The vast majority of securities offerings in the United States are completed under state and/or federal exemptions from the registration requirement. This means that the offering is much less costly to make but issuers must still ensure that they have identified and comply with the applicable state and federal exemptions. The following sections describe state and federal exemptions from the registration requirement and provide guidance on how the various exemptions can work together.

Summary of Federal Exemptions

Exempt Securities

The following types of securities are exempted from coverage of the 1933 Securities Act (the 1933 Act) pursuant to Section 3(a): 1

(2) Any security issued or guaranteed by the United States . . . or by any State of the United States, or by any political subdivision of a State or Territory, or by any public instrumentality of one or more States . . . or any security issued or guaranteed by any bank; or any security issued by or representing an interest in or a direct obligation of a Federal Reserve bank; . . . or any interest or participation in a single trust fund, or in a collective trust fund maintained by a bank, or any security arising out of a contract issued by an insurance company . . . .;

(3) [Short term notes] Any note, draft, bill of exchange, or banker’s acceptance . . . which has a maturity at the time of issuance of not exceeding nine months . . . .;

(4) [Charitable organizations] 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 [a pooled income fund, collective trust fund, collective investment fund, or similar fund maintained by a charitable organization];

(5) [Savings and loans and farmers’ co-ops] Any security issued (A) by a savings and loan association, building and loan association, cooperative bank, homestead association, or similar institution, which is supervised and examined by State or Federal authority having supervision over any such institution; or (B) by (i) a farmer’s cooperative organization exempt from tax under section 521 of the Internal Revenue Code of 1954, (ii) a corporation described in section 501(c)(16) of such Code and exempt from tax under section 501(a) of such Code, or (iii) a corporation described in section 501(c)(2) of such Code which is exempt from tax under section 501(a) of such Code and is organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization or corporation described in clause (i) or (ii);

(6) Any interest in a railroad equipment trust […].;

(7) Certificates issued by a receiver or by a trustee in bankruptcy, with the approval of the court;

(8) [Insurance instruments] Any insurance or endowment policy or annuity contract or optional annuity contract, issued by a corporation subject to the supervision of the insurance commissioner, bank commissioner, or any agency or officer performing like functions, of any State or Territory of the United States or the District of Columbia;

(9) […] any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange;

(10) [Exchanges][…] any security which is issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash, where the terms and conditions of such issuance and exchange are approved, after a hearing upon the fairness of such terms and conditions at which all persons to whom it is proposed to issue securities in such exchange shall have the right to appear, by any court, or by any official or agency of the United States, or by any State or Territorial banking or insurance commission or other governmental authority expressly authorized by law to grant such approval;

(11) [Intrastate offerings] Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory;

(12) [Bank holding company] Any equity security issued in connection with the acquisition by a holding company of a bank […];

(13) [Church pension plan] Any security issued by or any interest or participation in any church plan, company or account […];

(14) Any security futures product that is—(A) cleared by a clearing agency […]and (B) traded on a national securities exchange or a national securities association […].

Exempt Transactions

What is the difference between an exempt security and an exempt transaction? An exempt security is always exempt, whereas a security that is exempt pursuant to a transaction exemption is only exempt for that particular transaction. If the security is offered or sold again, a new exemption must be identified. The following securities transactions are exempt according to Section 4 of the 1933 Act:

(1) transactions by any person other than an issuer, underwriter,2 or dealer;3

(2) transactions by an issuer not involving any public offering;

(3) transactions by a dealer . . . ;

(4) brokers’ transactions executed upon customers’ orders on any exchange or in the over-the-counter market but not the solicitation of such orders;

(5) transactions involving offers or sales by an issuer solely to one or more accredited investors, if the aggregate offering price of an issue of securities offered in reliance on this paragraph does not exceed the amount allowed under section 3(b) of this title, if there is no advertising or public solicitation in connection with the transaction by the issuer or anyone acting on the issuer’s behalf, and if the issuer files such notice with the Commission as the Commission shall prescribe.

A quick aside on the Section 4(1) exemption: It sounds quite broad because it exempts transactions by anyone other than an issuer, underwriter, or dealer. An issuer, of course, is the company that sells its own stock (or other securities) to raise money for itself. So the 4(1) exemption applies to secondary trading of securities. The reason it is rarely used is that the definition of underwriter is very broad (see footnote 2). You don’t need to be a professional underwriter to be included in the definition—you simply must be someone with the intent to re-sell securities. More details about this exemption are contained in the section below on Resales of Restricted Securities.

Commonly Used Federal Exemptions

What are the most commonly used federal exemptions for initial offerings of securities by issuers?

Charitable Organizations

Section 3(a)(4) is used by religious, educational, benevolent, fraternal, charitable, or reformatory organizations. This allows nonprofit organizations to issue notes without having to worry about registration under federal securities laws. Note that not all of the states have a similar exemption.

Cooperatives

Section 3(a)(5) is used by farmers’ cooperative organizations that meet the requirements of Section 521 of the Internal Revenue Code and by nonprofit organizations exempt from tax under Section 501(c)(16) (Cooperative Organizations to Finance Crop Operations). Section 521 provides favorable tax treatment to farmer co-ops that meet certain requirements. Nonprofit organizations exempt from tax under Section 501(c)(16) are organized by Section 521 cooperatives for the purpose of financing the ordinary crop operations of members or other producers.

In addition to the federal exemption for securities of these types of cooperatives, the federal Securities Act prohibits any state from requiring state level securities registration (see section below on the National Securities Markets Improvement Act (NSMIA)).

Intrastate Exemption

Section 3(a)(11) is known as the Intrastate Exemption. This exemption recognizes that an issuer that is only offering and selling securities within one state and doing most of its business within that state is best left alone by the federal securities laws and left to the regulatory authority of the state in which that issuer is located and offering securities.

The Securities and Exchange Commission (SEC) has adopted a safe harbor rule to make it easier for an issuer to ensure that it is covered by the intrastate exemption. A safe harbor rule is one that contains requirements that, if complied with, ensure eligibility for the exemption. But non-compliance with the safe harbor requirements does not necessarily result in ineligibility for the exemption.

The intrastate exemption safe harbor is found in 17 CFR § 230.147 and is also known as Rule 147. It states, “This rule shall not raise any presumption that the exemption provided by Section 3(a)(11) of the Act is not available for transactions by an issuer which do not satisfy all of the provisions of the rule.”

The rule’s preliminary notes state that the intrastate exemption “was intended to apply only to issues genuinely local in character, which in reality represent local financing by local industries, carried out through local investment.” The following items must be satisfied to comply with Rule 147:

•  The issuer is incorporated or organized (or if an individual has his or her principal residence) in the state in which the offering is made.

•       The issuer derived at least 80 percent of its gross revenues and those of its subsidiaries on a consolidated basis from that state. 4

•  The issuer had at the end of its most recent semi-annual fiscal period prior to the first offer of any part of the issue, at least 80 percent of its assets and those of its subsidiaries on a consolidated basis located within that state.

•  The issuer intends to use and uses at least 80 percent of the net proceeds from sales made pursuant to the rule in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services within such state.

•  The principal office of the issuer is located within such state.

•       No part of the issue may be offered or sold to non-residents for a period of nine months from the date of the last sale of an issue under the rule.5

•  During that nine-month period, all resales of any part of the issue, by any person, shall be made only to persons resident within the state.

•  The issuer shall, in connection with any securities sold by it pursuant to the rule: (i) place a legend on the certificate or other document evidencing the security stating that the securities have not been registered under the Act and setting forth the limitations on resale contained in the rule; (ii) issue stop transfer instructions to the issuer’s transfer agent, if any, with respect to the securities, or, if the issuer transfers its own securities make a notation in the appropriate records of the issuer; and (iii) obtain a written representation from each purchaser as to his residence.

•  The issuer shall, in connection with any offers, offers to sell, offers for sale or sales by it pursuant to this rule, disclose, in writing, the limitations on resale contained in the rule.

Finally, Rule 147 is not available if the offering, although in technical compliance with the rule, is part of a plan or scheme to make interstate offers or sales of securities.

Private Offerings

Section 4(2) exempts “transactions by an issuer not involving any public offering.” This is obviously quite vague. As the Supreme Court said twenty years after the Securities Act was enacted, “[t]he Securities Act nowhere defines the scope of § 4([2])’s private offering exemption. Nor is the legislative history of much help in staking out its boundaries.”6

Helpfully, the SEC has adopted a safe harbor rule to assist with compliance with this exemption. Before describing that rule, it is necessary to define “accredited investor.”

Accredited Investors

What is the relevance of accredited investors? Companies that offer securities in a private offering only to accredited investors are subject to far simpler compliance requirements than companies that offer securities to even one unaccredited investor. Accredited investor includes the following:7

 (a) [Savings and loans, brokers, public employee benefit plans] Any savings and loan association or other institution . . .; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees . . .;

(b) Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;

(c) [Entity with at least $5 million in assets] Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, . . . business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;

(d) [Principal of the issuer] Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;

(e) [Person with at least $1 million in net worth] Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000;8

(f) [Person with at least $200,000 in annual income] Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

(g) [Trust with at least $5 million in assets] Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered . . .; and

(h) [Entity made up of accredited investors] Any entity in which all of the equity owners are accredited investors.

Even before the definition of accredited investor was narrowed by the Dodd–Frank Act (discussed in footnote 7), it was estimated that only eight percent of the population meets the definition.9 This is a source of great frustration to enterprises that would like to solicit a larger pool of potential investors.

Conducting a Private Offering

To conduct an offering under the federal private offering exemption, there are two options: either conduct an offering that fits within the guidelines for private offerings that have been developed over the years by the courts, or use the private offering safe harbor known as Rule 506.

Relying on 4(2) is a bit risky since there are no hard and fast rules regarding what exactly is a private offering. The SEC has said that

persons who offer or sell . . . securities without complying with [a safe harbor] are hereby put on notice by the Commission that in view of the broad remedial purposes of the [Securities] Act and of public policy which strongly supports registration, they will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers and other persons who participate in the transactions do so at their risk.10

In the leading case interpreting Section 4(2), the Supreme Court stated that the availability of the exemption

should turn on whether the particular class of persons affected need the protection of the [Securities] Act. An offering to those who are shown to be able to fend for themselves is a transaction “not involving any public offering.”11 [A]ct would make available in the form of a registration statement.”12

According to the American Bar Association Committee on Federal Regulation of Securities,13 the following factors are the most important in evaluating compliance with Section 4(2):

•  Manner of offering: How the purchasers of the particular securities offered are found—whether through a public process (e.g., general solicitation, advertising, seminars, etc.) or a non-public process.

•  Eligibility of the purchasers: Whether each purchaser (not all offerees), either alone or with a qualified advisor, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment.

•  Information: Whether each purchaser (or its qualified advisor) receives, or has meaningful access to, such information as the particular purchaser needs to make an informed investment decision.

•  Resales: Whether steps appropriate in the circumstances are taken to prevent resales that are not registered or exempt.

Notice that the inquiry focuses on actual purchasers, not offerees. So if an issuer were to accidentally make an offering to an investor that did not meet the requirements of Section 4(2), this would not defeat the exemption as long as that person did not ultimately purchase securities. The same is true under the private offering safe harbor (Rule 506).14 Fed. Sec. L. Rep. (CCH) ¶ 83,014 (proposed Aug. 7, 1981).]

Rule 506 Safe Harbor

Rule 506 is part of Regulation D, which the SEC adopted in 1982. Regulation D (often called “Reg D”) also includes Rules 504 and 505, which are discussed in the section on small offerings below. To meet the requirements of Rule 506, the offering must comply with the following:

•  There are no more than 35 purchasers of securities. The following types of purchasers do not count toward this limit of 35:15

•  Any relative, spouse or relative of the spouse of a purchaser who has the same principal residence as the purchaser;

•  Any trust or estate in which a purchaser and his or her relatives collectively have more than 50 percent of the beneficial interest;

•  Any corporation or other organization of which a purchaser and his relatives collectively are beneficial owners of more than 50 percent of the equity interests; and

•  Accredited investors.

•  Each purchaser who is not an accredited investor either alone or with his or her purchaser representative(s) has such knowledge and experience in financial and business matters that he/she/it is capable of evaluating the merits and risks of the prospective investment (or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description).

•  If the issuer sells securities to any purchaser that is not an accredited investor, the issuer is required to furnish certain information (specified in Reg D, 17 CFR 230.502(b)) to such purchaser a reasonable time prior to sale (this requirement can be quite onerous to comply with, which is why so few private placements are open to unaccredited investors).

•  Neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:

•  Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and

•  Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

How does the issuer determine who is and is not accredited? The issuer must have a reasonable belief that an investor is accredited. This can be accomplished by having the investor provide information and certifications related to wealth and income.

There is no maximum dollar amount that can be raised under Rule 506.

Securities sold under Rule 506 are “restricted securities.” This means that they cannot be re-sold by the initial purchaser without some additional securities compliance. This is why securities purchased in a private placement come with a “legend” that says something like the following:

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) AND MAY NOT BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION OTHERWISE COMPLIES WITH THE ACT.

The issuer is required to

exercise reasonable care to assure that the purchasers of the securities are not underwriters within the meaning of section 2(11) of the Act, which reasonable care may be demonstrated by the following: (1) Reasonable inquiry to determine if the purchaser is acquiring the securities for himself or for other persons; (2) Written disclosure to each purchaser prior to sale that the securities have not been registered under the Act and, therefore, cannot be resold unless they are registered under the Act or unless an exemption from registration is available; and (3) Placement of a legend on the certificate or other document that evidences the securities stating that the securities have not been registered under the Act and setting forth or referring to the restrictions on transferability and sale of the securities.16

            As with all offerings under Reg D, the issuer must report the offering to the SEC using Form D.

One characteristic of Rule 506 that makes it very attractive to issuers is that the NSMIA preempts states from requiring registration of offerings made under Rule 506 (for more information, see the section on NSMIA below).

Small Offerings

Small offerings are not exempt under the 1933 Act. However, Section 3(b) of the Act says

The [Securities and Exchange] Commission may from time to time by its rules and regulations, and subject to such terms and conditions as may be prescribed therein, add any class of securities to the securities exempted as provided in this section, if it finds that the enforcement of this title with respect to such securities is not necessary in the public interest and for the protection of investors by reason of the small amount involved or the limited character of the public offering; but no issue of securities shall be exempted under this subsection where the aggregate amount at which such issue is offered to the public exceeds $5,000,000.

Under this authority, the SEC has adopted rules that exempt small offerings. The three main exemptions under this provision are Regulation A, Rule 504, and Rule 505.

Regulation A

17

Regulation A (Reg A) is an exemption that allows a public offering18 to raise up to $5 million. It must meet the following conditions:

•  The issuer of the securities must be

•  An entity organized under the laws of the United States or Canada, or any State, Province, Territory or possession thereof, or the District of Columbia, with its principal place of business in the United States or Canada;

•  Not subject to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act’’) (15 U.S.C. 78a et seq.) immediately before the offering (in other words not a public reporting company);

•  Not a development stage company that either has no specific business plan or purpose, or has indicated that its business plan is to merge with an unidentified company or companies;

•  Not an investment company registered or required to be registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.);

•  Not issuing fractional undivided interests in oil or gas rights or a similar interest in other mineral rights; and

•  Not disqualified because of Section 230.262 (these are called “bad boy” provisions that disqualify issuers that have been involved in fraud or other wrongdoing).

•  Except as allowed by Section 230.254 (a section that allows a “testing of the waters” for interest in the offering prior to completion of the offering statement), no offer of securities shall be made unless a Form 1-A offering statement has been filed with the Commission.

The materials that must be filed are rather extensive and costly to prepare. Because they are considered almost as onerous as a full registration, offerings under Reg A are sometimes called “mini registrations.” But, unlike a full registration, full state-level compliance is required. For these reasons, Reg A is not very commonly used.

The JOBS Act, passed on April 5, 2012, requires the SEC to either amend Reg A or adopt a new regulation similar to Reg A that increases the maximum amount that can be raised to $50 million, among other new provisions.

Rule 504

Rule 504 can be used for offerings of up to $1 million.19 Rule 504 has two separate ways that it can be used: for a private offering and for a public offering.

 

Rule 504 for Private Offerings

A private offering can be conducted under Rule 504 under the following conditions:

The issuer may not be

•  Subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act;

•  An investment company; or

•  A development stage company that either has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person.

The same rules regarding restricted securities and the prohibition on advertising that apply to Rule 506 also apply to Rule 504 when it is used to conduct a private offering.

 

Rule 504 for Public Offerings

The prohibition on advertising that generally applies under Rule 504 does not apply to offers and sales of securities that are made:

(i) Exclusively in one or more states that provide for the registration of the securities, and require the public filing and delivery to investors of a substantive disclosure document before sale, and are made in accordance with those state provisions;

(ii) In one or more states that have no provision for the registration of the securities or the public filing or delivery of a disclosure document before sale, if the securities have been registered in at least one state that provides for such registration, public filing and delivery before sale, offers and sales are made in that state in accordance with such provisions, and the disclosure document is delivered before sale to all purchasers (including those in the states that have no such procedure); or

(iii) Exclusively according to state law exemptions from registration that permit general solicitation and general advertising so long as sales are made only to accredited investors.

Here are some examples to illustrate what this means:

Julie lives in Spokane, Washington, and owns a business there. She would like to raise $1 million in a public offering from Washington residents. She doesn’t qualify for the federal intrastate exemption because she sells products throughout the Pacific Northwest. As noted above, the ban on public advertising under Rule 504 does not apply to securities offerings made “exclusively in one or more states that provide for the registration of the securities, and require the public filing and delivery to investors of a substantive disclosure document before sale, and are made in accordance with those state provisions.” Washington State does provide for the registration of securities and does require the public filing and delivery to investors of a substantive disclosure document before sale. So, as long as Julie complies with Washington’s registration requirements, her offering is eligible for exemption under Rule 504, and there is no federal prohibition on public advertising.

Angelica lives in Buffalo, New York. She would like to raise $1 million in a public offering from New York residents. She doesn’t qualify for the federal intrastate exemption because she sells products throughout the Mid Atlantic region. New York does not provide for the registration of the securities, and does not require the public filing and delivery to investors of a substantive disclosure document before sale. So Rule 504 would not allow Angelica to do a public offering. What should she do? Remember that the ban on public advertising under Rule 504 does not apply to securities offerings made in one or more states that have no provision for the registration of the securities or the public filing or delivery of a disclosure document before sale, if the securities have been registered in at least one state that provides for such registration, public filing and delivery before sale, offers and sales are made in that state in accordance with such provisions, and the disclosure document is delivered before sale to all purchasers (including those in the states that have no such procedure). This means that Angelica could register her public offering in another state (let’s say Connecticut). Then, assuming she complies with New York’s filing requirement as well as Connecticut’s registration procedure and delivers the disclosure document she prepared for Connecticut to all purchasers in both Connecticut and New York, her public offering would be exempt under Rule 504.

If the conditions are met for conducting a public offering under Rule 504, the securities are not restricted which means they can be re-sold without registration.

Rule 505

Rule 505’s requirements are very similar to Rule 506’s except that no more than $5 million can be raised and the requirement that unaccredited investors have “such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment” does not apply.

Offers and Sales That Occur Outside the United States—Regulation S

Regulation S states that the federal registration requirements do not apply to offers and sales that occur outside the United States and provides safe harbors for those who are conducting securities offerings outside of the United States. 20

Exemption for Transactions Exempt from Qualification Under Section 25102(n) of the California Corporations Code

This exemption was created specifically to coordinate with a California exemption that allows public solicitation and allows the purchase of securities by unaccredited investors as long as they meet wealth and income requirements that are less stringent than the accredited investor requirements. The total offering may not exceed $5 million.21

State Exemptions

Once you have determined which federal exemption you can use for your offering, you still have to determine which state securities laws apply and what exemptions might be available under the applicable state laws.

State securities statutes vary quite a bit. This can create a huge hassle for an offeror that wants to offer securities in more than one state. For example, Pat is going to conduct a public offering under Rule 504 and would like to offer securities in both Louisiana and Texas. In addition to completing the required federal filing (Form D), it will be necessary to comply with the securities laws of both Louisiana and Texas, which may be quite different.

Click on the state name for exemptions specific to that state:

California

North Carolina

Oregon

 

National Securities Markets Improvement Act

NSMIA, adopted in 1996, added Section 28 to the 1933 Securities Act in an attempt to partially alleviate this regulatory burden. NSMIA provides that certain securities offerings that are exempt under federal law are also exempt from state registration requirements. The securities exempt from state registration requirements under NSMIA are called “covered securities.” Covered securities include securities of farmers’ cooperatives (exempt under Section 3(a)(5) of the Act) and securities issued under Rule 506.

States are still permitted to require notice filings and charge fees for offerings of covered securities. States also retain jurisdiction to investigate and bring enforcement actions in the case of fraud. Unfortunately, NSMIA does not help Pat, in the example described above, because securities offered under Rule 504 are not covered securities.

The Concept of Integration

It is important to be familiar with the concept of integration when conducting securities offerings. The purpose of the integration requirements is to prevent someone from getting around the requirements of an exemption by doing more than one offering. For example, let’s say Scott want to raise $6 million in a private offering. He does not want to use Rule 506 because he does not want to be limited to “sophisticated” investors. He decides to use Rule 505 and knowing that you cannot raise more than $5 million under Rule 505, he does two separate offerings under Rule 505 and raises $4 million in the first offering and then a couple of months later raises $2 million in the second offering. Obviously, the only reason he did two offerings was to evade the $5 million cap on a Rule 505 offering.

The SEC created the integration rules to prevent this kind of scheme. Similar requirements exist under state law. Generally, as long as two offerings are separated by at least six months, they will not be “integrated” (i.e., considered part of a single offering). Otherwise, the determination of whether separate sales of securities are part of the same offering generally depends on the particular facts and circumstances considering factors such as

(a) Whether the sales are part of a single plan of financing; (b) Whether the sales involve issuance of the same class of securities; (c) Whether the sales have been made at or about the same time; (d) Whether the same type of consideration is being received; and (e) Whether the sales are made for the same general purpose.22

 

  1. The numbers used are the same as the section numbers in the 1933 Act; there is no number 1. In addition, several provisions have been omitted in the interest of space. See the 1933 Act for a complete description of exempted securities.
  2. “The term ‘underwriter’ means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking; but such term shall not include a person whose interest is limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors’ or sellers’ commission.” The SEC has said that investors may be “underwriters” if “they act as links in a chain of transactions through which securities move from an issuer to the public.” Preliminary Note 2 to Rule 144, 17 C.F.R. § 230.144 (2010).
  3. The term ‘‘dealer’’ means any person who engages either for all or part of his time, directly or indirectly, as agent, broker, or principal, in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another person.
  4. Rule 147:

    (1) For its most recent fiscal year, if the first offer of any part of the issue is made during the first six months of the issuer’s current fiscal year; or (2) For the first six months of its current fiscal year or during the twelve-month fiscal period ending with such six-month period, if the first offer of any part of the issue is made during the last six months of the issuer’s current fiscal year from the operation of a business or of real property located in or from the rendering of services within such state or territory; provided, however, that this provision does not apply to any issuer which has not had gross revenues in excess of $5,000 from the sale of products or services or other conduct of its business for its most recent twelve-month fiscal period.

  5. Rule 147:

    For purposes of determining the residence of offerees and purchasers: (1) A corporation, partnership, trust or other form of business organization shall be deemed to be a resident of a state or territory if, at the time of the offer and sale to it, it has its principal office within such state or territory. (2) An individual shall be deemed to be a resident of a state or territory if such individual has, at the time of the offer and sale to him, his principal residence in the state or territory. (3) A corporation, partnership, trust or other form of business organization which is organized for the specific purpose of acquiring part of an issue offered pursuant to this rule shall be deemed not to be a resident of a state or territory unless all of the beneficial owners of such organization are residents of such state or territory.

  6. SEC v. Ralston Purina Co., 346 U.S. 119, 122 (1953).
  7. “Accredited investor” is defined in Section 2(a)(15) of the Act and 17 C.F.R. § 230.215.
  8. This part of the definition was narrowed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203, 124 Stat. 1376), which required that the value of an individual’s primary residence must be excluded when determining net worth for accredited investor purposes.
  9. SEC Release No. 33-8766; IA-2576; File No. S7-25-06, available at http://www.sec.gov/rules/proposed/2006/33-8766.pdf.
  10. 37 Fed. Reg. at 592.
  11. SEC v. Ralston Purina Corp., 346 U.S. 119, 125 (1953).

    The Supreme Court also considered it important whether the offerees had “access to the same kind of information that the [Securities

  12. SEC v. Ralston Purina Corp., 346 U.S. 119, 125-26 (1953).
  13. Law of Private Placements (Non-Public Offerings) Not Entitled to Benefits of Safe Harbors—A Report by Committee on Federal Regulation of Securities (ABA Section of Business Law, Apr. 2010).
  14. Proposed Revision of Certain Exemptions from the Registration Provisions of the Securities Act of 1933 for Transactions Involving Limited Offers and Sales, Securities Act Release No. 6339, 46 Fed. Reg. 41,791, 41,793, [1981–1982 Transfer Binder
  15. A corporation, partnership, or other entity shall be counted as one purchaser. If, however, that entity is organized for the specific purpose of acquiring the securities offered and is not an accredited investor, then each beneficial owner of equity securities or equity interests in the entity shall count as a separate purchaser.
  16. This requirement also applies to Rule 505 and to Rule 504 when it is used for a private placement.
  17. 17 C.F.R. §§ 230.251 et seq.
  18. What does the term “public offering” mean? It does not have a precise legal definition but it is generally used to refer to an offering in which the offeror is permitted to conduct general solicitation of the public through advertising. In a private offering, generally, advertising is not permitted.
  19. The aggregate offering price for an offering of securities under Rule 504 shall not exceed $1,000,000, less the aggregate offering price for all securities sold within the twelve months before the start of and during the offering of securities under Rule 504. For example, if an issuer sold $4,100,000 in securities on December 1, 1987, under Rule 505, the issuer could not sell any of its securities under Rule 504 until December 1, 1988. Until then the issuer must count the December 1, 1987, sale towards the $1,000,000 limit within the preceding twelve months.
  20. 17 C.F.R. § 230.901-.905.
  21.   17 C.F.R. § 230.1001.
  22. Rule 502(a).