22. What is a “Section 3 exemption” from registration under the ’33 Act?
Section 3(a) Exemption – Section 3(a)(11) is an “intrastate offering exemption” designed to allow businesses to seek local funding. The issuer may offer securities for sale to residents of the state in which the business primarily does business without registering the issuance or securities with the SEC.
⁃ Note: Issuers of securities pursuant to the section 3(a)(11) statutory exemption must be careful that no offer is made to prospective out-of-state purchasers. Even one offer to a non-resident will destroy the exemption. Issuers can use the legal fiction of publishing information likely to go only to intrastate residents with a legend, “this is an offer only to in-state residents” to try to protect themselves.
• Exempt Security – Section 3(a)(11) offers an exemption for a class of securities, rather than an exemption for the particular issuance or transaction. The securities can be freely resold without worrying about registration.
• Benefits of Section 3 Exemptions – The exemption is attractive to issuers because it allows for:
⁃ an unlimited number of investors,
⁃ an unlimited amount of raised capital, and
⁃ general solicitation of investors may be allowed under the applicable state law.
• Coming to Rest – Purchasers cannot immediately resell the security, as that resale may involve out-of-state purchasers. If the securities have not “come to rest” then resale out of state destroys the exemption for the entire offering.
⁃ Note: The issuer must encourage purchasers to avoid immediate resale in order to avoid the appearance of a sham attempt to achieve a non-intrastate offering.
• Integration Doctrine – The “integration doctrine” applies to Section 3 issuances. This doctrine states that any offering of securities by the issuer within the last 12 months may be integrated into the current offering. Even if the other offerings were under another exemption, they may be “integrated” into a single transaction. If the issuances are integrated, it is possible that the prior offering will cause the loss of the registration exemption for the present and former transactions.
⁃ Note: The result of a failed exemption is that any purchasers in either offering may seek to rescind the transaction.