Corp Fin issues new CDIs providing guidance on Rule 701 primarily in the merger context

by Cydney Posner

Corp Fin has just issued some new CDIs providing guidance on Rule 701, with all but one of the CDIs addressing the application of Rule 701 in the context of merger transactions.  The new CDIs are summarized below:

  • In a merger transaction, where derivative securities of the target are assumed by the acquirer and by their terms become derivative securities for an economically equivalent amount of acquirer securities, the acquirer would not need an exemption from registration for the assumption of those derivative securities, provided that, at the time of grant by the target, the compensatory benefit plan under which they were granted permitted this assumption without the consent of the holders of the derivative securities.
  • The exercise or conversion of those derivative securities assumed in the merger transaction would be eligible for exemption under Rule 701 if the target complied with Rule 701 at the time those assumed securities were originally granted, subject to compliance with the Rule 701(e) disclosure requirements, where applicable. (See the last two bullets below.) That’s because, when an eligible issuer grants derivative securities in compliance with Rule 701, the securities underlying the derivative securities are considered to have been sold on the date of grant of the derivative securities (without regard to when they become exercisable or convertible).
  • Generally, Rule 701(d)(2) limits the aggregate sales price or amount of securities that may be sold or in any consecutive 12-month period under Rule 701 to the greatest of $1 million, 15% of the total assets of the issuer, or 15% of the outstanding amount of the class of securities being offered and sold, in each case, measured at the issuer’s most recent balance sheet date (if no older than its last fiscal year end). After the completion of a merger transaction, for purposes of determining the amount of securities that the acquirer may sell, going forward, under Rule 701(d) during a consecutive 12-month period, the acquirer would be required to include the aggregate sales price and amount of securities previously claimed to have been sold by the target under Rule 701 during the same 12-month period.
  • After completion of a merger transaction, to calculate compliance with Rule 701(d)(2) on a going-forward basis, an acquirer may use a pro forma balance sheet as of its most recent balance sheet date that reflects the merger transaction as if it had occurred on that date, or alternatively, a balance sheet date after the merger that will reflect the total assets and outstanding securities of the combined entity.
  • Generally, Rule 701(e) requires an issuer to provide certain disclosure to the investor if the aggregate sales price or amount of securities sold during any consecutive 12-month period exceeds $5 million. Where the obligation to provide disclosure is triggered, Rule 701(e)(4) requires the issuer to provide investors, a reasonable time before the date of sale, with the financial statements required to be furnished by Part F/S of Form 1-A. The issuer may elect to provide financial statements that follow the requirements of either Tier 1 or Tier 2 Reg A offerings, without regard to whether the amount of sales that occurred under Rule 701 during the consecutive 12-month period would have required the issuer to follow the Tier 2 financial statement requirements in a Reg A offering of the same amount.
  • If the target in a merger transaction was required to provide disclosure pursuant to Rule 701(e) for derivative securities that were assumed in a merger transaction, where the securities are exercised or converted post-merger, the acquirer assumes the target’s obligation and must provide information meeting the requirements of Rule 701(e) consistent with the timing requirements of Rule 701(e)(6), that is, the information must be delivered a reasonable period of time before the date of exercise or conversion.
  • After the completion of a merger transaction, for purposes of determining whether the amount of securities sold by the acquirer during any consecutive 12-month period exceeds $5 million — thus triggering a disclosure obligation under Rule 701(e) — the acquirer must include any securities that the target sold during the same period.


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