North Carolina Securities Law Exemptions

**Note: These are some of the common exemptions available under North Carolina law, this is not an exhaustive list of available exemptions**

 

Limited Offering Exemption (aka Private Placement Exemption)

N.C.G.S § 78A-17(9) of the NC Securities Act exempts transactions pursuant to an offer to 25 or fewer persons in North Carolina if the seller reasonably believes that the buyers are purchasing for investment purposes and the securities are offered through a twelve-month offering period.

In order to qualify for this exemption, these requirements (which include requirements from 18 N.C.A.C. 06A.1205 1, and Rule 147 of the 1933 Act) must be met:

(1) the issuer must be a resident and doing business in North Carolina;

(2) the offer is limited to 25 or fewer North Carolina residents during the offering period;

(3) all offers and sales must be completed within North Carolina;

(4) securities cannot be resold outside of North Carolina;

If these requirements are met, an issuer has no other specific disclosure requirements, no federal or state filings are required, and the federal “accredited investor” requirements do not apply. However, this is not the case for LLCs, which must meet other requirements under the Direct Participation Rules.

Waterman v. Alta Verde Industries 2 provides an example where it was insufficient to warrant invocation of the private placement exemption of federal and NC laws with respect to registration requirements. In Waterman, the court found that defendants were not entitled to the private placement exemption in N.C.G.S. § 78A-17(9) because their cattle feeding program was open to any interested investors regardless of the investors’ expertise, and the program was nationally advertised. Citing a case from the fifth circuit, the court found public advertising incompatible with a claim of private offering. Furthermore, it is irrelevant whether the purchaser is aware that the advertisement is made to the public at the time he or she invests in the security if the advertisement is in fact made public.3

NC Direct Participation Program Rules

North Carolina’s Direct Participation Program (DPP) rules are unique in their application to limited liability companies (LLC) and any entity taxed as a partnership.[Suitability standards do not apply to S corporations.] They require that offerees meet certain “suitability standards” before purchasing securities from issuers. These rules are intended to protect passive investors, and thus, investors that are “actively engaged, on a regular basis, in the management of the issuer’s business” are unaffected by the suitability standards.4 18 N.C.A.C. 06A.1313(b) stipulates the “suitability standards” that are imposed on offerings of direct participation program securities. Pursuant to the suitability standards, a company issuer can sell securities to an investor only if the investor has either (1) a minimum net worth of $225,000, or (2) a minimum net worth of $60,000 and a minimum annual taxable income of $60,000.5

Advertising

Pursuant to 18 N.C.A.C. § 06A.1308, “advertising” encompasses any of the following if used or circulated with the sale and promotion of securities: advertisement; display; pamphlet; brochure; letter; article or communication published in any newspaper, magazine or periodical; scripts; recordings; or any radio or television announcement, broadcast or commercial. An advertisement must be filed with the Administrator at least 10 days before use within the state for the offer or sale of a security.6 Furthermore, advertisements must carry the name of at least one NC registered dealer that can legally make an offering within NC.7

Offerings under Federal Rules 504, 505 and 506.

Sales under federal Rules 504 and 505 are exempted, but are limited to 25 purchasers, must adhere to 18 NCAC § 06A.1205 and 18 NCAC § 06A.1206, and if LLCs are involved, other suitability requirements are relevant. If an offering is made pursuant to Rule 506, the National Securities Markets Improvements Act of 1996 preempts state law, and North Carolina only requires the filing of a Form D, form U-2, and the payment of a filing fee.

Cooperatives and Marketing Associations

Securities issued by certain cooperatives, such as mutual associations, and marketing associations are exempt under N.C.G.S. § 78A-16(14).8

Nonprofits

Under N.C.G.S. § 78A-16(9), securities issued by certain nonprofits are exempt.9

Offerings to High Net-Worth Entities

N.C.G.S. § 78A-17(8) of the NC Securities Act exempts a sale of securities to, among other entities, an entity having a net worth in excess of $1,000,000 as determined by generally accepted accounting principles, an investment company as defined in the Investment Company Act of 1940,10 a financial institution, an institutional buyer or to a dealer.

Research for this page was conducted by SELC Volunteer Aaron Shaki.

  1. Limited Offerings Pursuant to N.C.G.S. § 78-17(9), 18 N.C.A.C 06A.1205.
  2. 643 F.Supp. 797 (1986.
  3.  Id. at 807.
  4.  See 18 N.C.A.C. § 06A.1205(b)(2).
  5. The investor’s principal residence, mortgage thereon, home furnishings and automobiles are excluded in his or her net worth valuation. See 18 N.C.A.C. § 06A.1313(b)(2).
  6.  See 18 N.C.A.C. § 06A.1308(b).
  7.  Id. § 06A.1308(c).
  8. See N.C.G.S. § 54-111 et seq. and N.C.G.S. § 54-129 et seq.
  9. See also 18 N.C.A.C. § 06A.1209.
  10. 15 U.S.C. § 80a–3 (2012).