Some private-target M&A transactions take the form of stock-for-stock deals. These transactions may have complications when the acquirer is a private company or a public company issuing new shares that have not been registered with the SEC prior to closing. In these cases, the buyer typically wants an exemption from SEC registration requirements in connection with issuing shares to the target company’s shareholders and closing the acquisition.
A common exemption from registration used in these circumstances is available pursuant to Rule 506 under SEC Regulation D. This exemption may be available on transactions in which there are no more than 35 non-accredited investors and those investors are “sophisticated”. “Sophisticated” is defined under the Securities Act as “someone who has either alone or with his purchaser representative such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the prospective investment.” The role of the purchaser representative is to ensure that non-accredited investors evaluate the merits and risks of the prospective investment in the acquirer’s stock. Buyers relying on this exemption often require target companies to engage a purchaser representative as advisor to the non-accredited investors to ensure the sophistication requirement is met.
Whether a purchaser representative is needed for a deal depends on the way the transaction is structured, the nature of the buyer’s stock being issued and the make-up of the target company’s shareholders.