Transcript TURKISH CAPITAL MARKETS - University of Pennsylvania

SECURITIES ACT OF 1933
REGISTRATION
EXEMPTIONS
EXEMPTIONS
• Section 5 of the Securities Act of 1933 provides that all
securities must be registered unless there exists an exemption
for the securities issued.
• Section 5 of the 1933 Act contains basic prohibitions on
applies to all offers and all sales of any security.
• The 1933 Act exempts certain classes of securities,
transactions by certain individhuals not involved in the
distribution process, and transactions not involving any public
offering.
• However, the 1933 Act exemptions provide only exemptions
from the Act`s registration requirements and thus do not affect
the 1933 Act`s antifraud provisions.
• Exemptions from registration generally come in two forms -either the securities themselves are exempt or the transaction
is exempt.
Three statutory bases for exemption from the
Securities Act`s registration provisions.
• Section 3 of the 1933 Act lists various categories of securities
that are exempt from registration. Because these exemptive
provisions apply to securities not to transactions, they provide a
permanent exemption from registration requirements of the Act.
• Section 4 of the 1933 Act describes a variety of transactions that
qualify for an exemption for registration.
• Section 28 of the Act gives the SEC broad exemptive
rulemaking power beyond that granted by the statutory
exemptions that are found in sections 3 and 4 of the 1933 Act. A
new section 28 of the 1933 Act provided that the Commission
may exempt transactions, securities, and persons if in the public
interest and consistent with investor protection.
Exempt Securities
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They are not subject to the registration requirements of the
1933 Act.
Securities of governments, banks, insurance companies,
and qualified pension plans- Section 3(a)(2)
Certain Short term commercial paper- Section 3(a)(3)
Securities issued by nonprofit, religious, educational,
charitable organizations- Section 3(a)(4)
Securities of Building and Loan Associations, Farmers`
Cooperatives and Like- Section 3(a)(5)
Certain Securities Issued by Federally Regulated Common
Carriers – Section 3(a)(6)
Certificates Issued Under the Bankruptcy Act by Receivers
and Trustees- Section 3(a)(7)
Insurance Policies and Annuity Contracts- Section 3(a)(8)
Transaction Exemptions
• Section 4 of the Act contains number of exemptions that apply
to specific transactions. In working with transaction exemptions,
it must be remembered that the exemption extends to the
transaction, not to individuals.
• Section 3(b) authorizes the SEC, by means of rules and
regulations, to add any class of securities to the securities
exempted as provided in the 33 Act if the SEC finds that the
enforcement of the 33 Act is not necessary in the public interest
and for the protection of investors by reason of the small amount
involved or the limited character of the public offering, subject
to the limitation that the aggregate amount at which the issue is
offered to the public can not exceed $5,000,000.
• Exemption relates only to the requirement to register under the
33 Act. Such transactions are not exempt from the anti-fraud,
civil liability or other provisions of the federal securities laws.
INTEGRATION:
• If a series of transactions are similar and
look like they are really part of one public
offering, the SEC will integrate the
offerings so that even if the transactions
were exempt from registration individually,
they will violate the Act unless there is an
exemption that covers the AGGREGATE.
Preliminary notes to rule 147 has the five factors of
integration
1. Are the offerings part of a single plan of financing?
2. Do the offerings involve issuance of the same class of
securities?
3. Are the offerings made at or about the same time?
4. Are the same types of consideration involved?
5. Are the offerings made for the same general purpose?
Most important factors are 1(single plan of financing) and
5 (same general purpose).
Section 4(2) of the 33 Act - Private
Placements
• Section 4(2) of the Securities Act of 1933 exempts from
the registration requirements “transaction by an issuer not
involving any public offering.”
• Determination that a transaction is a private placement
must be made under releases issued by the SEC and court
cases. The statute and regulations do not define
"transactions by an issuer not involving a public offering."
• The SEC has adopted Regulation D which, if followed,
creates a "safe harbor" for private placement transactions;
however, an issue can rely directly upon Section 4(2) if, in
doing so, the issuer engages in a genuine "private
placement" as recognized by the SEC and the courts.
Section 4(6) of the 33 Act Accredited Investor Exemption
• Provides an exemption for offers or sales by an issuer
solely to one or more accredited investors which does not
exceed $5,000,000
• no advertising or public solicitation is permitted in
connection with the transaction.
• Issuers required to file notice-of-sales form with SEC.
• Form D serves as the notice-of-sales form under Section
4(6).
Section 3(a)(11) of the 33 Act Intrastate Offering Exemption
Rule 147 promulgated under the 33 Act, was adopted to
provide clearer guidelines for the exemption provided by
Section 3(a)(11). To qualify for this exemption:
• the issuer must, at the time of any offers and sales, be a
person resident and doing business within the state.
• the offerees and purchasers be residents of the state of the
offering.
• No resales may be made outside the state for a period of 9
months.
• No filing with the SEC is required.
• While intrastate offerings are exempt from federal
regulation, such offerings are still subject to regulation by
the state in which the offering occurs.
• The federal intrastate offering exemption is primarily
relied upon by issuers in large states in which the
populations are not particularly mobile. Great care must be
exercised in utilizing this federal exemption as one
improper offer or sale can taint the entire offering, thereby
destroying the exemption.
Small Offering Exemptions
Section 3(b) authorizes the SEC, by means of
rules and regulations, to add any class of securities
to the securities exempted as provided in the 33
Act if the SEC finds that the enforcement of the 33
Act is not necessary in the public interest and for
the protection of investors by reason of the small
amount involved or the limited character of the
public offering, subject to the limitation that the
aggregate amount at which the issue is offered to
the public can not exceed $5,000,000.
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Acting pursuant to its authority under Section
3(b), the SEC has adopted Rules 504 and 505
under Regulation D and Regulation A.
REGULATION D
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Rule 501 Definitions
Rule 502 Conditions
Rule 503 Filing Notices Of Sales (Form D)
Rule 504 & 505 Small Issue Exemptıons
Rule 506 Nonexclusive Safe Harbor §4(2)
Rule 507 Disqualification Provisions
Rule 508 Insignificant Deviations
Rule 504:
• Rule 504 permits any issuer, other than an
investment company or Exchange Act reporting
company, to offer and sell maximum of $1 million
of its securities to an unlimited number of persons
during a 12-month period. The rule does not
prescribe specific disclosure requirements and
does not impose limitations on the manner of sales
or on resales. Rule 504 requires a notice of sale to
be filed with the SEC.
Rule 505
• Rule 505 provides a registration exemption for
any noninvestment company issuer, whether or not
it is a reporting company under the Exchange Act.
It allows an eligible issuer to offer and sell up to
$5 million during a 12-month period without
general advertising and solitication. An offering
under Rule 505 can be made to an unlimited
number of accredited investors and to a maximum
of 35 nonaccredited investors. Purchasers of
securities in a Rule 505 offering acquire restricted
securities. The issuer must file a notice of sales
with the SEC.
Rule 506
• Rule 506 does not contain any limitation on the dollar
amount of securities offered. It is avaliable to any issuer,
whether or not it is a reporting company. A Rule 506 can
be made to an unlimited number of accredited investors
and to a maximum of 35 nonaccredited investors. Each
nonaccredited investor, either alone or with the purchaser
representative, must understand the merits and risks of the
offering or the issuer must reasonably belive, prior to the
sale, that each such investor is sophisticated. Specified
information must be disclosed to nonaccredited investors.
All purchasers, regardless of their status, acquire restricted
securities. The issuer must file a notice of sales with the
SEC.
Regulation A -Small Public Offering
Exemption
Limits offerings under this exemption to $5
million in a 12 month period,
To utilize this exemption, a company must be:
a. Organized under the laws of the U.S. or
Canada, with its principal place of business in the
U.S. or Canada.
b. Not be a reporting company under the 34 Act.
c. Not be an investment company, not a
development stage company
• Issuers are required to file a offering statement
with the SEC
• Regulation A offerings are unique in that they
allow a prospective issuer to "test the waters" of
the market to determine if there is sufficient
interest in the company's securities before the
prospective issuer commits the time and resources
to filing an offering statement with the
Commission.
• There are virtually no restrictions on resale of
securities and no special qualifications for initial
investors to meet with respects to number or
sophistication.
CASE: LUMION COMPANY
Lumion took advantage of the federal exemption (Rule 504), as well as the
exemptions offered by Florida and New York, to raise $750,000 by selling
common stock at $1 per share to investors in those states only. (Lumion also
sold stock to foreign investors - sales that are also exempt from federal
securities laws- Regulation S.)
Advantages they state;
They decreased the costs of raising money. Overall their audit and legal
expenses were $60,000 compare to the $500,000 they might have spent on a
full-blown IPO
The due diligence conducted by his earlier venture capital investors was very
time onsumung and difficult compared to the due diligence associated with
exempt stock offerings
Investors are essentially passive and rely on management to build value. On
the other hand, venture capital investors want to control the company's
financial management.
One of the greatest challenges of raising capital has to do with liquidity. Some
form of resale mechanism can increase the likelihood of successfully raising
money. Exempt public offerings can accommodate this need by trading on
Nasdaq's Bulletin Board stock market.
REGISTRATION EXEMPTIONS IN
TURKEY
• According to the Article 4 of the Turkish Capital
Markets Law;
Capital market instruments to be issued or to be
offered to public are required to be registered with
the Board.
Article 11 clearly states that there is no exemption
for registration of capital market instruments
(exception government bonds).
According to the Article 11 of the Turkish Capital Markets Law;
• The shares of joint stock corporations having more than 250
stockholders shall be considered to have been offered to the public
and such companies shall be subject to the provisions applicable to
publicly held joint stock corporations. Issuers are required to inform
the Capital Market Board within thirty days
• Issuers, that are not joint stock companies, or that have not offered
capital market instruments to the public, or whose total assets, gross
sales revenues, or public offering totals are less than amounts
specified by the Board, or who are issuing or offering to the public
other capital market instruments may be partially or completely
exempted by the Board from the requirements of this Law. The
conditions of this exemption, the principles of issuers withdrawing
from the Board registry or being withdrawn and the conditions of
partial exemption from public offering regulations shall be
determined by communiqués .
• As it is clearly stated in the Law, joint stock corporations
can not be exempted from public offering regulations.
• But, it is not possible to offer shares for any forms of
business organizations other than joint stock corporations
according to Turkish Commercial Code and Capital
Markets Law.
• Therefore, capital raising registration exemptions don’t
exist for corporations.
• Only issuing debt instruments by using exemptions is
possible according to the existing regulations in Turkey.
• Additionally, Communique Serial:IV, No:9
which is promulgated under Article 11 of
the Turkish Capital Markets Law does not
contain any exemption for registration of
public offering and sales of equity shares.
Private placement regulation
• Private placement regulation (the allotment sales)
takes place in Article 11 of Communique Serial:I, No:26
“Communique On Principles Regarding Registration
With The Capital Markets Board And Sale Of Shares”.
•Registration with the Capital Market Board is required
but there is no obligation to prepare prospectus for the
issuer.
Cost of IPO in US
• For a typical IPO in US, total cost is estimated
between $400.000 and $500.000 for the necessary
services of attorneys, investment bankers,
accountants, and printers. professional institutions.
• The costs associated with operating as a publicly
traded company can run between $20,000 and
$100,000 per year for a newly public company.
• Economies of scale make Securities Act
registration disproportionately burdensome for
smaller offerings and cost-effective only for larger
public companies .
• The economic rationale for the small offering
exemptions is based on economies of scale in
registration. Because of relatively large fixed
costs, the cost to register a small offering exceeds
the benefits associated with registration.
• We especially need exemptions from the
registration process for many small offerings in
Turkey. Small companies can’t raise additional
capital they needed by using capital markets.
• Rule 504 is the least restrictive small offering
exemption while Regulation A is the most
burdensome.
• Regulation A and Rule 504 exemptions can be
models for registration exemptions of small
offerings for Turkey.
• Regulation A model can cut cost of offering to nearly half .
This model may not be enough depending on TL limits
will be determined for isues. Furthermore, CMB of Turkey
will have to review offering circular which is like a short
form of prospectus if we use similar model of Regulation
A. This may not be an effective solution to shorten
registration process.
• In Turkey, we don`t know the total cost of going public.
When we determine the TL upper limits for the
exemptions, this average should be carefully examined. We
should make a carefull cost-benefit analysis and then
determine reasonable limits for exemptions.