Last week, the United States General Services Administration, Department of Education, and Department of Health and Human Services sent a letter to Alan M. Garber, the President of Harvard University, and Penny Pritzker, Lead Member of the Harvard Corporation. The letter asserts that "Harvard has in recent years failed to live up to both the intellectual and civil rights conditions that justify federal investment". The letter outlined an agreement in principle so that Harvard could maintain its "financial relationship with the federal government". Harvard responded a few days later through its outside counsel with an unequivocal nyet: "Harvard will not accept the government’s terms as an agreement in principle". Yesterday, President Trump raised the stakes even higher by posting the following:
Perhaps Harvard should lose its Tax Exempt Status and be Taxed as a Political Entity if it keeps pushing political, ideological, and terrorist inspired/supporting "Sickness?" he wrote on Truth Social. "Remember, Tax Exempt Status is totally contingent on acting in the PUBLIC INTEREST!
In the midst of this donnybrook, Harvard is offering $750 million in bonds. According to the offering memorandum, the offer and sale has not been registered under the Securities Act of 1933 in reliance upon Section 3(a)(4). That statute exempts:
Any security issued by a person organized and operated exclusively for religious, educational, benevolent, fraternal, charitable, or reformatory purposes and not for pecuniary profit, and no part of the net earnings of which inures to the benefit of any person, private stockholder, or individual, or any security of a fund that is excluded from the definition of an investment company under section 3(c)(10)(B) of the Investment Company Act of 1940.
The exemption does not expressly refer to tax exempt status under the Internal Revenue Code, but the Offering Memorandum does state that the issuer is "exempt from federal income tax pursuant to Section 510(c)(3) of the Internal Revenue Code". Loss of that tax exemption likely would call into question the availability of the Section 3(a)(4) for future offerings. With respect to the current offering, it is also possible that the Securities and Exchange Commission could question whether any part of the net earnings Harvard inure to the benefit of any person.
The Section 3(a)(4) exemption does not exempt Harvard from liability under Section12(a)(2) or Section 17 of the Securities Act. Thus, it is possible that the SEC may take an interest in the adequacy of disclosures in Harvard's Offering Memorandum, as was recently suggested on a LinkedIn post by Professor Steven Davidoff Solomon at the University of California, Berkeley School of Law.
Finally, it should be noted that Harvard's bond offering is not necessarily exempt from state qualification/registration requirements or antifraud provisions. State qualification/registration requirements may also apply to resales of the bonds. Thus, one or more states may decide to take a look at Harvard's bond offering as well.
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