Choosing federal exemptions

Section 4(a)(2)

Section 4(a)(2) of the Securities Act exempts from registration "transactions by an issuer not involving any public offering." To qualify for this exemption, which is sometimes referred to as the “private placement” exemption, the purchasers of the securities must:

  • either have enough knowledge and experience in finance and business matters to be “sophisticated investors” (able to evaluate the risks and merits of the investment), or be able to bear the investment's economic risk;
  • have access to the type of information normally provided in a prospectus for a registered securities offering; and  
  • agree not to resell or distribute the securities to the public.

Rule 701

A rule under the Securities Act that provides a safe harbor from registration under the Securities Act for grants of equity securities by a non-reporting company to its employees and certain other persons under a written compensatory benefit plan or written compensation contract. Securities acquired in Rule 701 transactions are restricted securities, however, under Rule 701(g)(3), they benefit from favorable treatment under Rule 144 after a company goes public.

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Reg D - 506(b)

Under Rule 506(b), a company can be assured it is within the Section 4(a)(2) exemption by satisfying the following standards: 

  • The company cannot use general solicitation or advertising to market the securities;
  • The company may sell its securities to an unlimited number of "accredited investors" and up to 35 other purchases. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment
  • Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well
  • The company must be available to answer questions by prospective purchasers; and 
  • Financial statement requirements are the same as for Rule 505

Reg D - 506(c)

Under Rule 506(c), a company can broadly solicit and generally advertise the offering, but still be deemed to be undertaking a private offering within Section 4(a)(2) if:

  • The investors in the offering are all accredited investors; and
  • The company has taken reasonable steps to verify that its investors are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like. 

Reg D - 505

Rule 505 of Regulation D provides an exemption from the registration requirements of the federal securities laws for companies when they offer and sell securities. To qualify for this exemption, a company:

  • Can only offer and sell up to $5 million of its securities in any 12-month period;
  • May sell to an unlimited number of "accredited investors" and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions; 
  • Must inform purchasers that they receive "restricted" securities, meaning that the securities cannot be sold for six months or longer without registering them; and 
  • Cannot use general solicitation or advertising to sell the securities.

Reg D - 504

Rule 504 does allow companies to solicit or advertise their securities to the public and to sell securities that are not restricted, if one of the following circumstances is met:

  • The company registers the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors;
  • A company registers and sells the offering in a state that requires registration and disclosure delivery and also sells in a state without those requirements, so long as the company delivers the disclosure documents required by the state where the company registered the offering to all purchasers (including those in the state that has no such requirements); or 
  • The company sells exclusively according to state law exemptions that permit general solicitation and advertising, so long as the company sells only to "accredited investors."

Reg S

The Securities and Exchange Commission is adopting amendments to the Regulation S safe harbor procedures for offshore sales of equity securities of U.S. issuers and the reporting requirements applicable to those transactions. The amendments are designed to stop abusive practices in connection with offerings of equity securities purportedly made in reliance on Regulation S.

Reg A

Regulation A allows companies to offer and sell securities to the public, but with more limited disclosure requirements than what you would currently expect from publicly reporting companies.  In comparison to registered offerings, smaller companies in earlier stages of development may be able to use this rule to more cost-effectively raise money. 

Click for a more comprehensive overview of Reg A

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