The private securities market is just that, private. You won’t find headlines about private offerings like you will with a public offering. However, these private offerings do exist, and they come with some complex laws. One of the most important of the securities laws for some business owners who raise private funds from investors is the integration doctrine. The integration doctrine at is most simple is the concept that one or more securities offerings are integrated (i.e. the same offering), even if they are legally set up as separate offerings. This most often comes up when trying to use different federal and state regulations or when offerings are close in time. The integration doctrine is also ever evolving.

Back to the Basics

Traditionally, whether or not two offerings are integrated has been based on a five factor test. What I mean by a factor test is that five factors are evaluated when determining offering integration. All five factors don’t need to apply for offerings to be integrated. The five factors are whether or not:

  • the different offerings are part of a single plan of financing;
  • the offerings involve the issuance of the same class of security;
  • the offerings are made at or about the same time;
  • the same type of consideration is to be received from investors in each offering; and/or
  • the offerings are made for the same general purpose

If the separate offerings are found to be integrated, they must meet the requirements of the same federal and state exemptions. For private offerings, they must meet the same exemption from public registration at the federal level. Other exemptions may also apply at both the federal and state level, including investment company and investment advisor exemptions. If one fails to meet the same exemption as the other(s), it could cause you to be obligated to offer a right of rescission to investors (i.e. you may have to give them their money back) or you could be sanctioned from raising any capital from investors for five years under the “bad actor “ rules.

Evolution of the Doctrine

As is true with most securities laws, the integration doctrine is an ever-changing doctrine. Over time, the Securities and Exchange Commission has provided further guidance and safe harbor rules when it comes to the integration doctrine. The Securities Exchange Commission is the federal regulation authority in securities laws. They provide guidance on a host of securities legal matters because the regulations themselves don’t usually explain every single detail, and what the regulations actually mean in every context has to be flushed out over time, if ever. Safe harbor rules are created to specifically exclude certain behavior from violation of specific regulations.

Some safe harbor rules have effectively eradicated the five factor test’s application to certain offerings. This includes Regulation S (private offerings where securities are only offered to foreign investors). Other safe harbor rules limit the application of the integration doctrine. One of the most important safe harbor rule when it comes to integration is the one that applies to Rule 506(b) and Rule 506(c) under Regulation D (the most commonly used securities exemptions). Under Regulation D, securities offerings conducted within 6 months apart are not considered integrated. The six-month time period starts at the ending date of the first offering and continues until the start date of the second offering.

The securities laws can be messy and complex. Further guidance is available from Dodson Legal Group on how to organize your securities financing to avoid the legal pitfalls. Call or connect online with Dodson Legal Group to schedule a consultation at 844-4DODSON.