Armanino White Paper
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A Purchaser Representative may be necessary in merger and acquisition transactions where the consideration is not all cash, but includes securities that are not registered with the SEC.

Most technology companies raise the capital necessary to develop their technology and business from venture capital investors, business angels, or corporate partners. Usually, these investors are accredited investors, within the meaning of Rule 501 of Regulation D of the Securities Act of 1933.

However, some early investment may come from unaccredited investors, and virtually all venture-backed companies issue stock options to employees that are sooner or later exercised. Most of the employees are not accredited investors.


Accredited Investors

Within the meaning of Rule 501, an accredited investor is a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year, or a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase. California provides for similar provisions regarding a “qualified purchaser”.

As IPOs continue to be the exception, the exit route of choice for most companies is a sale to another company in an M&A transaction. As the market rises and stock prices increase, the acquiring company frequently pays with its own stock.


Exempt Transactions

Most often, the stock of the acquiring company is not registered with the SEC, either because the acquirer is a public company that uses newly issued shares that are pending registration, or because the acquirer itself is a private company with restricted stock. Thus, such a stock offering would need to use one of the exemptions provided under Regulation D of the 1933 Securities Act – known as “Reg D Offerings. For very small transactions including only buyers (and seller) in the same states, companies may be able to take advantage of some of the state exemptions, such as California Corporations Code Section 25012.

Many companies have non-accredited investors as shareholders. This may raise compliance issues in an acquisition for stock."

Usually, the issuance is exempt under Rule 506 of Regulation D, which allows for unlimited amounts of capital raised (Rule 504 limits the sale of securities to $1 million within a 12-month period;

Rule 505 limits the raise to $5 million, also within a 12-month period). Rule 506 also allows the sale to a maximum of 35 non-accredited investors; however, these investors need to be “sophisticated”.

However, some early investment may come from unaccredited investors, and virtually all venture-backed companies issue stock options to employees that are sooner or later exercised. Most of the employees are not accredited investors.


What is “sophisticated”?

In the eyes of the regulators, “sophisticated” means someone who has “either alone or with his purchaser representative(s) such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.” Often, this requirement is fulfilled by retaining a Purchaser Representative.


What is a “Purchaser Representative”?

The Purchaser Representative is defined in Rule 501 of the Securities Act.

The purchaser representative “has such knowledge and experience in financial and business matters that he is capable of evaluating, alone, or together with other purchaser representatives of the purchaser, or together with the purchaser, the merits and risks of the prospective investment”. The purchaser representative cannot be affiliated with the issuer and needs to be acknowledged by the purchaser in writing.

Armanino regularly acts as purchaser representative, enjoying the opportunity to help unaccredited investors to navigate and understand sometimes complex transactions with hundreds of pages of agreements in a multitude of disclosure documents that today’s mergers produce in the interest of compliance and informing investors.


Summary

Purchaser Representatives are regularly retained to help with compliance with securities law to represent non-accredited shareholders in a merger or acquisition where the consideration consists at least partially of restricted stock.

A purchaser representative may be necessary to comply with securities law when unregistered stock is issued to nonaccredited shareholders."

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February 18, 2016

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