Rule 144A is a non-exclusive safe harbor rule under the Securities Act of 1933. The rule exempts reoffers and resales of securities from the registration (but not the anti-fraud) provisions of the Securities Act. Many securities practitioners are, of course, familiar with the conditions of Rule 144A which has been on the books for over two decades. What some practitioners may overlook is the fact that Rule 144A is not an exemption from state blue sky laws (See Preliminary Note 5).
Because Rule 144A is not available to issuers, the first step is to consider whether the issuer transaction is subject to qualification under state law. In many cases, the issuer will rely on Rule 506 of Regulation D. If that is the case, then the securities will be “covered securities” with respect to that transaction pursuant to Section 18(b)(4)(D) of the Securities Act, and , more to the point of this discussion, state registration requirements will be preempted. See Cal. Corp. Code § 25102.1(d). If the securities are not “covered securities”, the issuer will need to identify an exemption from the qualification requirements of Corporations Code Section 25110. In California, this most likely (but not invariably) means the limited offering exemption found in Section 25102(f).
Issuers looking to rely on Section 25102(f) may be concerned that Paragraph (3) of that statute requires that each purchaser represent, among other things, that the purchaser is not purchasing with a view to or for sale in connection with any distribution of the security. This would seem to be a problem because Rule 144A is intended to facilitate resales. Fortunately, this issue is addressed by Rule 260.102.15 which provides that for purposes of Paragraph (3), an offer to resell or a resale made under Rule 222.214.171.124 will not be viewed as inconsistent with that representation.
This brings us to resales, which are the raison d’etre for Rule 144A. Pursuant to Corporations Code Section 25130, California imposes a separate qualification requirement on nonissuer transactions (defined in Corp. Code § 25011). A common mistake is to assume that exemptions from the issuer qualification requirement (Corp. Code § 25110) apply to the nonissuer qualification requirement. Section 25102(f), for example, is an exemption only from the issuer qualification requirement. The Commissioner has addressed this problem by adopting Rule 2126.96.36.199 which exempts offers to resell and resales of restricted securities made in compliance with Rule 144A.
Of course, exemptions from qualification do not relieve issuers of possible liability under the anti-fraud provisions of the Corporate Securities Law of 1968. As the Second District Court of Appeal observed in OCM Principal Opportunities Fund v. CIBC World Markets Corp., 157 Cal.App.4th 835, 854 (2007) (footnote omitted):
The state regulations in question (Cal. Code Regs., tit. 10, §§ 260.102.15, 2188.8.131.52) recognize Rule 144A transactions and exempt initial purchasers from statutory registration requirements regarding securities transactions (Corp. Code, §§ 25102, subd. (f), 25110, 25111, 25130), but do not otherwise address or limit an initial purchaser’s liability for fraud. They therefore do not limit CIBC’s duty to disclose.
Finally, it should be noted that Rule 144A does not obviate any broker-dealer registration requirements that may apply to the issuer or any other person.