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; and
  • Have access to the type of information normally provided in a prospectus for a registered securities offering.

In general, public advertising of the offering, and general solicitation of investors, is incompatible with the private placement exemption.

The precise limits of the private placement exemption are not defined by rule. As the number of purchasers increases and their relationship to the company and its management becomes more remote, it is more difficult to show that the offering qualifies for this exemption. Purchasers in a Section 4(a)(2) offering receive “restricted securities.”

Rule 506(b)

Rule 506(b) of Regulation D is considered a “safe harbor” under Section 4(a)(2). It provides objective standards that a company can rely on to meet the requirements of the Section 4(a)(2) exemption. Companies conducting an offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors. An offering under Rule 506(b), however, is subject to the following requirements:

  • No general solicitation or advertising to market the securities; and,
  • Securities may not be sold to more than 35 non-accredited investors (all non-accredited investors, either alone or with a purchaser representative, must meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment)

If non-accredited investors are participating in the offering, the company conducting the offering:

  • Must give any non-accredited investors disclosure documents that generally contain the same type of information as provided in registered offerings (the company is not required to provide specified disclosure documents to accredited investors, but, if it does provide information to accredited investors, it must also make this information available to the non-accredited investors as well);
  • Must give any non-accredited investors financial statement information specified in Rule 506 and; and
  • Should be available to answer questions from prospective purchasers who are non-accredited investors.

Purchasers in a Rule 506(b) offering receive “restricted securities.” A company is required to file a notice with the SEC on Form D within 15 days after the first sale of securities in the offering. Although the Securities Act provides a federal preemption from state registration and qualification under Rule 506(b), the states still have authority to require notice filings and collect state fees.

Rule 506(b) offerings are subject to “bad actor” disqualification provisions.”

Rule 506(b) Offering Documents

Our SEC compliant, Rule 506(b) Offering Documents include the PPM, Investor Questionnaire, Subscription Agreement, Form D (which we file for you for free), Patriot Act Disclosures, Jurisdictional Legends for all 50 states and more.  These kits are available for your corporation, LLC, Hedge Fund or Real Estate Fund issuing equity or debt securities.

Relevant FAQs

Do the anti-fraud provisions apply?

All securities transactions, even exempt transactions, are subject to the antifraud provisions of the federal securities laws. This means that you and your company will be responsible for false or misleading statements that you or others on your behalf make regarding your company, the securities offered, or the offering. You and your company are responsible for any such statements, whether made by your company or on behalf of the company, and regardless of whether they are made orally or in writing.

The government enforces the federal securities laws through criminal, civil and administrative proceedings. Private parties also can bring actions under certain securities laws. Also, if all conditions of the exemptions are not met, purchasers may be able to return their securities and obtain a refund of their purchase price.

What is an accredited investor?

Certain securities offerings that are exempt from registration may only be offered to, or purchased by, persons who are “accredited investors.” An “accredited investor” is:

  • A bank, insurance company, registered investment company, business development company, or small business investment company;
  • An employee benefit plan (within the meaning of the Employee Retirement Income Security Act) if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  • A tax exempt charitable organization, corporation or partnership with assets in excess of $5 million;
  • A director, executive officer, or general partner of the company selling the securities;
  • An enterprise in which all the equity owners are accredited investors;
  • An individual with a net worth of at least $1 million, not including the value of his or her primary residence;
  • An individual with income exceeding $200,000 in each of the two most recent calendar years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or,
  • A trust with assets of at least $5 million, not formed only to acquire the securities offered, and whose purchases are directed by a person who meets the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment.

Do state law requirements apply?

While the SEC regulates and enforces the federal securities laws, each state has its own securities regulator who enforces what are known as “blue sky” laws. If a company is selling securities, it must comply with both federal regulations and state securities laws and regulations in the states where securities are offered and sold (typically, the states where offerees and investors are based).

Under the Securities Act, if a company’s offering qualifies for certain exemptions from registration, that offering is not required to be registered or qualified by state securities regulators. Even if the offering is made under one of those exemptions, the states still have authority to investigate and bring enforcement actions for fraud, impose state notice filing requirements, and collect state fees. The failure to file, or pay filing fees regarding, any such materials may cause state securities regulators to suspend the offer or sale of securities within their jurisdiction. Companies should contact state securities regulators in the states in which they intend to offer or sell securities for further guidance on compliance with state law requirements. The following table illustrates which offerings are potentially subject to state registration or qualification under the Securities Act.

Securities Act Exemption Under the Securities Act, is the offering potentially subject to state registration or qualification?
Rule 504 Yes
Rule 506(b) No
Rule 506(c) No
Regulation Crowdfunding No
Regulation A – Tier 1 Yes
Regulation A – Tier 2 No
Rules 147 and 147A Yes

For the offerings that are potentially subject to state registration or qualification, each state’s securities laws have their own separate registration requirements and exemptions to registration requirements. Even if the offering is not subject to state registration or qualification, there may still be state notice filing requirements and fees.

To locate a state securities regulator and learn more about a particular state’s securities laws, please visit the North American Securities Administrators Association (NASAA) website.

What are restricted securities?

“Restricted securities” are previously-issued securities held by security holders that are not freely tradable. Securities Act Rule 144(a)(3) identifies what offerings produce restricted securities. After such a transaction, the security holders can only resell the securities into the market by using an effective registration statement under the Securities Act or a valid exemption from registration for the resale, such as Rule 144.

Rule 144 is a “safe harbor” under Section 4(a)(1) providing objective standards that a security holder can rely on to meet the requirements of that exemption. Rule 144 permits the resale of restricted securities if a number of conditions are met, including holding the securities for six months or one year, depending on whether the issuer has been filing reports under the Exchange Act. Rule 144 may limit the amount of securities that can be sold at one time and may restrict the manner of sale, depending on whether the security holder is an affiliate. An affiliate of a company is a person that, directly, or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the company.

 

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 Our SEC compliant documents and other services are not a substitute for the advice of legal counsel.