An analysis of the Section 3(a)(10) exemption under the Securities Act of 1933 in the context of the public offering component of Section 3(c)(1) of the Investment Company Act of 1940

Fordham Journal of Corporate & Financial Law, 2003 by Holzapfel, Marc F

The design of the... [1933 Act] is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions. The natural way to interpret the private offering exemption is in light of the statutory purpose. Since exempt transactions are those as to which "there is no practical need for [the bill's] application," [sic] the applicability of [sec] 4(1) should turn on whether the particular class of persons affected needs the protection of the Act.69

The Court further stated that "the exemption question turns on the knowledge of the offerees...[and, therefore,] the focus of inquiry should be on the need of the offerees for the protection afforded by [a] registration [statement]."70 Thus, the crux of the analysis focuses on the offerees themselves. The SEC has issued a number of releases describing certain offeree characteristics to be evaluated when determining whether an offering is public or private.71 Such factors include: (a) the number and identity of offerees; (b) the size of the offering; and (c) the manner of the offering.72

A. Number of Offerees

Although nothing prevents the SEC from using a strict numerical test in deciding what rises to the level of a public offering, the U.S. Supreme Court has held that the number of offerees is not conclusive as to the availability of the nonpublic exemption.73 It is not even a question of the number "of actual purchasers, but [rather] the number of persons to whom the security in question is offered for sale."74 Negotiations with a large, unrelated group of prospective purchasers with little association or knowledge of the issuer are typical in public offerings,75 even if few offerees ultimately purchase shares.76 It is the identity of the initial offerees-and not just the actual purchasers-that is significant.77 Thus, an offering to persons who are able to "fend for themselves would most likely indicate a transaction not involving any public offering."78

B. Size of Offering

The larger the size of the offering, the more likely it will be considered public.79 A multi-million dollar offering to non-institutional and non-affiliated investors would thus tend to indicate a public offering.80 Similarly, an offering in connection with a "settlement of a class action or a business combination where the corporation to be acquired is not closely held would more likely be a transaction involving a public offering."81 Since a class action or a non-closely held corporation would have a large, diverse, and unsophisticated number of shareholders, such offerees may need the protections typically afforded investors in public offerings.

C. Manner of the Offering

A determination of whether an offering is public or private "also include[s] a consideration of the question of whether it should be regarded as part of a larger offering."82 Indeed, it is not enough to focus narrowly on a specific offering.83 Section 4(2) of the 1933 Act84 does not "exempt every transaction, which is not itself a public offering."85 Rather, the statute exempts "transactions not 'involving' any public offering."86 Thus, a person may not separate small parts of a series of related transactions-each of which alone would have been a private transaction, but the sum total of which is really one offering-and claim that a particular part is a non-public transaction merely to avoid registration.87 The SEC uses additional factors to determine whether or not a series of transactions should be integrated: whether (1) the different offerings are part of a single plan of financing; (2) the offerings involve issuance of the same class of security; (3) the offerings are made at or about the same time; (4) the same type of consideration is to be received; or (5) the offerings are made for the same general purpose.88