Book Review
Private Placements and Limited Offerings of Securities: A Guide for the Arkansas Practitioner Francis S. Fendler (Arkansas Bar Association, 2011) Two Volumes
Book Review By A. Heath Abshure
Frances S. Fendler, Professor of Law at the University of Arkansas at Little Rock William H. Bowen School of Law, has written an indispensable tool for transactional attorneys, litigators, and all lawyers who may ever represent a client in forming, funding, buying, or selling a business or business interest. Private Placements and Limited Offerings of Securities provides the basics needed to identify when a security exists, discern how securities can be sold in compliance with Arkansas and federal law, and determine the various mistakes that can be made by failing to comply with applicable securities law. In the Preface, Professor Fendler sums up the thrust of her book as follows: Any person (whether an individual or a business or other entity) who offers or sells securities without registration and without satisfying an exemption from registration at both the federal and state levels has violated the securities laws. At a minimum, that violation will enable purchasers of the securities to rescind and get their money back. In addition, any person who offers or sells securities by deceptive means is potentially subject to liability—civil and perhaps criminal—regardless of whether the offering was registered or exempt from registration. The remainder of the book and the various supplements describe adeptly and concisely the various factual and legal issues that are contemplated by these three sentences. The Arkansas Securities Department encounters many issues resulting from sellers (and unfortunately, their lawyers) unaware that a transaction or series of transactions involve the issuance of a security, and that all sales of securities must be registered or 36
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exempt from the registration requirements at both the state and federal level. Professor Fendler notes that failing to register or secure an exemption, at a minimum, will give rise to a private cause of action for rescission plus interest. It could also result in an enforcement action by the Securities and Exchange Commission or the Arkansas Securities Department. After introducing the practitioner to the Arkansas and federal securities laws, Professor Fendler moves on to answer the question: What is a security? This seemingly simple question is actually quite complex. There are distinctions between the Arkansas tests and federal tests for determining whether a security exists, and Arkansas courts can be imprecise in applying the various tests. Further, recent federal precedent contradicts older Arkansas cases and the Arkansas courts have yet to address these contradictions. Professor Fendler does an outstanding job of navigating these issues and providing much needed guidance for buyers, sellers, counsel, and others involved in securities transactions. She covers the Arkansas and federal tests applicable to investment contracts, stock, notes and other debt instruments, general partnerships, limited partnerships, limited liability partnerships, limited liability limited partnerships, limited liability companies, real estate interests, oil and gas interests, and other types of securities. She describes the differences between federal and Arkansas law, illuminating how these differences might trip up even an experienced lawyer. She also summarizes relevant factors that should be considered when confronted by a novel instrument, a case of first impression, or a conflict between federal and state law. Professor Fendler then examines another critical question: How does a seller sell
securities in compliance with Arkansas and federal law? All securities transactions must be registered or exempt from registration at the state and federal level. Registration is an expensive and time-consuming process, and generally appropriate for larger companies. Most lawyers involved in a securities transaction will want to make sure that either the security or the transaction meets the requirements of an exemption from registration. Professor Fendler describes succinctly the various ways that issuers may raise capital by selling securities without the cost of registration. She points out the distinctions between exempt securities and exempt transactions and lays out the requirements for the most common exemptions of both types. Most securities transactions will not involve exempt securities, but potentially exempt transactions. Professor Fendler describes thoroughly the Arkansas and federal transactional exemptions. Her analysis includes the most common transactional exemption, Rule 506 of Regulation D under the Securities Act of 1933. She notes that a proper Rule 506 offering, which will involve a notice filing and payment of a fee in states in which sales occur, is treated as a “covered security.” Accordingly, transactions in Rule 506 securities are subject to certain state law preemptive provisions contained in the National Securities Markets Improvement Act of 1996. Many lawyers are unaware that all sales of securities must be registered or exempt, including resales by passive investors. Professor Fendler devotes a chapter of her book to resales under federal law, noting that most resales of private company securities are conducted between private buyers and sellers. She discusses one of the most important resale exemptions, the so-called