SecondaryMarketinExemptOfferings

Theexemptofferingsecondarymarket,largelygovernedbyRule
144A,isgrowingrapidly.
WhatisRule144A?
ThefollowingtransactionsareconductedunderRule144A:a)
offeringsofdebtorpreferredsecuritiesbypubliccompanies;b)
offeringsbyforeignissuersthatdonotwanttobecomesubjectto
U.S.reportingrequirements;andc)offeringsofcommonsecurities
bynonreportingissuers(i.e.,backdoorIPOs).
Anissuerwhointendstoengageinmultipleofferingsoftenhasa
Rule144Aprogram.Rule144Aprogramsareestablishedto
offerdebtsecuritiesonanongoingbasis.Theyaresimilarto
mediumtermnoteprograms,buttheyareunregisteredandcan
bedesignedforsalestoQIBs.Amongtheadvantagesofusing
Rule144Aprogramsare(1)nopublicdisclosureofinnovative
structuresorotherwisesensitiveinformation;(2)fewerFINRA
filingrequirements;and(3)reducedliabilityexposureunderthe
SecuritiesAct.
Rule144Aisanonexclusivesafeharbor.Aresellermayrelyupon
anyapplicableexemptionfromtheregistrationrequirementsofthe
SecuritiesActinconnectionwiththeresaleofrestricted
securities.Inaddition,Rule144Aofferingsoftenaremadeside
bysidewithaRegulationSoffering(targetedatforeign
investors).Thispermitsanissuertodoamultinationaloffering
withaQIBtrancheandaRegulationStranche,andtoselltoan
initialpurchaseroutsidetheUnitedStatesinrelianceon
RegulationS,eventhoughthepurchaseranticipatesandintends
immediateresaletoQIBs,inrelianceonRule144A.

Rule144Aprovidesthatreoffersandresalesofexemptofferings
orprivateplacementsincompliancewiththerulearenot
distributionsandthatthereselleristhereforenotan
underwriterwithinthemeaningofSection2(a)(11)ofthe
SecuritiesAct.
Aresellerwhoisnottheissuer,anunderwriter,oradealercan
relyontheexemptionprovidedbySection4(1)oftheSecurities
Act.Resellersthataredealerscanrelyontheexemptionprovided
bySection4(3)oftheSecuritiesActof1933.Issuersmustfind
anotherexemptionfortheofferandsaleofunregisteredsecurities.
TypicallytheyrelyonSection4(2),inrelianceonRegulation,or
onRegulationS.AffiliatesoftheissuermayrelyonRule144A.
ResellersnoteligibleforthesafeharborunderRule144Aneedto
relyontheSection4(1)exemption.
WhatisaSection4(1/2)exemption?
IfanaccreditedinvestorcannotqualifyasaQIBunderRule
144A,itwillseektousetheSection4(1)exemptionfor
secondarysales.ASection4(1)exemptionisacaselawderived
exemptionthatallowsprivateplacementresalesofprivate
placementofferings.ResellersrelyonSection4(1),which
providesanexemptionfornonissuers,underwriters,anddealers,
toavoidunderwriterstatusbyimplementingrestrictionsthatwould
berequiredinthecaseofaSection4(2)offeringbytheissuer
itself.TheSection4(1)exemptiontypicallyappliestotheresale
ofrestrictedsecuritiestoaccreditedinvestorswhomake
appropriaterepresentations.
Section4(1)alsoissometimesusedtoextendaRule144A
offeringtoinstitutionalaccreditedinvestors.TheSecondCircuit,
atleast,hasopinedthatapersonpurchasingrestrictedsecurities

fromanissuerisnotanunderwriterforpurposesofSection4(1)if
thepurchaserresellstherestrictedsecuritiestopersonswho
qualifyaspurchasersunderSection4(2)asdescribedbytheU.S.
SupremeCourtinSECv.RalstonPurinaCo.,346U.S.119(1953),
andwhoacquiretherestrictedsecuritiesinaprivateofferingofthe
typecontemplatedbySection4(2).
SecuritiesacquiredinaRule144Atransactionaredeemedtobe
restrictedsecuritieswithinthemeaningofRule144(a)(3)and
remainrestricteduntiltheapplicableholdingperiodexpires,and
mayonlybepubliclyresoldunderRule144pursuanttoan
effectiveregistrationstatementorinrelianceonanother
exemption.Afteraoneyearholdingperiod,resalesofthese
securitiesbynonaffiliatesarenotsubjecttoanyotherconditions
underRule144.
Forareportingissuer,compliancewiththeadequatecurrentpublic
informationconditionrequirestheissuertohavefiledallrequired
reportsunderSection13orSection15(d)oftheExchangeAct.For
anonreportingissuer,compliancewiththeadequatecurrent
publicinformationconditionrequiresthepublicavailabilityof
basicinformationabouttheissuer,includingcertaindisclosure
documentsandfinancialstatements.
Foraffiliateholdersofrestrictedsecurities,Rule144providesa
safeharborpermittingresalesofrestrictedsecurities,subjectto
thesamesixmonthandoneyearholdingperiodsfornonaffiliates
andtootherresaleconditionsofamendedRule144.Otherresale
conditionsinclude:(a)adequatecurrentpublicinformationabout
theissuer,(b)volumelimitations,(c)mannerofsalerequirements
forequitysecurities,and(d)noticefilingsonForm144.
WhatisaQIB?

AQIBisanyentityincludedwithinoneofthecategoriesof
accreditedinvestordefinedinRule501ofRegulationD,acting
foritsownaccountortheaccountsofotherQIBs,thatinthe
aggregateownsandinvestsonadiscretionarybasisatleast$100
millioninsecuritiesofissuersnotaffiliatedwiththeentity($10
millionforabrokerdealer).Inadditiontothequalificationsabove,
banksandsavingsandloanassociationsmusthaveanetworthof
atleast$25milliontobedeemedQIBs.
QIBscanbeforeignordomesticentities,butmustbeinstitutions.
IndividualscannotbeQIBs,nomatterhowwealthyor
sophisticated.Abrokerdealeractingasarisklessprincipalforan
identifiedQIBwillitselfbedeemedaQIB.
EligiblepurchasersunderRule144Acanbeentitiesformedsolely
forthepurposeofacquiringrestrictedsecuritiesiftheysatisfythe
qualifyingQIBtests.
Aresellerofrestrictedsecuritiescanrelyoninformationotherthan
thatenumeratedinRule144Aforitsbeliefthattheprospective
purchaserisaQIB.ThebasesforrelianceenumeratedinRule
144Aarenonexclusive;resellersmayhavereasonablebeliefof
eligibilitybasedonanynumberoffactors.
Aresellercannotrelyoncertificationsthatitknows,orisreckless
innotknowing,arefalse.However,asellerhasnodutyof
verification.Inotherwords,unlessthecircumstancesgiveare
sellerreasontoquestiontheveracityoftheinformationreliedon,
theresellerdoesnothaveadutytoverifytheinformation.
Thesellermustmakethepurchaserawarethatitisacquiring
restrictedsecuritiesandthathesecuritiesmayonlyberesold
pursuanttoanexemptionfromorregistrationundertheSecurities

Act.Theinvestorisentitledtoknowthatthesecuritiesmaybe
subjecttoreducedliquidity.
Usuallythewarningisgivenbyplacingalegendonthesecurity
itself.Forexample,thenoteorstockcertificaterepresenting
securitiesresoldunderRule144Amustincludealegend(ora
notationifusingelectronicrecordkeeping)statingthatthe
securitieshavenotbeenregisteredand,therefore,theymaynotbe
resoldorotherwisedisposedofintheabsenceofsuchregistration
orunlesssuchtransactionisexemptfrom,ornotsubjectto,
registration.Inaddition,thePPMorotherofferingmemorandum
usedinconnectionwiththeRule144Aofferingmustincludean
appropriatenoticetoinvestors,suchasthefollowing:Each
purchaserofthesecuritieswillbedeemedtohaverepresentedand
agreedthatitisacquiringthesecuritiesforitsownaccountorfor
anaccountwithrespecttowhichitexercisessoleinvestment
discretion,andthatitorsuchaccountisaQIBandisawarethat
thesaleisbeingmadetoitinrelianceonRule144A.
Theofferingdocumentsmustinformthepurchaserthatthe
securitiestobeacquiredcanonlybereofferedandresold
pursuanttoanexemptionfrom,orregistrationunder,theSecurities
Act,andthattheresoldsecuritieshavearestrictedCUSIPnumber.
SecuritiesofferedunderRule144Amustnotbefungiblewith,or
substantiallyidenticalto,aclassofsecuritieslistedonanational
securitiesexchangeorquotedinanautomatedinterdealer
quotationsystem(listedsecurities).Commonstockisdeemedto
beofthesameclassifitisofsubstantiallysimilarcharacterand
theholdersenjoysubstantiallysimilarrightsandprivileges.
AmericanDepositoryReceipts(ADRs)areconsideredtobeof
thesameclassastheunderlyingequitysecurity.Preferredstockis
deemedtobeofthesameclassifitstermsrelatingtodividendrate,
liquidationpreference,votingrights,convertibility,call,

redemption,andothersimilarmaterialmattersaresubstantially
identical.Debtsecuritiesaredeemedtobeofthesameclassifthe
termsrelatingtointerestrate,maturity,subordination,
convertibility,call,redemption,andothermaterialtermsare
substantiallythesame.
Informationmustbereasonablycurrentinrelationtothedateof
resaleunderRule144A.Thisdeliveryobligationcancontinuefor
sometime.Tobereasonablycurrenttheinformationmustbeasof
adatewithin12monthspriortotheresale;themostrecent
balancesheetmustbeasofadatewithin16monthspriortothere
sale;andthemostrecentprofitandlossandretainedearnings
statementsmustbeforthe12monthsprecedingthedateofthe
balancesheet.
Theissuerwillprepareanofferingmemorandumwithdisclosures
normallyexceedingthedisclosuresrequiredtobemadeavailable
underRule144Abecausetheofferingmemorandumoftenis
usedasamarketingdocument.Also,ingeneral,robustdisclosure
oftheissuersbusinessandfinancesreducesliabilitiesoftheissuer
andtheinitialpurchasers.
Brokerdealersreofferandresellthesecuritiesusingthe
exemptionprovidedbyRule144A.Rule144Apermitsthebroker
dealertoimmediatelyreofferandreselltherestrictedsecurities,
eventhoughithaspurchasedthesecuritieswithaviewtotheir
distribution.
TheavailabilityofRule144Adoesnotdependonhowmuchtime
hasexpiredsincethesecuritieswereissuedoronwhetherthe
resellerhadinvestmentintentwhenitpurchasedthesecurities.Re
salesunderRule144Aarecompletelyseparatedfromtheissuers
originalofferingnomatterhowquicklythereaftertheyoccur.

ThedocumentationusedinaRule144Atransactionissimilarto
thatusedinregisteredofferings,includinganoffering
memorandumandapurchaseagreementbetweentheissuerandthe
initialpurchasers(i.e.,brokerdealers).Theofferingmemorandum
willcontainadetaileddescriptionoftheissuer,includingits
financialstatements,andthesecuritiestobeoffered.Theform,
organization,andcontentofapurchaseagreementforaRule144A
offeringoftenresemblesanunderwritingagreementforapublic
offeringbutismodifiedtoreflectthemannerofoffering.
InthecaseofaRule144Aofferingthatiscombinedwitha
RegulationSoffering,theRegulationSofferingmaybeconducted
usingdocumentsthatarebasedonthecountryspecificpracticesof
therelevantnonU.S.jurisdictionorjurisdictions.However,the
disclosuredocumentsinsuchacasegenerallywillcontainthe
samesubstantiveinformationsothatinvestorshavethesame
disclosurepackage.Inconnectionwithoffersofdebtsecurities,
itisverycommontohaveaRule144AtrancheofferedtoQIBs,
andaRegulationStrancheofferedtononU.S.persons.However,
whileRule144Asecuritiesgenerallyhavearestrictedperiodofsix
monthstooneyear,RegulationSdebtsecuritieshavearestricted
periodofonly40days.Therefore,thesetranchesarerepresented
byseparatecertificatestoensuretheirlawfultransferinthe
secondarymarket.TheRule144AglobalcertificatewithaRule
144ArestrictivelegendisdepositedwithDTC,whilethe
RegulationSglobalcertificatewithaRegulationSrestrictive
legendisdepositedwithaEuropeanclearingsystem.Thesetwo
securitieshavedifferentCUSIPnumbersandothersecurity
identificationnumbers.
TheRule144AsecuritiescanberesoldtononU.S.personsifthe
buyercertifiesthatitisnotaU.S.person,andthesaleotherwise
complieswithRegulationS.TheRegulationSsecuritiescanbere
soldintheUnitedStatestoQIBsiftheresalecomplieswithRule

144A.Aregistrationrightsagreementwouldonlybeapplicableto
Rule144Atransactionsinwhichtheissuerhasagreedtoregister
undertheSecuritiesActthesecuritiesresoldintheRule144A
transaction.
TheRule144Aofferingprocessisoftensimilartothepublic
offeringprocess.Thefeaturesofthisprocesstypicallyinclude:
solicitationofordersusingaredherringorpreliminaryoffering
memorandum;preparationanddeliveryofaworkingtermsheet;
confirmationoftermswithafinalofferingmemorandum;
executionofthepurchaseagreementatpricing;deliveryofa
comfortletter(ifany)fromtheissuersauditingfirmatpricing;
andclosingthreetofivedaysafterpricing.
Rule144Aofferingsdonotsubjecttheissuerandtheinitial
purchaserstoliabilityunderSection11oftheSecuritiesAct.
Accordingly,theinitialpurchasersarenotentitledtothedue
diligencedefensethatmaybeestablishedunderSection11.
Liquidityistheprimarybenefitthatcomesfromholdingfreely
tradablesecuritiesratherthanrestrictedsecurities.Plussomestates
prohibitsomemutualfundsandinsurancecompaniesfrom
investingmorethanacertainpercentageoftheirassetsinrestricted
securities.Someinvestmentpartnershipsandsimilarentitiesare
subjecttocomparablerestrictionsundertheirorganizational
documents.AbsentanissuersagreementtoregisterRule144A
securities,theseentitiesarelimitedintheirabilitytopurchase
securitiesinRule144Atransactions.
ExxonCapitalversusShelfRegistrations
ThetwoprincipalmethodstoregisterRule144Asecuritiesunder
theSecuritiesActareExxonCapitalexchangeoffersandShelf
registrationsunderRule415oftheSecuritiesAct.AnExxon

Capitalexchangeofferingisaprocedureunderwhichsecuritiesare
privatelyplacedpursuanttoRule144Aandthenpromptly
exchangedforsimilarsecuritiesthathavebeenregisteredunderthe
SecuritiesAct.Thisisthepreferredmeansforprovidingholdersof
Rule144Asecuritieswithfreelytradablesecurities.Iteliminates
theneedtocontinuouslyupdateashelfregistrationstatementover
itslifetimeifanyoftheinvestorsintheRule144Aofferingare
affiliatesoftheissuer.However,affiliatesoftheissuermaynot
participateinanExxonCapitalexchangeoffer,andbrokerdealers
alsomaynotparticipateintheseexchangeoffers.Inaddition,all
exchangingholderswillberequiredtorepresentthattheyacquired
thesecuritiesintheordinarycourseoftheirbusinessandhaveno
arrangementsorunderstandingswithrespecttothedistributionof
thesecuritythatisthesubjectoftheexchangeoffer.

UnderRule415(a)(1)(i),issuersofRule144Asecuritiesmay
registertheresaleoftherestrictedsecuritiesthatweresoldinthe
Rule144Atransaction.RegisteredofferingsunderRule415are
knownasshelfregistrations.Rule415(a)(1)(i)permitseithera
delayedorcontinuousofferingofsecuritieswhicharetobe
offeredorsoldsolelybyoronbehalfofapersonorpersonsother
thantheregistrant....Thepersonscoveredbythisruleinclude
resellersholdingRule144Asecurities.
Althoughshelfregistrationsofferpotentialliquiditytobuyersof
Rule144Asecurities,thesecuritiesremainrestricteduntiltheyare
resoldundertheshelfregistrationstatement.Inshelfregistrations,
theissuermustcovenanttokeeptheshelfregistrationstatement
continuouslyeffectivefornolessthanoneyearinordertoensure
theholderliquidityuntiltheresaleexemptionunderRule144
becomesavailablewithoutanylimitationsonnonaffiliates.

ExxonCapitalexchangeoffersarethepreferredmeansfor
providingholdersofRule144Asecuritieswithfreelytradable
securities.
Questions?Contactdslain@PrivatePlacementAdvisors.com