Yesterday’s post discussed a news report of an SEC inquiry into insider trading by CalPERS. Rather than being abashed by this news, CalPERS responded by congratulating itself on having implemented a personal trading policy.
As but one example of the muddle that is this policy, CalPERS defines a ”Private Placement Vehicle” as an offering of securities which are exempt from registration under Section 3(a)(11), Section 4(2), Regulation A or Rules 504, 505 or 506 of Regulation D of the Securities Act of 1933 or Section 25102 of the California Corporations Code. 2 CCR § 558.1(a)(13).
Aside from the unusual terminology, this definition is confused because it fails to take account of the two categories of exemptions under the Securities Act of 1933 and the Corporate Securities Law of 1968 – securities exemptions and transaction exemptions. In a securities exemption, it is the nature of the security or issuer itself that establishes the exemption while in a transaction exemption it is the manner of offering. Section 25100 of the Corporations Code exempts a variety of securities while Section 25102 exempts offers or sales. Thus, it makes no sense to refer to securities that are exempt under Section 25102. Similarly, Rule 500(d) of Regulation D clearly states “Regulation D provides an exemption only for the transactions in which the securities are offered or sold by the issuer, not for the securities themselves” (emphasis added).
More fundamentally, the exemptions found in Section 25102 are exemptions from the issuer qualification requirement (Section 25110) of the Corporate Securities Law of 1968. Insider trading is not usually an issue in issuer transactions because issuers are the ultimate insiders.
CalPERS explanation for this definition in its Final Statement of Reasons for its policy is even more outré:
Regulation D of the Securities Act of 1933 (Regulation D) contains the rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the Securities Exchange Commission (SEC), and defines “private placement” as the offer and sale of any security by a brokerage firm not involving a public offering. The term “private placement” appears in multiple instances in Regulation D and other SEC Rules. In addition, Section 25102 of the California Corporations Code provides a California exemption for making private placements if the private placements fall within its guidelines.
Here are just a few errors in this explanation:
The name of the agency is the Securities and Exchange Commission;
Regulation D does not define the term “private placement”;
Private placements, as commonly understood, are not limited to offers and sales of a security by a brokerage firm;
The term “private placement” appears only once in Regulation D (Note 2 to Rule 501); and
Section 25102 isn’t one exemption but a series of transactional exemptions, not all of which are conditioned upon the absence of a general solicitation or general advertising.