Document Type
Article
Publication Title
Loyola University Chicago Law Journal
Publication Date
1994
Volume
25
First Page
199
Abstract
(Excerpt)
The Securities Act of 1933 ("1933 Act" or "the Act") generally requires the filing of a registration statement with the Securities and Exchange Commission (the "SEC") prior to the offer or sale of any security and prohibits the sale of any security prior to the effective date of the registration statement. For the prospective issuer of securities, the preparation and filing of this registration statement can be costly and time-consuming. To prevent the hampering of commerce that results from unnecessary registration, the 1933 Act provides a variety of exemptions from registration that relieve issuers of the cost and delay of registration. These exemptions generally reflect a balancing of the 1933 Act's goal of protecting investors through mandatory registration with its goal of facilitating capital formation, particularly for small issuers. Under certain circumstances, separate offerings, each of which would satisfy the requirements of an exemption if considered separately, may be combined under the SEC's "integration" theory. The combination of two or more offerings often results in a single, integrated offering that does not qualify for an exemption when considered as a whole. When the integrated offering fails to satisfy the requirements of any of the 1933 Act's exemptions from registration, the issuer faces serious consequences for offering unregistered securities in violation of section 5 of the Act. An unregistered offering can result in an injunctive action by the SEC and in civil actions by purchasers of the unregistered securities.
To determine whether separate offerings are to be integrated, the SEC has developed a test for integration that consists of five factors. Offerings will be integrated when: (1) the offerings are part of the same plan of financing; (2) the offerings are made for the same general purpose; (3) the same class of security is issued in each of the offerings; (4) the offerings are made at or about the same time; and (5) the same kind of consideration is to be received in each of the offerings. This test for integration poses two problems. First, because the test lacks clarity, it is frequently impossible to predict whether an issuer's offerings will be integrated. When structuring transactions, a prospective issuer may bear considerable expense and delay in obtaining legal advice to determine whether the enumerated factors apply to its offerings, thereby causing integration and, perhaps, requiring registration. Issuers' counsel, however, are typically unable to provide any assurance that the offerings will be protected from a later finding of integration. Because of the formula's uncertainty, offerings may be precluded or delayed, and some possibly exempt offerings may be unnecessarily registered. Second, the test's five factors reflect neither the fundamental theory of the integration doctrine nor the goals and policies of the 1933 Act.
In this Article I will propose a test that enhances certainty while achieving the legitimate goals served by integration. In part II, I examine the goal of investor protection that registration was designed to provide as well as the competing goal of facilitating capital formation by relieving issuers of the burden of registration in certain instances. In part III, I describe and critique each of the five factors of the SEC's current test for integration. In part IV, I analyze the problems created by the SEC's integration analysis, and I also consider another approach to integration proposed by the Task Force on Integration (the "Task Force"), a review group established by the American Bar Association's Committee on Federal Regulation of Securities. I conclude that although the Task Force's proposal, standing alone, is inadequate, the safe harbors enumerated in the proposal should be adopted to provide more objective certainty to the threshold examination of the integration question. In part V, I discuss the many contexts in which the Task Force's safe harbors will be unavailable for multiple securities offerings. In those instances, I propose that integration should not be automatic. Rather, integration should occur only when the issuer is unable to demonstrate a rational business purpose for making separate offerings. Such a test would focus more appropriately on the issuer's reasons for the particular structure of the offering.
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