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

Notwithstanding the provisions of section 7(d) of the 1940 Act, an issuer relying on, and satisfying the requirements of, section 3(c)(1) of the 1940 Act shall be able to utilize the mails and interstate commerce to offer securities; provided that all of the following conditions are satisfied: (i) the securities are offered in reliance on, and satisfy the requirements of, section 3(a)(10) of the 1933 Act; (ii) the offering is made solely to accredited investors, or to accredited investors and no more than 50 non-accredited investors; (iii) the value of the offering is not in excess of $50 million; (iv) the offering is narrowly tailored to the intended offerees; and (v) a reasonable person would determine that the offerees are protected to the extent they would have been had the security been first registered pursuant to the 1933 Act.

So long as a transaction satisfied the foregoing requirements, issuers would no longer jeopardize their section 3(c)(1) status when making section 3(a)(10) offerings, and would thus be more likely to conduct section 3(a)(10) offerings. Such an increase in equity offerings would enable section 3(c)(1) issuers to expand their shareholder base and to raise additional capital. Additionally, U.S. investors would benefit because they would then have more opportunities to acquire section 3(a)(10) securities as investment opportunities.

Until the SEC rules directly on this issue or creates a safe harbor, the best available protection for a section 3(c)(1) issuer-the party who has the burden of proving that section 4(2) of the 1933 Act would apply119-is to structure its section 3(a)(10) offering with as many "private" offering criteria as possible so as not to trigger the "public offering" component of the 1940 Act. Yet, unfortunately, even if the section 3(c)(1) issuer manages to fashion its transaction with numerous "private" offering factors, it has no assurance that the SEC will not bring an enforcement action against it for making a public offering, if the issuer first did not register under the 1940 Act.

1. International M&A Boom Driven by Ample Finance, DOW JONES INT'L news, May 30, 2000 [hereinafter International M&A Boom]; see also Peter Stinton, Venture-Capital Investing Pot Overflows, S.F. CHRON., May 6, 2000, at B1 (discussing record investing by venture capital firms in the first quarter of 2000); Matt Marshall, Venture Capital Juggernaut Begins to Slow in Silicon Valley, SAN JOSE MERCURY NEWS, Feb. 18, 2001.

2. Investment Bank Lazard Freres Positioned for Growth in Europe, Dow JONES BUS. NEWS, Jan. 31, 2000.

3. See, e.g., Peter J. Sutro, Thinking About a Global Share Plan? Think Smart, 31 COMPENSATION & BENEFITS REV. 54 (1999) (discussing the growth of global share plans and the regulatory hurdles companies must overcome in creating such share plans).

4. HAROLD S. BLOOMENTHAL & SAMUEL WOLFF, SECURITIES AND FEDERAL CORPORATE LAW [sec] 1.1 (2000). These six statutes are: (i) Securities Act of 1933, 15 U.S.C. [sec][sec] 77a to z-3 (2002); (ii) Securities Exchange Act of 1934, 15 U.S.C. [sec][sec] 78a to ff (2002); (iii) Trust Indenture Act of 1939, 15 U.S.C. [sec][sec] 77aaa (2002); (iv) Public Utility Holding Act of 1935, 15 U.S.C. [sec][sec] 79-79z (2002); (v) Investment Company Act of 1940, 15 U.S.C. [sec][sec] 80a to a-64 (2002); (vi) Investment Advisers Act of 1940, 15 U.S.C. [sec][sec] 80b-1 to b-18a (2002).