(2) The following transactions are exempted from Sections 61-1-7 and 61-1-15:
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(n) a transaction not involving a public offering;
Division Interpretive Commentary:
This is the most used exemption. This exemption is used by privately held companies for a variety of transactions, although most companies qualify for and rely on this exemption unknowingly. This exemption may also be used by publicly held companies for private placements and other transactions where restricted securities are issued. An issuer may either claim the statutory exemption which is self-executing, or the "safe-harbor" rule exemption which requires a filing with the Division.
Statutory Exemption - The statutory transactional exemption is self-executing and a company can rely upon it without filing anything with the Division. However, the phrase "not involving a public offering" has not been defined by statute which leaves an issuer to seek guidance from the courts and interpretive releases.
The Utah Court of Appeals concluded in a decision issued on October 21, 1999 in State v. Shepherd, Case No. 981098-CA, that the term "public offering" has a long established meaning within the business community. The court found that this meaning comes from the leading federal case, SEC v. Ralston Purina Co., 346 US 119 (1953). The Ralston Purina court defined a transaction "not involving any public offering" as "an offering to those who are shown to be able to fend for themselves." In making this determination, the court also placed great emphasis on the need of the investors for the protections afforded by registration and whether the offerees had access to the same type of information that would be found in a registration statement.
In determining whether investors had actual access to the same type of information as would be found in a registration statement, the Division would look to the following factors for assistance:
Number of Offerees - In so far as numbers are of any consequence, the important criterion is the number of offerees, not buyers. Although the U.S. Supreme Court expressly stated in Ralston Purina that a numerical test was unwarranted, the courts continue to refer to the numbers. Particularly, the more people to whom an issuer offers its securities, the more likely the offering would be deemed a public offering. The fewer the offerees the less likely the offering would be deemed to be a public offering. However, the Tenth Circuit found a sale to a single individual of a large block of stock was not entitled to the exemption because "there was no evidence...of what knowledge [the buyer] possessed concerning either the stock or the company, nor was he shown to be in a position to know such information as would have been disclosed by registration." Eugene England Found. v. First Fed Corp., 663 F.2d 988 (10th Cir. 1973)
Sophistication of the Offerees - Many court cases have focused on the question of a particular class of offerees' need for the protection and disclosure as provided in the securities laws. In Ralston Purina it was stated, "[a]n offering to those who are shown to be able to fend for themselves is a transaction 'not involving any public offering.'" The question of "fending" for ones self is subjective.
The sale of stock to promoters who take the initiative in founding or organizing the business would come within the exemption. On the other hand, the transaction tends to become public when the promoters begin to bring in a diverse group of uninformed friends, neighbors, and associates.
It is believed that offerees in a private placement should be deemed accredited on any one of several bases. They may be qualified on the basis of their ability to understand risk. This attribute is sometimes called "sophistication." They may be qualified on the basis of their ability to assume the investment risk, sometimes called "wealth." They may be qualified on the basis of a personal relationship to the issuer or a promoter. However, the view that either the sophistication or the wealth of the offerees, without access to information, is sufficient to establish the exemption has been widely rejected.
Manner and Size of the Offering - A proper private placement relates to the manner of offering. In general, the offering should be made through direct communication with qualified offerees or their representatives. Public advertising is incompatible with a claim of a private offering. It is the offerees ability to understand the investment and the risk involved which is of issue, not the purchaser's ability to understand the investment and risk involved. Public advertising in any form will reach unsophisticated investors and persons that do not have access to the type of information found in a registration statement, and therefore all forms of general advertising and mass media circulation are forbidden.
The size of the offering may also raise questions as to the probability that the offering will be completed within the strict confines of the exemption. An offering of millions of dollars to non-institutional and non-affiliated investors would suggest that a public offering may be involved.
Relationship of the Offerees to Each Other and the Issuer - This element is tied to the need for the protection of the investor and disclosure. If the offerees are directors or officers of the company they are more than likely exempt. The assumption is that officers and directors have a good understanding of the conditions and risks involved with the issuer because of their access to information. However, offerees that have no pre-existing relationship with the issuer and do not have access to information are less likely to be exempt.
Safe-Harbor Rule Exemption - Since the phrase "not involving a public offering" has not been statutorily defined, the issuer always runs the risk that its offering may be deemed a public offering. If challenged, the company must establish the availability of the exemption -- a task which may be quite difficult. To minimize this risk, the Division has created a "safe-harbor" rule. If you qualify for the "safe-harbor" exemption, then it is prima facie evidence that the company's offering is deemed "not involving a public offering" and the company's burden will be limited to showing they qualified for the "safe-harbor."
Utah's "safe-harbor" rule was created by adopting the Uniform Limited Offering Exemption (ULOE). The Division adopted ULOE by rule which can be found at R164-14-2n of the Utah Administrative Code. The requirements are:
Rule 504 offerings do not qualify under ULOE and rule 506 offerings are Federal Covered Securities which are filed under rule R164-15-2. See Federal Covered Securities.
American Family Care of Utah, Inc., File # A31038-35, September 26, 1994