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Securities Law Considerations in Exits

When a private equity or venture capital fund is ready to make an exit from an investment, whether through an initial public offering (IPO), a merger or acquisition, or another form of exit, there are numerous securities law considerations that come into play. These considerations can have significant implications for how the exit is structured and executed.

Public Disclosure and Reporting Obligations

If the exit involves an IPO, the company will become a publicly traded company and will be subject to extensive disclosure and reporting obligations under the securities laws. These obligations include the requirement to file a registration statement with the Securities and Exchange Commission (SEC), which discloses detailed information about the company's business, financial condition, management, and risks, as well as the terms of the offering.

After the IPO, the company will be subject to ongoing reporting obligations, including the requirement to file annual reports (Form 10-K), quarterly reports (Form 10-Q), and current reports (Form 8-K) with the SEC. These reports must disclose a wide range of information, and the company must have systems and controls in place to ensure that the reports are accurate, complete, and timely.

Securities Registration and Exemptions

In a merger or acquisition, the securities laws may require the registration of the securities that are being offered to the shareholders of the target company, unless an exemption from registration is available. The specific requirements depend on the structure of the transaction and the types of securities being offered.

One commonly used exemption is Section 4(a)(2) of the Securities Act of 1933, which provides an exemption for transactions not involving any public offering. Another is Rule 506 of Regulation D, which provides a safe harbor for private offerings to accredited investors and up to 35 non-accredited investors.

If the merger or acquisition involves a tender offer, additional rules and regulations will apply, including the tender offer rules under the Securities Exchange Act of 1934 and the rules under the Williams Act.

Insider Trading and Other Fraud Considerations

Insider trading and other forms of securities fraud are serious violations of the securities laws that can result in criminal and civil penalties. In the context of an exit, the company and its insiders must be careful not to trade on the basis of material nonpublic information or to make false or misleading statements to the market.

State Securities Laws

In addition to federal securities laws, each state has its own securities laws, often referred to as "blue sky" laws. These laws vary from state to state, but they generally require the registration of securities offerings unless an exemption is available. In some cases, the state laws may also impose additional disclosure requirements or other obligations.

This article is an excerpt from The Insider’s Guide to Securities Law: Navigating the Intricacies of Public and Private Offeringsavailable on Amazon, Scribd and Barnes and Nobles.

DISCLOSURE: This communication is for informational purposes only, and contains general information only. Other People’s Capital, LLC is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Other People’s Capital, LLC does not assume any liability for reliance on the information provided herein.

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