Resales of Securities Under the Securities Act of 1933

I. IntroductionIn the 1972 release(1) that accompanied the adoption of Rule 145,(2) the Securities and Exchange Commission (the "Commission") patched up a small portion of the nearly nonsensical and fundamentally unprincipled rules regarding resales of securities under the Securities Act of 1933 (the "1933 Act").(3) In that release, the Commission stated that the matter of resales under the 1933 Act should be considered more broadly.(4)When considering the import of the Commission's statement, one would not be overly cynical to ask two questions: First, why did it take the Commission over forty years to reach that conclusion? Second, why in the twenty years following its 1972 pronouncement has the Commission done nothing except make matters worse?To understand the breadth of the resales problem, some rather technical definitions and descriptions are necessary. The term "resales," as used throughout this Article, refers to any noncontrolling,(5) nonissuer's sale of securities that the nonissuer (hereinafter a "Holder") originally purchased from an issuer or a controlling shareholder.(6) These resales by Holders fall within the proscription of Section 5 of the 1933 Act,(7) which makes it "unlawful for any person"(8) to offer or sell a security unless the security is either the subject of a registration statement or exempt from the registration requirement.(9) The term "any person" in Section 5 is defined broadly and easily includes Holders.(10) Holders that wish to resell securities, therefore, may only do so if those securities are the subject of a registration statement or are exempt from the registration requirement.In meeting the requirements of Section 5, a selling Holder is unable to rely on the issuer's original registration statement(11) or exemption(12) because the transactional exemptions and registrations legitimize only the original sales by the issuer(13) but do not legitimize the further resales of the securities by other persons. As a result, each selling Holder must either register the securities or establish its own exemption from the registration requirements.Registration by a Holder, however, is normally impossible or impracticable, in significant part, due to the Holder's lack of access to information about the issuer. Even if the Holder had access to such information, the costs of registration relative to the typical size of such resales make registration unworkable.With regard to exemptions available for reselling Holders, Section 4(1) is the exemption of choice.(14) This exceedingly broad section exempts all offers and sales of securities from the registration requirements of the 1933 Act except those offers and sales made by an "issuer, underwriter, or dealer."(15) Section 4(1) appears to operate without reference to the particular transactional authorization under which the Holder purchased its securities from the issuer. Instead; the availability of Section 4(1), at least on its face, is determined strictly by whether or not the Holder is included in the definition of "issuer," "underwriter" or "dealer."(16)Working through the availability of Section 4(1) for a Holder's resales, one concludes quite easily that a Holder is almost always outside the definitions of "issuer"(17) and "dealer."(18) A Holder's status as an "underwriter," however, is much less clear and, indeed, the very nub of the resales problem.One may become an "underwriter" under any one of the four independent definitions of underwriter contained in Section 2(11).(19) The first of the Section 2(11) definitions of underwriter, however, is clearly the most troublesome for a reselling Holder that seeks to qualify its resale under the Section 4(1) exemption. Specifically, the Section 2(11) definition of an underwriter as one "who has purchased from an issuer with a view to . . . distribution . . . ," especially when considered in light of the gloss applicable to the key terms in that definition, creates the significant risk of a wildly inclusive concept that broadly impairs the availability of Section 4(1) for Holders' resales. …