SEC Improves e-Capital Raising

The SEC changed Rule 144 to reduce regulation of restricted securities, which, in turn, facilitates Internet capital-raising.

The Internet, in conjunction with such statutes as the E-sign Act
(114 Stat. 464 (2000) ' codified at 15 U.S.C. '7001 et seq.) ' allows intangible property, including capital stock, to be contracted for and exchanged electronically. Certain capital fundraising, however, was not generally available to Internet users under some SEC regulations ' that is, until recently. In particular, using restricted securities to raise capital electronically is a most helpful strategy for cash-poor Internet startups, because unrestricted securities are less expensive to create than restricted securities, which presented problems.

Restricted Securities and Exemptions

Restricted securities are generally exempt from registration, and they can't be offered or sold unless they are registered with the SEC, or are exempt from registration. Rule 144 provides such an exemption and allows investors to resell restricted securities. While the SEC has allowed companies to issue shares and raise money without registering with the commission, it limits such transactions for most Internet users by imposing certain conditions; specifically, the SEC must be given notice of such transactions and the imposition of long holding-period requirements. The recent amendment of Rule 144 alleviates these difficulties for Internet users. The Rule 144 change allows a non-public issuer to raise capital electronically from private or overseas sources on an expedited basis.

Section 4(1) of the Securities Act exempts transactions from certain SEC regulations by any person other than an underwriter. Note, too, that Rule 144 provides a safe harbor from the Section 4(1) restrictions for sales of restricted securities by establishing specific criteria so that security holders will not be deemed to be underwriters of such securities; as a result, sales pursuant to Rule 144 are entitled to the exemption provided by Section 4(1).

Rule 144 used to require a one-year holding period before restricted securities could be sold. The amended Rule 144, however, reduces to six months the holding-period requirement for restricted securities of companies subject to the reporting requirements of the Securities Exchange Act of 1934.

The amendment to Rule 144 also appreciably reduces the restrictions on the public resale of securities, by the public. After the initial holding-period requirement is met, people who have not been affiliated with the security-seller during the prior
three months will not be subject to the Rule 144 conditions relating
to volume limitations, manner-of-sale requirements and filing Form 144.

Internet capital fundraisers must contend with the implementation of each regulation to all jurisdictions (that's the nature of the Internet), whereas traditional capital fundraisers need only contend with the application of regulations in the jurisdiction in which funds are raised. The reduction or elimination of capital fundraising regulations favors the Internet capital fundraiser. Thus, the Rule 144 elimination of certain regulations levels the playing field for Internet capital fundraisers with respect to traditional capital fundraisers by reducing the regulation-implementation costs.

The Securities Acts of 1933 and of 1934 necessitate information filing when a security is issued and require the periodic dissemination of information regarding these securities. The objective of the 1933 and 1934 Acts is to protect American investors by giving them timely and accurate information.

IPOs: Then and Now

Traditionally, firms use an initial public offering ('IPO') to raise capital. Section 5 of the 1933 Act requires people who offer securities for sale within U.S. jurisdiction to comply with the Act's registration requirements for Internet-based IPOs. The anti-fraud provisions of the 1934 Act have been interpreted to extend subject-matter jurisdiction to transactions taking place outside the United States when substantial fraud is found to have occurred within the nation's borders.

Consider this: The conventional IPO generally requires a bank to underwrite the transaction and attract buyers; for these services, investment banks charge a fee, starting from 6%-10% and going as high as 40%, of the expected offering. The Internet, however, provides a less costly alternative for attracting the attention of a large number of potential investors. The new SEC rule, then, reduces the cost to raise capital by eliminating the discount from market prices given the underwriter.

In particular, Internet firms, which often sell securities in private placements, should benefit from the amendment. A shorter holding period should lower the illiquidity discount noted above and that companies raising capital in private placements give and should increase the usefulness of the Rule 144 safe harbor.

Protecting the Public

Restricted securities are acquired in unregistered, private sales from the issuer, or from an affiliate of the issuer. Internet-firm investors typically receive restricted securities through private-placement offerings as compensation for professional services, or in exchange for providing so-called seed money, or start-up capital, to the company.

To protect the public from fraud, the SEC limits the resale of stock that isn't registered. The most common exemption to the limitation-on-resale rule is Rule 144. The rule, promulgated under the Securities Act of 1933, is a safe-harbor provision that allows holders of restricted securities to sell stock when certain conditions are met. Rule 144 provides a safe-harbor exemption to sellers for selling restricted, or control, securities.

Here's how it works. Rule 144 protects the public by barring creation of public markets in securities from issuers, and about which adequate current information is not available to the public. Where adequate current information concerning the issuer is available to the public, the rule permits the public sale in ordinary trading transactions of limited amounts of securities owned by people controlling, or that are controlled by or are under common control of the issuer, and also by people who have acquired restricted securities from the issuer.

The amendments to Rule 144 provide:

• A reduced holding period;
• The elimination of Form 144; and
• The application of the Rule 144 safe harbor to larger transactions.

The holding period for non-affiliates holding securities in a reporting company was reduced from one year to six months, and non-affiliates need no longer prepare and file Form 144 when selling restricted securities under Rule 144.

Prior to the amendment of Rule 144, when a person placed an order for a restricted stock, a notice to the SEC on Form 144 was required if the sale involved more than 500 shares or the aggregate dollar amount was greater than $10,000 in any three-month period. In addition, prior to the amendment of Rule 144, the sale must have taken place within three months of filing Form 144 and, if the securities had not been sold, then the seller had to file an amended notice. So, the boon and bottom line for online fundraising, and particularly for e-commerce ventures, is that removal of the notice requirement streamlines Internet capital fundraising.

Despite these changes, the current public-information requirement remains in place under the amended rules. And most of Rule 144's requirements still apply to affiliates, although affiliates benefit from the reduced holding period, and the thresholds for the filing of Rule 144 were raised to a $50,000/5,000-share limit.

The SEC changed Rule 144 to reduce regulation of restricted securities, which, in turn, facilitates Internet capital-raising.

The Internet, in conjunction with such statutes as the E-sign Act
(114 Stat. 464 (2000) ' codified at 15 U.S.C. '7001 et seq.) ' allows intangible property, including capital stock, to be contracted for and exchanged electronically. Certain capital fundraising, however, was not generally available to Internet users under some SEC regulations ' that is, until recently. In particular, using restricted securities to raise capital electronically is a most helpful strategy for cash-poor Internet startups, because unrestricted securities are less expensive to create than restricted securities, which presented problems.

Restricted Securities and Exemptions

Restricted securities are generally exempt from registration, and they can't be offered or sold unless they are registered with the SEC, or are exempt from registration. Rule 144 provides such an exemption and allows investors to resell restricted securities. While the SEC has allowed companies to issue shares and raise money without registering with the commission, it limits such transactions for most Internet users by imposing certain conditions; specifically, the SEC must be given notice of such transactions and the imposition of long holding-period requirements. The recent amendment of Rule 144 alleviates these difficulties for Internet users. The Rule 144 change allows a non-public issuer to raise capital electronically from private or overseas sources on an expedited basis.

Section 4(1) of the Securities Act exempts transactions from certain SEC regulations by any person other than an underwriter. Note, too, that Rule 144 provides a safe harbor from the Section 4(1) restrictions for sales of restricted securities by establishing specific criteria so that security holders will not be deemed to be underwriters of such securities; as a result, sales pursuant to Rule 144 are entitled to the exemption provided by Section 4(1).

Rule 144 used to require a one-year holding period before restricted securities could be sold. The amended Rule 144, however, reduces to six months the holding-period requirement for restricted securities of companies subject to the reporting requirements of the Securities Exchange Act of 1934.

The amendment to Rule 144 also appreciably reduces the restrictions on the public resale of securities, by the public. After the initial holding-period requirement is met, people who have not been affiliated with the security-seller during the prior
three months will not be subject to the Rule 144 conditions relating
to volume limitations, manner-of-sale requirements and filing Form 144.

Internet capital fundraisers must contend with the implementation of each regulation to all jurisdictions (that's the nature of the Internet), whereas traditional capital fundraisers need only contend with the application of regulations in the jurisdiction in which funds are raised. The reduction or elimination of capital fundraising regulations favors the Internet capital fundraiser. Thus, the Rule 144 elimination of certain regulations levels the playing field for Internet capital fundraisers with respect to traditional capital fundraisers by reducing the regulation-implementation costs.

The Securities Acts of 1933 and of 1934 necessitate information filing when a security is issued and require the periodic dissemination of information regarding these securities. The objective of the 1933 and 1934 Acts is to protect American investors by giving them timely and accurate information.

IPOs: Then and Now

Traditionally, firms use an initial public offering ('IPO') to raise capital. Section 5 of the 1933 Act requires people who offer securities for sale within U.S. jurisdiction to comply with the Act's registration requirements for Internet-based IPOs. The anti-fraud provisions of the 1934 Act have been interpreted to extend subject-matter jurisdiction to transactions taking place outside the United States when substantial fraud is found to have occurred within the nation's borders.

Consider this: The conventional IPO generally requires a bank to underwrite the transaction and attract buyers; for these services, investment banks charge a fee, starting from 6%-10% and going as high as 40%, of the expected offering. The Internet, however, provides a less costly alternative for attracting the attention of a large number of potential investors. The new SEC rule, then, reduces the cost to raise capital by eliminating the discount from market prices given the underwriter.

In particular, Internet firms, which often sell securities in private placements, should benefit from the amendment. A shorter holding period should lower the illiquidity discount noted above and that companies raising capital in private placements give and should increase the usefulness of the Rule 144 safe harbor.

Protecting the Public

Restricted securities are acquired in unregistered, private sales from the issuer, or from an affiliate of the issuer. Internet-firm investors typically receive restricted securities through private-placement offerings as compensation for professional services, or in exchange for providing so-called seed money, or start-up capital, to the company.

To protect the public from fraud, the SEC limits the resale of stock that isn't registered. The most common exemption to the limitation-on-resale rule is Rule 144. The rule, promulgated under the Securities Act of 1933, is a safe-harbor provision that allows holders of restricted securities to sell stock when certain conditions are met. Rule 144 provides a safe-harbor exemption to sellers for selling restricted, or control, securities.

Here's how it works. Rule 144 protects the public by barring creation of public markets in securities from issuers, and about which adequate current information is not available to the public. Where adequate current information concerning the issuer is available to the public, the rule permits the public sale in ordinary trading transactions of limited amounts of securities owned by people controlling, or that are controlled by or are under common control of the issuer, and also by people who have acquired restricted securities from the issuer.

The amendments to Rule 144 provide:

• A reduced holding period;
• The elimination of Form 144; and
• The application of the Rule 144 safe harbor to larger transactions.

The holding period for non-affiliates holding securities in a reporting company was reduced from one year to six months, and non-affiliates need no longer prepare and file Form 144 when selling restricted securities under Rule 144.

Prior to the amendment of Rule 144, when a person placed an order for a restricted stock, a notice to the SEC on Form 144 was required if the sale involved more than 500 shares or the aggregate dollar amount was greater than $10,000 in any three-month period. In addition, prior to the amendment of Rule 144, the sale must have taken place within three months of filing Form 144 and, if the securities had not been sold, then the seller had to file an amended notice. So, the boon and bottom line for online fundraising, and particularly for e-commerce ventures, is that removal of the notice requirement streamlines Internet capital fundraising.

Despite these changes, the current public-information requirement remains in place under the amended rules. And most of Rule 144's requirements still apply to affiliates, although affiliates benefit from the reduced holding period, and the thresholds for the filing of Rule 144 were raised to a $50,000/5,000-share limit.