On May 9, 2014, the Georgia Securities Division issued a proposed rule to create a formal process for fairness hearings to be conducted by the Georgia Commissioner of Securities.  The proposed rule would establish procedures for administrative hearings to determine the fairness of certain mergers and other business combinations in which securities are issued.  If the Commissioner determines that the terms of the proposed transaction are fair to the shareholders receiving securities, the issuer would be able to claim an exemption from the registration requirements of the federal Securities Act of 1933 for the securities to be issued.  Specifically, Section 3(a)(10) provides an exemption from the registration requirements of the federal Securities Act for securities issued in a transaction determined to be fair pursuant to a fairness hearing by a governmental authority.  The exemption from registration with the SEC is particularly valuable for companies that are not currently subject to the periodic reporting requirements under the Securities Exchange Act of 1934.

In our view, fairness hearings conducted by the Georgia Commissioner will make it easier for private bank holding companies to use stock to fund the purchase price for acquisitions.  Not only will the hearing process allow companies to avoid filing a Form S-4 registration statement for the acquisition with the SEC, it will also allow the companies to avoid triggering the significant ongoing expense associated with the periodic reporting and disclosure requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act.  We have seen circumstances in which the registration and ongoing reporting requirements have discouraged a company from using stock as a currency for an acquisition.

States such as California and North Carolina have conducted state fairness hearings similar to those described in the proposed rule for some time.  Following the re-write of the Georgia Securities Act in 2008, Georgia has only conducted one fairness hearing, which involved the merger of two financial institutions in late 2013. The proposed rule would provide more clarity and certainty with respect to the fairness hearing process in Georgia.

On January 6, 2012, the Advisory Committee on Small and Emerging Companies established by the Securities and Exchange Commission (“SEC”) recommended that the SEC take immediate action to permit general solicitation and general advertising in private offerings of securities under Rule 506 of Regulation D where securities are sold only to accredited investors. Relaxing the current restrictions on general solicitation and advertising would facilitate the ability of companies to raise capital from accredited investors, who are generally viewed as able to fend for themselves. For example, relaxing these restrictions would make it easier for companies to publicize their financing plans and seek funding from investors without any pre-existing relationship.

Rule 506 of Regulation D provides a widely-used safe harbor from the registration requirements of the Securities Act of 1933 for qualifying private offerings. Under current Rule 506, neither the issuer nor any person acting on the issuer’s behalf may offer or sell securities by any form of “general solicitation or general advertising,” and securities sold pursuant to Rule 506 may only be sold to “accredited investors” or persons who, either alone or with a representative, have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of a prospective investment.

The Advisory Committee is of the view that the restrictions on general solicitation and advertising prevent many privately held small businesses and smaller public companies from gaining sufficient access to capital sources and thereby materially limit their ability to raise capital through private offerings. The Advisory Committee noted that the investor protections afforded by the existing restrictions on general solicitation and general advertising are not necessary in private offerings where the securities are sold solely to accredited investors. Because the concepts of general solicitation and advertising are vague, the prohibition increases compliance and diligence costs for issuers of securities who seek to avoid potential activities that might be deemed to constitute general solicitation or advertising and thereby destroy the availability of the Rule 506 safe harbor.