And with the current elevated level of valuations, many companies take advantage of their equity as acquisition currency. They go shopping, and instead of paying with cash, they pay with their stock. And if that stock is not registered with the SEC (either because the company is private, or the public stock is not yet registered), this is a private placement – and the buyer needs to comply with regulations that allow for the issuance of restricted stock.
The most common exemption used in these cases is Rule 506 of Regulation D of the Securities Act of 1933. This allows for the sale of stock for an unlimited dollar amount from accredited investors in a non-public offering. However, the number of non-accredited investors is limited to 35.
Most investors in the target company are very well accredited. However, not all employees that have exercised stock options are accredited.
Furthermore, these 35 non-accredited investors need to be “sophisticated”. They may be sophisticated in many ways, but how the SEC describes it in Rule 506(b), they must have “either alone or with his purchaser representative(s) such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.”
To make sure that the sophistication requirement is fulfilled, many buyers insist that the seller hires a Purchaser Representative that helps the non-accredited investors to understand the risks and merits of the transaction.
The purchaser representative itself is defined in Rule 501 of the Securities Act:
He or she must have “such knowledge and experience in financial and business matters that he is capable of evaluating, alone, or together with other purchaser representatives of the purchaser, or together with the purchaser, the merits and risks of the prospective investment”.
The Purchaser Representative also needs to be independent of the issuer, meaning he can’t be an affiliate, director, officer or other employee of the issuer, or beneficial owner of 10 percent or more of any class of the equity securities or of the equity interest in the issuer (with some exceptions).
The Purchaser Representative also needs to be acknowledged by the purchaser in writing.
CFA regularly acts as Purchaser Representative during Mergers and Acquisitions, helping non-accredited shareholders of target companies to understand the risks and merits of a proposed transaction – and in the course helping buyers stay compliant with private placement rules.