There are complex securities laws that can be triggered in the business acquisition context. Because the penalties for securities violations are severe, it is always worth the time to have securities counsel review the transaction and confirm compliance with the securities laws.

1. Securities Issues with M&A Deals | BizTaxBuzz by Trevor
Crow
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24thJuneSecurities Issues with M&A Deals
Posted by Trevor Crow
In general, M&A transactions are structured in one of three broad
categories: (1) asset sales, (2) stock sales, and (3) mergers. Of course there are many nuances and
combinations of these broad categories that may be implemented when structuring a particular deal. Deal
attorneys and the business people involved in these transactions typically center their attention on draf ting the
main deal document whether it is an asset purchase agreement, stock purchase agreement, or merger
agreement. Securities law issues are of ten overlooked. Securities law implications may af f ect even seemingly
straightf orward deals, which if not handled appropriately can cause an inquiry f rom the SEC or state law
regulators.
Securities Overview
The securities laws are triggered when there is a sale of a “security.” This includes the transf er of stock (or
membership interests) in connection with the sale of a business. For example, in the case of a merger, a
company’s issuance of new stock (or membership interests) to the shareholders of another company in
exchange f or their shares of stock is a securities of f ering under the securities laws.
The securities laws require that when securities are being sold they must be registered under the Securities Act
or the transaction must be exempt f rom registration. Registration is an expensive and time-consuming task
with large f ees f or accountants and lawyers who prepare the registration statement. For these reasons,
issuers try to avoid registration by issuing the securities pursuant to an exemption.
Mistakes during the registration process or in qualif ying f or an exemption can lead to serious consequences.
Under Section 11 of the Securities Act, issuers are liable if a registration statement “contain[s] an untrue
statement of a material f act or omit[s] to state a material f act required to be stated therein or necessary to
make the statements therein not misleading.” Further, Section 12 of the Securities Act establishes liability f or
sales of non-exempt unregistered securities and creates remedies including a right of rescission f or
purchasers and liability f or f raud. Many penalties under the securities laws apply to the of f icers and directors
of the company as well as the company itself .
Exemptions
Whenever attempting to conduct an unregistered of f ering of securities, the f irst two legal issues that must be
addressed are: (a) which exemption f rom the registration applies, and (b) what type of disclosure is required.

2. The most common exemption used f or stock issued as consideration in a merger or acquisition is the private
placement exemption pursuant to Section 4(a)(2) of the Securities Act, and corresponding saf e harbor
contained in Regulation D. Generally, there can be no public solicitation or advertising (although the JOBS Act
will change this) and the issuer must make (or make available, depending on the specif ic exemption and the
nature of the purchasers) certain disclosure.
There are some consequences to using an exemption to sell securities. The securities sold in reliance on an
exemption f rom registration are generally considered “restricted securities” under the securities laws, and
theref ore are subject to resale limitations. Further, when an company sells securities in an unregistered
of f ering, it can sell to an unlimited number of “accredited investors,” but it may only sell to a limited number of
“non‐accredited investors.”
State Law
When making an unregistered of f ering, the company must f ind an exemption at both the f ederal level and the
state level. Thus, a caref ul analysis of the residency of each potential buyer and of the securities laws of
these states’ should be conducted bef ore of f ering securities f or sale in a particular state. Many states require
a notice f iling even when a f ederal exemption applies.Read about Legal Steps Required to Sell a Colorado
Corporation
Anti-Fraud Compliance
The anti-f raud provisions of the securities laws apply to all sales of securities whether the sale qualif ies f or
an exemption or they are sold under a registration statement. In general, the anti-f raud provisions require
disclosure of (or access to, depending on the applicable exemption) all available material inf ormation about the
company’s business and the securities being of f ered. In the context of an M&A transaction f or example,
assume that the shareholders of the target company will receive shares of the acquiring company in exchange
f or their shares of the target company. In this transaction, under state law the target shareholders will likely
have to vote to approve the transaction. To comply with the securities anti-f raud provisions, the acquiring
company must provide disclosure of all material inf ormation (or make it available, depending on the applicable
exemption) to the target shareholders. Typically, this disclosure is disseminated through combined
prospectus/proxy statement that is delivered to each shareholder entitled to vote. Draf ting the combined
prospectus/proxy statement requires input f rom both the target company and the acquiring company.
Resales
When shares are issued under an exemption f rom registration, the securities laws place resale restrictions on
these shares and these shares are called “restricted securities.” The shareholders who purchased the
restricted securities must register the shares or comply with SEC Rule 144 bef ore selling. While not addressed
here, I am planning a f uture post that discusses the specif ic requirements of Rule 144. Further, in the M&A
context, of ten the recipients of the acquiring company’s shares become executive of f icers and directors of the

3. acquiring company. Thus, these of f icers and directors must be aware of the insider trading laws, which restrict
sales when such insiders are in possession of material nonpublic inf ormation. The parties to an M&A
transaction should be advised of these resale restrictions early in the negotiation process.
Bottom Line. There are complex securities laws that can be triggered in the business acquisition context.
Because the penalties f or securities violations are severe, it is always worth the time to have securities
counsel review the transaction and conf irm compliance with the securities laws.