The JOBS Act And The Convergence Of Private And Public Sales Under The UCC

Section 9610(b) of the California Commercial Code provides that if commercially reasonable, a secured party may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, and at any time and place and on any terms.  The Commercial Code, however, does not override applicable securities laws:

Dispositions of investment property may be regulated by the federal [and state] securities laws.  Although a "public" disposition of securities under this Article may implicate the registration requirements of the Securities Act of 1933 [and applicable state qualification requirements], it need no do so.  A disposition that qualifies for a "private placement" exemption under the Securities Act of 1933 nevertheless may constitute a "public" disposition within the meaning of this section.  Moreover, the "commercially reasonable requirements of subsection (b) need not prevent a secured party from conducting a foreclosure sale without the issuer's compliance with federal registration requirements.

Official Comment No. 8.

The Jumpstart Our Business Startups Act, or JOBS Act, makes it easier for foreclosing lenders to conduct a "public" sale without running afoul of federal and state securities laws.  Section 201(a) of the JOBS Act required the Securities and Exchange Commission to eliminate the prohibition on using general solicitation under Rule 506 when all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors.  The SEC fulfilled this mandate by adopting paragraph (c) of Rule 506. State qualification or registration requirements are preempted with respect to Rule 506 offerings.  Even in the absence of federal preemption, California exempts from the nonissuer qualification requirement (Cal. Corp. Code § 25130), any offer or sale of any security by or for the account of a bona fide secured party selling the security in the ordinary course of business to liquidate a bona fide debt.  Cal. Corp. Code § 25104(e).

I find the Official Comment to Section 9610 to be odd in at least two respects.  First, it omits any reference to state securities laws that may apply to a foreclosure sale of securities.  Second, the last sentence seems to misapprehend who must comply with securities law registration requirements.  In the foreclosure setting, the issuer isn't the person making the offer and sale.

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