Question 271.17. In a merger transaction, where derivative securities of the target company are assumed by the acquirer and by their terms become derivative securities for an economically equivalent amount of acquirer securities, the acquirer does not need an exemption for the assumption of those derivative securities, provided that, at the time of the grant by the target, the compensatory benefit plan under which they were issued permitted this assumption without the consent of the holders of the derivative securities.

Question 271.18. Rule 701 requires that an issuer must be eligible for, and comply with, the exemption at the time that any sales are made under it. For these purposes, when an eligible issuer grants derivative securities under Rule 701, the securities underlying the derivative securities are considered to have been sold on the date of the grant of the derivative securities (without regard to when the derivative securities become exercisable or convertible). So long as the target company complied with Rule 701 at the time the derivative securities assumed in the merger transaction were originally granted, the exercise or conversion of the derivative securities would be exempt, subject to compliance, where applicable, with Rule 701(e).

Question 271.19. After the completion of a merger transaction, for purposes of determining the amount of securities that the acquirer may sell under Rule 701(d), an acquirer is required to include the aggregate sales price and amount of securities for which the target company claimed the Rule 701 exemption during the same 12-month period for which the acquirer is making the determination.

Question 271.20. After the completion of a merger transaction, when calculating compliance with Rule 701(d)(2) on a going forward basis, an acquirer may use a pro forma balance sheet as of its most recent balance sheet date that reflects the merger as if it had occurred on that date. As an alternative, the acquirer could also use a balance sheet date after the merger transaction that will reflect the total assets and outstanding securities of the combined entity.

Question 271.21. Where an obligation to provide disclosure under Rule 701(e) is triggered, Rule 701(e)(4) requires an issuer to provide investors with the financial statements required to be furnished by Part F/S of Form 1-A a reasonable time before the date of sale. In these circumstances, an issuer could elect to provide financial statements that follow the requirements of either Tier 1 or Tier 2 Regulation A offerings, without regard to whether the amount of sales that occurred under Rule 701 during the time period contemplated in Rule 701(e) would have required the issuer to follow the Tier 2 financial statement requirements in a Regulation A offering of the same amount.

Question 271.22. For assumed derivative securities for which the target company is required to provide disclosure under Rule 701(e) that are exercised or converted post-merger, the acquirer would satisfy that obligation by providing information that meets the requirements of Rule 701(e) consistent with the timing requirements of Rule 701(e)(6).

Question 271.23. Following a merger transaction, in determining whether the amount of securities the acquirer sold during any consecutive 12-month period exceeds $5 million (for purposes of Rule 701(e)), the acquirer must include any securities that the target company sold during the same period.