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Earlier this year the Securities and Exchange Commission adopted Rule 155 of the Rules and Regulations promulgated pursuant to the Securities Act of 1933, as amended. [FOOTNOTE 1] The rule provides a safe harbor for a private offering by an issuer of securities following an abandoned registered offering by that same issuer, or vice versa, without integrating the registered (public) and private offerings in either case. This new rule was primarily a response to the heightened volatility of the stock markets in the 1990s and was intended to facilitate an issuer’s ability to convert from one type of offering to another in response to changing market conditions. [FOOTNOTE 2] The SEC could not have been more prescient when it adopted Rule 155. Since then it has become increasingly common for registered offerings to be abandoned. [FOOTNOTE 3] This has been due, in large part, to the decline in the stock markets. Indeed, since the adoption of Rule 155, the Standard & Poor’s 500 stock index has fallen approximately 22 percent while the Nasdaq composite has lost approximately 42 percent of its value. [FOOTNOTE 4] The increase in abandoned registered offerings is also due to the events of Sept. 11. Beginning with that morning, the New York Stock Exchange closed for four business days while terrorism and threatened war became a stark reality in America. This new reality has been a legitimate basis for underwriters to exercise the standard “force majeure” clause in an underwriting agreement. This clause typically enables the representative of an underwriting syndicate to terminate an underwriting agreement and thereby not purchase the offered shares if certain events outside the control of the parties occur. Examples of these events include some variation of the following: 1. If any domestic or international event has materially disrupted the securities markets; 2. If there has occurred any new outbreak or material escalation of hostilities or other calamity or crisis the effect of which on the financial markets of the United States is such as to make it, in the judgment of the representative, inadvisable to proceed with the offering; 3. If there shall be such a material adverse change in general financial, political or economic conditions or the effect of international conditions on the financial markets in the United States is such as to make it, in the judgment of the representative, inadvisable or impracticable to market the shares; and 4. If trading in the shares has been suspended by the SEC or trading generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market System has been suspended or limited. If an underwriter exercises this out, the public offering has effectively been abandoned. What is the issuer then to do? ISSUER OPTIONS More and more issuers are now converting to a scaled down, less ambitious private offering. In so doing, however, it is essential that the private offering and the registered offering not be integrated. Integration in the world of securities offerings means that separate sales of securities by an issuer will be deemed by the SEC and state securities “blue sky” authorities as part of the same offering. If they are integrated, the private offering is likely to no longer qualify for an exemption from the registration requirements of Section 5 of the Securities Act. This is because the issuer’s public offering activities might constitute general advertising or public solicitation, thereby preventing the use of the private offering exemptions under section 4(2) or 4(6) of the Securities Act or under Regulation D. As a result, the private offering will potentially subject the issuer and its controlling persons to rescission of the sales or damages pursuant to Section 12 of the Securities Act and penalties imposed by the SEC pursuant to Section 20 of the Securities Act. The doctrine of integration is intended in part to prevent an issuer from improperly avoiding registration by artificially dividing a single offering so that an exemption under the Securities Act appears to apply to the individual parts where none would be available to the whole. This unlawful reliance on an exemption can have grave consequences for investors. It can deprive investors of the benefits of full and fair disclosure and of the civil remedies under Sections 11 and 12 of the Securities Act that emanate from misstatements and omissions of material facts in a registration statement. [FOOTNOTE 5] The Preliminary Note to Rule 155 states that the integration safe-harbor established in Rule 155 is not exclusive. Thus, if the safe-harbor of Rule 155 is not available, an issuer can expect that the traditional five factor test established by the SEC in the early 1960s will be applied to the facts and circumstances of the offerings. [FOOTNOTE 6] The five factors to be considered are as follows: 1. Are the offerings part of a single plan of financing? 2. Are the offerings of the same class of security? 3. Are the offerings made at or about the same time? 4. Are the offerings made for the same general purpose? 5. Are the offerings made for the same type of consideration? This article focuses on the steps that an issuer must take in order to meet the requirements of Rule 155(c)’s public-to-private offering safe-harbor and thereby avoid integration. [FOOTNOTE 7] Rule 155(c) provides that an abandoned registered offering will not be integrated with a later commenced private offering if: � No securities were sold in the registered offering; � The issuer withdraws the registration statement under Rule 477; � Neither the issuer nor any person acting on the issuer’s behalf commences the private offering earlier than 30 calendar days after the effective date of withdrawal of the registration statement under Rule 477; � Any disclosure document used in the private offering discloses any changes in the issuer’s business or financial condition that occurred after the issuer filed the registration statement that are material to the investment decision in the private offering; and � The issuer notifies each offeree in the private offering that: (i) the offering is not registered under the Securities Act; (ii) the securities will be “restricted securities” as defined in Rule 144 and cannot be resold without registration unless an exemption is available; (iii) purchasers do not have the protection of Section 11 of the Securities Act; and (iv) a registration statement for the abandoned offering was filed and withdrawn, specifying the date of withdrawal. These requirements are meant to provide a clear delineation between the abandoned registered offering and the subsequent private offering so that a prospective investor in the private placement knows that he or she is not receiving the legal protections of a registered offering. INVESTOR PROTECTIONS While Rule 155(c) was intended to enhance an issuer’s ability to convert from a registered offering to a private placement in the face of changing market conditions, the SEC made certain that such flexibility was not afforded at the expense of the investor. First, the requirement that no sale shall be made in the registered offering is absolute; it is not sufficient to merely place investors’ monies in escrow. [FOOTNOTE 8] Second, the 30-day waiting period between offerings is intended to provide a sufficient gap such that a prospective investor in the private placement that had evaluated the registered offering will be encouraged to make a new investment decision. The passage of time here is intended to act as a firewall between the two offerings. Third, the requirement that the private placement offering materials disclose any material change in the issuer’s business or financial condition subsequent to the filing of the registration statement is meant to ensure that an offeree is not misled by a prospectus that, with the passage of time, is now misleading or now omits material information. Finally, Rule 155(c) specifically requires that its mandated disclosures be made to each offeree in the private placement, not merely the ultimate purchasers. Moreover, the Preliminary Note to Rule 155 makes it clear that, as always, Rule 155 is not available to any issuer for any transaction or series of transactions that, although in technical compliance with the rule, is part of a plan or scheme to evade the registration requirements of the Securities Act. When the SEC adopted Rule 155, it also amended Rule 477 to facilitate the withdrawal of a pre-effective registration statement. Prior to the amendment, Rule 477 only permitted the withdrawal of a registration statement if the SEC determined such withdrawal to be consistent with the public interest and investor protection, and consented thereto. Rule 477 now, however, provides that an application to withdraw a pre-effective registration statement will be deemed granted at the time the application is filed unless the SEC notifies the registrant within 15 calendar days after the registrant filed the application that the application for withdrawal will not be granted. The registrant must state in its application for withdrawal that it did not sell any securities in connection with the offering, and that it anticipates undertaking a private offering in reliance on Rule 155(c) if indeed the Registrant so anticipates. [FOOTNOTE 9] CONCLUSION The adoption of Rule 155 has become particularly significant in the current volatile economic and political climate. It provides issuers with much greater flexibility as they access today’s capital markets. Indeed, prior to the adoption of Rule 155(c), an issuer and its securities counsel would have to apply the rather unwieldy five-factor test established by the SEC in 1962 before they could confidently pursue a private placement following an abandoned registered offering. With the adoption of Rule 155, the SEC has provided much greater legal certainty in these rather uncertain times. Hank Gracin is a partner and Steven J. Pappas is a senior associate at Lehman & Eilen LLP in Uniondale, Long Island. ::::FOOTNOTES:::: FN1 17 C.F.R. �230.155, adopted in Securities Act Release No. 33-7943, Integration of Abandoned Offerings (Jan. 26, 2001) (the Rule 155 Release). FN2 See the Rule 155 Release at 1. FN3 An abandoned registered offering is one in which an issuer files a registration statement with the SEC and subsequently withdraws it prior to effectiveness. FN4 See F. Norris, “The Peaks of 1999, the Valleys of 2001,” The New York Times, (Oct. 7, 2001). FN5 See the Rule 155 Release at 3. See also C. Johnson, Jr. and J. McLaughlin, “Corporate Finance and the Securities Laws,” 2d Ed., at 460-66 (Aspen Publishers, Inc. 1997). FN6 See SEC Release No. 33-4434 (Dec. 6, 1961) and SEC Release No. 33-4552 (Nov. 6, 1962). FN7 Rule 155(b) sets forth the requirements for the private-to-public offering safe-harbor. This conversion by an issuer is likely to occur when an issuer commences a private offering, but finds that the appetite for its securities is sufficiently strong so as to justify an underwritten public offering. This article focuses on the more likely scenario of these times: the public-to-private offering. FN8 See the Rule 155 Release at 7. FN9 The SEC took the further facilitative measure of amending Rule 457 under the Securities Act to provide that filing fees paid in connection with an abandoned registration statement may be applied for use with future registration statements for up to five years. This is of no small import to the small issuer when one realizes that the average filing fee paid for each registration statement abandoned during the four year period ending Dec. 31, 1999 was $22,962. See the Rule 155 Release at 13.

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