The Private Offering: Rule 146 and Offeree Sophistication

The fundamental premise of the Securities Act of 1933 is that protection of the investor is achieved by requiring the dissemination of information essential to an informed investment decision. Carved from this general requirement are exemptions from registration dealing with certain types of securities and transactions. This lack of clarity has created a situation in which the SEC continues to list the characteristics of a private offering while the judiciary seizes upon particular factors as determinative tests. In response to the need for "greater certainty in the application of the Section 4(2) exemption, the SEC has recently proposed Rule 146 as an alternative definition of the private offering guidelines. While the exemption also depends on other considerations, Rule 146 assumes the fulfillment of other aspects of the statutory scheme and focuses upon the single problem of defining the nonpublic offering. The Rule is structured around four basic conditions: access to information; the nature of the offerees; the manner of the offering; and the number of purchasers. Though the Rule purports to be nonexclusive, it is essentially an accumulation of factors already employed. And, whether or not the Rule is a viable alternative to the existing confusion, it is surely predictive of the future meaning of the section 4(2) exemption. The purpose of this comment is to highlight the problems raised by proposed Rule 146 and to evaluate critically the appropriateness of a "sophistication" standard in a "disclosure" statute. A definitional clarification of the private offering is both needed and useful, but the proposed rule merits criticism for its sweeping incorporation of vague and unpredictable standards. Beyond the general deficiencies of the rule, its chief problem is the inclusion of offeree sophistication as a determinative factor in private offerings.