for offeringsnot in excess of $500,000.

(62] Question: A foreign issuerproposes to use Rule 504. The issuer isnot subject, to section 15(d) and itssecurities are exempt from registrationunder Rule 12g3-2 (17 CFR 240.12g3-2).May this issuer use Rule 504?

Answer. Yes.(63) Question: An issuer proposes to

make an offering under Rule 504 in twostates. The offering will be registered inone state and the issuer will deliver adisclosure document pursuant to thestate's requirements. The offering willbe made pursuant to an exemption fromregistration in the second state. Must theoffering satisfy the limitations on themanner of offering and on resale inparagraphs (c) and (d) of Rule 502?

Answer: Yes. An offering under Rule504 is exempted from the manner of saleand resale limitations only if it isregistered in each state in which it isconducted and only if a'disclosuredocument is required by state law.

(64) Question: The state in which theoffering will take place provides for"qualification" of any offer or sale ofsecurities. The state statute alsoprovides that the securitiescommissioner may conditionqualification of an offering on thedelivery of a disclosure document priorto sale. Would the issuer be making itsoffering in a state that "provides forregisbation of the securities andrequires the delivery of a dis closure

"The Division is of.the view that the provision inRules 504 and 505 that bars an investment companyfrom using the exemptions should be construed tomean an investment company as that term isdefined in section 3 of the Investment Company Act.

document before sale" if its offeringwere qualified in this ;state on thecondition that it deliver a disclosuredocument before sale to each investor?

Answer: Yes."(65) Question: If an issuer is

registering securities at the state level,are there any specific requirements as toresales outside of that state if the issueris attempting to come within theprovision in Rule 504 that waives thelimitations on the manner of offeringand on resale in Rules 502 (c) and .d)?

Answer N6.47 The issuer, however,must intend to use Rule 504 to makebona fide sales in that state and not toevade the policy of Rule 504 by usingsales in one state as a conduit for salesinto another state. See Preliminary Note6 to Regulation D.

B. Rule 505 "Rule 505 provides an exemption -under

section 3(b) of the Securities Act for .non-investment companies for offeringsnot in excess of $5,000.000.

(66) Question: An issuer is a brokerthat was censured pursuant to aCommission order. Does the censure barthe issuer from using Rule 505?

Answer No. Rule 505 is not availableto any issuer who falls within thedisqualifications for the use ofRegulation A (17 CFR 230.251-.264). SeeRule 505(b)(2)(iii). One suchdisqualification occurs when the issueris subject to a Commission order undersection 15(b) of the Exchange Act. Acensure has no continuing force andthus the issuer is not subject to an orderof the Commission.

C. Questions Relating to Rules 504 and505

Both Rules 504(b)(2)(i) and 505(b)(2)(i)require that the offering not exceed aspecified aggregate offering price. Theallowed aggregate offering price,however, is reduced by the aggregateoffering price for all securities soldwithin the last twelve months in relianceon section 3(b) or in violation of section5(a) of the Securities Act.

(67) Question: An issuer preparing toconduct an offering of equity securitiesunder Rule 505 raised $2,000,000 fromthe sale of debt instruments under Rule505 eight months earlier. How much maythe issuer raise in the proposed equityoffering?

Answer: $3,000,000. A specificcondition to the availability to Rule 505for the proposed offering is that itsaggregate offering price not exceed

"See letter to Geraldine D. Green datedNovember 22.1982.

47See letter re Freeport Resources, Inc. datedDecember 9. 1982.

$5,000,000 less the proceeds for allsecurities sold under section 3(b) withinthe last 12 months.

(68) Question: An issuer is planning aRule 505 offering. Ten months earlier theissuer conducted a Rule 506 offering.Must the issuer consider the previousRule 506 offering when calculating theallowable aggregate offering price forthe proposed Rule 505 offering?

Answer No. The Commission issuedRule 506 under section 4(2), and Rule505(b)(2)(i) requires that the aggregateoffering price be reduced by previoussales under section 3(b). 8

(69) Question: Seven months before aproposed Rule 504 offering the issuerconducted a rescission offer under Rule504. The rescission offer was forsecurities that were sold in violation ofsection 5 more than 12 months beforethe proposed Rule 504 offering. Must theaggregate offering price for the proposedRule 504 offering be reduced either bythe amount of the rescission offer or theearlier offering in violation of'section 5?. Answer No. The offering in violationof section 5 took place more than 12months earlier and thus is not requiredto be included when satisfying thelimitation in Rule 504(b)(2)(i). The staffis of the view that the rescission offerrelates back to the earlier offering andtherefore should not be included as anadjustment to the aggregate offeringprice for the proposed Rule 504 offering.

(70). Question: Rules 504 and 505contain examples as to the calculationof the allowed aggregate offering pricefor a particular offering. Do theseexamples contemplate integration of theofferings described?

Answer No. The examples have beenprovided to demonstrate the operationof the limitation on the aggregateoffering price in the absence of anyintegration questions.

(71) Question: Note 2 to Rule 504 isnot restated in Rule 505. Does theprinciple of the note apply to Rule 505?

Answer: Yes. Note 2 to Rule 504 setsforth a general principle to the operationof the rule on limiting the aggregateoffering price which is the same for bothRules 504 and 505. It provides that if, asa result of one offering, an issuerexceeds the allowed aggregate offeringprice in a subsequent unintegratedoffering, the exemption for the firstoffering will not be affected.

"' Note that under Rule 502(a) these offerings maynot have to be integrated because they areseparated by six months.

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D. Rule 508(72) Question: May an issuer of

securities with a projected aggregateoffering price of $3,000,000 rely Rule 506?

Answer Yes. The availability of Rule506 is not dependent on the dollar sizeof an offering.

(73) Question: Rule 506 requires thatthe issuer shall reasonably believe thateach purchaser who is not an accreditedinvestor either alone or with a purchaserrepresentative has such knowledge andexperience in financial and businessmatters that he is capable of evaluatingthe merits and risks of the prospectveinvestment. Former Rule 146 requiredthe issuer to make a similardetermination with respect to eachofferee. Rule 506 is not an exclusivebasis for satisfying the requirements ofthe private offering exemption in section4(2). See Preliminary Note 3 toRegulation D. What is the Commission'sview of the relevance of the nature ofthe offerees in an offering that reliesexclusively on section 4(2) as its basisfor exemption from registration?

Answer: Clearly, in an offering relyingexclusively on section 4(2) for anexemption from registration, all offereeswho purchase must possess the requisitelevel of sophistication. Thesophistication of each of those to whomthe securities are offered who do notpurchase is not a fact that in and ofitself should determine mechanically theavailability of the exemption; the*number and the nature of the offerees,however, are relevant in determiningwhether an issure has engaged in ageneral solicitation- or generaladvertising that would preclude relianceon the exemption in section 4(2).

E. Questions Relating to Rules 504-506(74] Question: If an issuer relies on

one exemption, but later realizes thatexemption may not have been madeavailable, may it rely on anotherexemption after the fact?

Answer: Yes, assuming the offeringmet the conditions of the newexemption. No one exemption isexclusive of another.

(75) Question: May foreign issuers useRegulation D?

Answer: Yes. Recent amendments toRegulation D have clarified thedisclosure requirements for foreignissuers.

49

(76) Question: Is Regulation Davailable to an underwriter for the sale,of securities acquired'in a firmcommitment offering?

Answer: No. As Preliminary Note 4indicates, Regulation D is available only

"See Release No. 33-6437 (November 19,1982)(47 FR 54764).

to the issuer of the securities and not toany affiliate of that issuer or to anyother person for resales of the issuer'ssecurities. See also Rule 502(d) whichlimits the resale of Regulation Dsecurities.

(77) Question: Regulation T (12 CFR220.1-.8) of the Federal Reserve Boardimposes certain restrictions on brokersand dealers for the use of credit in thepurchase of securities. Regulation Tprovides an exemption from thoseprovisions for the arrangement of creditin a sale of securities that is exemptfrom the registration requirements of theSecurities Act under section 4(2). See 12CFR 220.7(g). What is the applicabilityof this provision to offerings conductedunder Regulation D?

Answer: Regulation T is interpretedby the Federal Reserve Board which hasexpressed the view that the exemptionfrom Regulation T in 12 CFR 220.7(a) isavailable for offerings conducted inreliance on Rules 505 and 506, 5) but notfor those under 504. 51

(78) Question: A corporation proposesto implement an employee stock optionplan for key employees. Can the issuerrely on Regulation D for an exemptionfrom registration for the issuance ofsecurities under the plan?

Answer: The corporation may useRegulation D'for the sale of its securitiesunder the plan to the extent that suchoffering complies with Regulation D. In atypical plan, the grant of the options willnot be deemed a sale of a security forpurposes of the Securities Act. Theissuer, therefore, will be seeking anexemption for the issuance of the stockunderlying the options. The offering ofthis stock generally. will commencewhen the options become exercisableand will continue until the options areexercised or otherwise terminated.Where the key employees involved aredirectors or executive officers, suchindividuals will be accredited investorsunder Rule 501(a)(4) if they purchasesecurities through the exercise of theiroptions. Other key employees may beaccredited as a result of net worth orincome under Rules501(a)(6] or (a)(7).

(79) Question: In an "all or none" orminimum-maximum Regulation Doffering of interests in a limitedpartnership, the general partnerproposes, if necessary, to purchase

"Letters from Laura Homer, Securities CreditOfficer, Board of Governors of the Federal ReserveSystem to Ardith Eymann, Esq., Chief Counsel,Division of Market Regulation, Securities andExchange Commission (April 10, 1982) and to Mrs.Mary E.T. Beach, Associate Director, Securities andExchange Commission (January 8, 1982).

1 Letter from Laura Homer, Securities CreditOfficer, Board of Governors of the Federal ReserveSystem to Alan G Rosenberg, Esq. (May 20, 1982).

/ Rules and Reg," 'ions

enough interests for the issuer to sell aspecified level of interests by thespecified expiration date of the offering.What disclosure and otherconsiderations are relevant?

Answer: The staff is of the view thatpursuant to Rule 10b-9 under theExchange Act, the issuer must disclosethe possibility that the general partnermay make purchases of the limitedpartnership interests in order to meetthe specified minimum. In addition, theissuer should disclose the maximumamount of the possible purchases.Finally, these purchases must be forinvestment and not resale. Questionsregarding these views should bedirected to the Division of MarketRegulation, Office of Trading Practices,(202) 272-2874.

(80) Question: An issuer will conducta Regulation D offering on an "all ornone" basis within a specified time.What considerations are there for theissuer if it wishes to extend the offeringbeyond the specified time in order tosell the specified amount of securities?

Answer:. The staff is of the view thatan offering may be extended beyond thespecified time without resulting in aviolation of Rule J0b-9 under theExchange Act or, in the case of anoffering in which a broker-dealer is aparticipant, Rule 15c2-4 under theExchange Act, under the followingconditions:

a. Prior to the specified expirationdate, a reconfirmation offer must bemade to-all subscribers that disclosesthe extension of the offering and anyother material information necessary toupdate previously provided disclosure.

b. The reconfirmation offer must bestructured so that the subscriberaffirmatively elects to continue hisinvestment and so that thosesubscribers who take no affirmativeaction will have their funds returned tothem.

c. The reconfirmation offer must bemade far enough in advance of thespecified expiration date so that anysubscriber who does not elect tocontinue his investment will have hisfunds returned to him promptly after thespecified expiration date.

Questions regarding these viewsshouldbe directed to the Division ofMarket Regulation, Office of TradingPractices, (202) 272-2874.

V. Notice of Sale-Form D

Rule 503 requires the issuer to file anotice of sale on Form D. The noticemust be filed-not later than 15 days afterthe first sale, every six months

Federal Registeir / Vol. 48, No. 48 / Thursday, March 10, 1983 / Rules and Regulations

thereafter, and no later than 30 daysafter the last sale. 52

(81) Question: Where can an issuerobtain copies of Form D and where mustthe form be filed?

Answer: Form D is available throughthe Public Reference Branch of theCommission's main office, 450 5thStreet, N N., Washington, D.C. 20549,(202) 272-7460, or any of its regional orbranch offices. The form should be filedat the Commission's main office. Thereis no filing fee.

(82) Question: In a minimum..maximum offering where subscriptionfunds are held in escrow pending receiptof minimum subscriptions, when is thefirst Form D required to be filed?

Answer: In the context of Rule 503, thefirst sale takes place upon receipt of thefirst subscription agreement and thedeposit of the first funds into e3crow.The issuer, therefore, should file its firstForm D not later than 15 days after thereceipt of the first subscriptionagreement.

(83) Question: An issuer conducting aminimum-maximum offering hasreceived subscriptions for the minimumnumber of interests needed to form thelimited partnership. Subsequent toclosing and formation of the partnership,the issuer continues to offer interests.After two months in which no ,ales takeplace, the issuer decides to terminatethe offering. Because more than 30 dayshave elapsed since the last sale, howcan the issuer comply with Rule 503 inthe filing of its final Form D?

Answer: The staff is of the view that afinal Form D may be filed not later than30 days after the last sale or after thetermination of the offering, whicheveroccurs later.

(84) Question: In an employee stock -

option plan, when would the first andlast Form D be filed?

Answer: The first Form D should befiled not later than 15 days after theexercise of the first option. The finalForm D would be due not later than 30days after the exercise or expiration ofthe last outstanding option, whicheveroccurs later.

(85) Question:An issuer commences aRegulation D offering and files anoriginal ]Form D not later than 1.5 daysafter the first sale. Subsequently,because no further sales are made, theissuer returns the money to the oneinvestor and terminates the offering.How should the issuer reflect theunsuccessful offering on its Foimi D?

62 A Form D is also required to be filed in

,connection with an offering conducted pursuant tosection 4(6]. See 17 CFR 239.500.

Answer: The issuer should file a finalForm D indicating zero sales, investors,and proceeds.

(86) Question: If the issuer is a limitedpartnership, who would be consideredthe chief executive officer for purposesof Form D questions?

Answer: The chief executive officer ofa limited partnership is that individualwho fulfills the function of chiefexecutive officer. That individual maybe the chief executive officer of acorporate general partner.

(87) Question: What is a StandardIndustrial Classification ("SIC") andwhere is it obtained?

Answer: The SIC is a code associatedwith a particular economic activity. TheSIC system, developed by the Bureau ofthe Census under the auspices of theOffice of Management and Budget, isused in classification of establishmentsby the type of activities in which theyare engaged. An issuer's SIC can befound in the Standard IndustrialClassification Manual, a publication ofthe U.S. Government that may beobtained from the Superintendent ofDocuments and is generallly available inpublic and university libraries.

(88) Question: Question 8 of Part Aasks for the issuer's CUSIP number.What is a CUSIP number?

Answer: CUSIP 53 is the trademark fora system that identifies specific securityissuers and their classes of securities.Under the CUSIP plan, a CUSIP numberis permanently assigned to-each classand will identify that class and no other.Generally, a CUSIP number will beassigned only to a class for which thereis a secondary trading market. Theoperation of the CUSIP numberingsystem is controlled by the CUSIP Boardof Trustees which awarded a contract toStandard & Poor's Corporation tofunction as the CUSIP Service Bureau,the operational arm of the system.Issuers relying on Regulation D that donot have a class of securities with asecondary trading market and thus donot have a CUSIP number shouldanswer Question 8 in the negative.

(89) Question: Part B of Form Drequests statistical information aboutthe issuer. In an offering of interests in alimited partnership to be formed, howshould this part be answered?

Answer: The answers to Part B shouldbe with respect to the partnership to beformed and will be zero or "notapplicable." This will reflect thestatistical profile of a start-up issuer.

"The acronym "CUSIP" derives from the title ofthe American Banker's Association committee thatdeveloped the CUSIP system-Committee onUniform Security Identification Procedures.

(90) Question: Question 2 to Part Crequests certain information as to thenumber of accredited and non-accredited investors in a Rule 505 or 506offering. Must an issuer make a findingas to accredited investors even if theissuer is not relying on the accreditedinvestor concept in its offering?

Answer: No. Where an issuer underRule 505 6r 506 is not relying on theaccredited investor concept for all orcertain investors, it should treat thoseinvestors as non-accredited for purposesof this question.

.(91) Question: Questions 5 and 6 toPart C request certain informationregarding the offering expenses and theuse of proceeds. May the issuer attach aseparate schedule listing expenses anduse of proceeds in lieu of completingthese questions?

Answer. No. The Form D has beenformulated for keypunching and entry ofthe information into an automatic datastorage system. Failure to complete thequestions on the form in the spaceprovided frustrates the objectives of theform.

(92) Question: May the Form D besigned by the issuer's attorney?

Answer: Form D may be signed onbehalf of the issuer by anyone who isduly authorized.Text of AmendmentList of Subjects in 17 CFR Part 231

Reporting requirements, Securities.In accordance with the foregoing, Title

17, Chapter II, of the Code of FederalRegulations is amended as follows:

PART 231-INTERPRETIVE RELEASESRELATING TO THE SECURITIES ACTOF 1933 AND GENERAL RULES ANDREGULATIONS THEREUNDER.

1. Part 231 is amended by adding thisRelease No. 33-6455 (March 3, 1983) tothe list of interpretive releases.

By the Commission.George A. Fitzsimmons,SecretaryMarch 3, 1983.[FR Doc. 83-6220 Filed 3-9-83: 8:45 am]

BILUN CODE 8010-01-M

DEPARTMENT OF STATE

Bureau of Consular Affairs

22 CFR Part 41

[Dept. Reg. 108.829]

Issuance of Nonimmigrant Visas-Procedures

AGENCY: Department of State.

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