The number of companies confused by issues of aggregation and integration is exceeded only by the number of companies that have never heard of these two terms. Few issues confuse companies engaged in the raising of capital through the sale of securities more than aggregation and integration. In this article we will tackle the issue of aggregation, leaving integration as the subject of a second article (a third article will discuss possible solutions to aggregation and integration violations). The detailed analysis that needs to be undertaken to spot potential aggregation and integration issues cannot be explained within the confines of these short articles. However, the penalty for violating one of these concepts is a violation of the federal exemption underlying the securities offering and potentially subjecting the company, and its officers and directors, to liability from investing shareholders and the Securities and Exchange Commission (the “SEC”), or both. Therefore, the goal of these articles is to summarily explain these two concepts in a way that can be understood and hopefully increase the chances that issues related to aggregation and integration are raised and discussed by companies and their counsel prior to the beginning of an offering of its securities.
Aggregation
Aggregation is the analysis of an offering, at the time the offering begins, to determine the maximum amount that can be sought by a company under the exempt offering of its securities. If an offering is aggregated with previous offerings, then the subsequent offering’s maximum ceiling offering amount is subject to reduction by the aggregated amount. Aggregation only applies to offerings that have a maximum monetary ceiling, primarily Rule 504, Rule 505 and Regulation A offerings. Under the rules of aggregation, an offering’s maximum monetary ceiling is reduced by the aggregate offering price for all securities sold within 12 months prior to and during the proposed offering that are either: (1) pursuant to a Section 3(b) registration exemption, or (2) in violation of the registration requirements of the Securities Act of 1933 (the “1933 Act”). The Section 3(b) exemptions referred to are those exemptions created by the SEC under its delegated authority of the 1933 Act to adopt registration exemptions not exceeding $5,000,000. The primary Section 3(b) registration exemptions are Rule 504, Rule 505, and The Aggravation of Aggregation Regulation A. However, there are also less frequently used Section 3(b) exemptions, including Regulation B, Rule 236, and Regulation F.
Aggregation is calculated on the basis of prior sales, not offers. For example, if a $1,000,000 Rule 504 offering has investments of $150,000 in each of the months of September, October, and November of 2005 ($450,000 total investments), and if the issuer then wishes to undergo another 504 offering in June of 2006, it can do so for up to $550,000 since only $450,000 was sold under the earlier offering of $1,000,000. However, it is the amount of the subsequent offering at the time of the offering that determines whether that subsequent offering qualifies for a particular registration exemption not the amount actually sold under that subsequent offering. Using the above example, even though Rule 504 has a $1,000,000 maximum ceiling, the subsequent offering can only be for $550,000, not for $1,000,000. If the subsequent offering is for $1,000,000 (or for any amount over $550,000) then the subsequent offering does not qualify for the Rule 504 exemption because the previous $450,000 sold under the first offering is aggregated with the new $1,000,000 creating a total offering of $1,450,000, which exceeds Rule 504’s $1,000,000 maximum offering ceiling.
In our experience, the primary confusion with aggregation relates to companies analyzing this issue after an offering to see if the offering met the registration exemption relied on based on sales under the offering, instead of at the time the offering started. For instance, if a company sells $500,000 in March 2006 under a Rule 504 offering and then issues a private placement memorandum for a new $1,000,000 Rule 504 offering in July 2006, but only sells $400,000 under the July 2006 offering, many companies believe there has been no violation. However, at the start of the July 2006 offering, the previous $500,000 from March 2006 is aggregated with the July 2006 offering so the company could not rely on Rule 504 for a $1,000,000 offering in July 2006. The Rule 504 federal registration exemption was not available to the company in this situation. Therefore, if the company’s July 2006 offering does not meet another federal registration exemption, then it may have an unregistered offering, with no applicable exemption, and be subject to liability from investing shareholders and the SEC, or both.
The Lebrecht Group, APLC provides comprehensive advice on a variety of corporate, securities, and employment law matters. Please contact us if you have any questions.
Craig V. Butler, Esq. is an attorney with The Lebrecht Group, APLC, located in Irvine, California and Salt Lake City, Utah. He can be reached at (949)635-1240 orcbutler@thelebrechtgroup.com with questions or comments.
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