Opinion ID: 1442955
Heading Depth: 2
Heading Rank: 2

Heading: The M & A West and Digital Bridge Transactions

Text: Both the M & A West and Digital Bridge transactions involved more complex two-step structures. However, the result of the transactions was substantively identical. In all three transactions, Medley was compensated with shares of the relevant corporations, and in all three transactions Medley received the stock from persons who were indisputably affiliates at the time that the agreements were formed. The difference lies merely in the structure of the agreements. In the VirtualLender transaction the act which transformed the relevant affiliates into non-affiliates and the transfer of stock from those persons to Medley were both accomplished in one agreement, whereas in the M & A West and Digital Bridge transactions the two acts were accomplished in separate agreements. The mere strategic change from one document to two does not excuse Medley from liability. In both the M & A West and Digital Bridge transactions, the relevant agreements were contingent on each other. In the M & A West Transaction, the stock transfer specified in the Stock Purchase Agreement was expressly contingent on the closing of the Reorganization Agreement. In the Digital Bridge transaction, the Reorganization Agreement contained a condition subsequent clause which assumed the future closing of Stock Purchase Agreements. The referenced Stock Purchase Agreements then provided for the transfer of stock to Medley. In other words, in each transaction the Reorganization Agreement and the Stock Purchase Agreements could not contractually operate independently. The failure to comply with the terms of one agreement would necessarily void the other. Under such circumstances, the multiple agreements actually constituted a single actual transaction with multiple stages. SEC v. Cavanagh, 445 F.3d 105, 114 (2d Cir.2006). We agree with our sister circuit that: In these circumstances, a person who is an affiliate during the negotiation of, and agreement to, the deal may not enjoy a Section 4(1) exemption by simply abdicating his affiliate status (e.g., by selling his controlling shares or resigning as an officer or director) shortly before the parties complete the transaction. Id. at 114-15. In so holding, we are informed by the purpose of registration, which is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions. SEC v. Ralston Purina Co., 346 U.S. 119, 124, 73 S.Ct. 981, 97 L.Ed. 1494 (1953). The express purpose of the reverse mergers at issue in this case was to transform a private corporation into a corporation selling stock shares to the public, without making the extensive public disclosures required in an initial offering. Thus, the investing public had relatively little information about the former private corporation. In such transactions, the investor protections provided by registration requirements are especially important. Medley's actions violated the spirit of Section 4(1) exemption, which is to allow certain persons to sell unregistered securities because those persons do not have potential access to non-public information relevant to the securities, either through their own affiliation with the relevant corporation or through the affiliation of the person from whom they obtained the securities. Here, Medley arranged to obtain the securities from persons whose status at the time of the negotiations would place Medley outside the protection of Rule 144(k), but attempted to create a loophole by creating a separate agreement which would alter that status immediately prior to what Medley would have us identify as the actual moment of the stock transfer. [11] The Supreme Court has long instructed that securities law places emphasis on economic reality and disregards form for substance. See SEC v. W.J. Howey Co., 328 U.S. 293, 298-300, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946); see also Danner v. Himmelfarb, 858 F.2d 515, 518 (9th Cir.1988); SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 481-82 (9th Cir. 1973). Where a single transaction accomplishes both a change in status from an affiliate to a non-affiliate and a transfer of stock from that person or entity, the transfer must be viewed as a transfer from an affiliate for the purposes of determining Rule 144(k) eligibility. The existence of multiple agreements bears little effect when the agreements collectively constitute a single transaction. Thus, the district court properly held that Medley violated Section 5 when he sold unregistered shares of VirtualLender, M & A West, and Digital Bridge to the public.