Do 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?
Section 4(a)(2) Yes
Rule 506(b) No
Rule 506(c) No
Rule 504 Yes
Regulation Crowdfunding No
Regulation A - Tier 1 Yes
Regulation A - Tier 2 No
Rules 147 and 147A Yes
Rule 701 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.

How can an investor resell non-restricted securities?

An investor that is not affiliated with the issuer and wishes to sell securities that are not restricted must either register the transaction or have an exemption for the transaction. An exemption commonly relied upon for the resale of the securities is Section 4(a)(1) of the Securities Act which is available to any person other than an issuer, underwriter or dealer.  Please be aware that several exemptions, including the exemptions under Regulation D, are only available for offers and sales by an issuer of securities to initial purchasers and are not available to any affiliate of the issuer or to any person for resales of the securities.

What is the process for requesting a waiver of “bad actor” disqualification?

The Office of Small Business Policy in the Division of Corporation Finance handles applications for waivers from the disqualifications imposed by Rule 262 of Regulation A, Rule 504(b)(3) of Regulation D, Rule 506(d) of Regulation D and Rule 503 of Regulation Crowdfunding.

Disqualification Provisions

The disqualification provisions provide that the Regulation A, Regulation D, and Regulation Crowdfunding exemptions from registration are not available for an offering if, among other things, the issuer or other “covered persons” have experienced a disqualifying event, such as being convicted of or subject to court or administrative sanctions for certain securities fraud or other violations of specified laws. The substance of each of these requirements is consistent across the rules.

For a discussion of the covered persons and disqualifying events, please see the Small Business Compliance Guides for Regulation A, Rule 504 and Rule 506 of Regulation D and Regulation Crowdfunding.

Under Regulation D and Regulation Crowdfunding, disqualification will not arise as a result of disqualifying events relating to any conviction, order, judgment, decree, suspension, expulsion or bar that occurred before the effective date of the rule or “bad actor” amendment. Matters that existed before the effective date of the rule or “bad actor” amendment, are still within the relevant look-back period, and would otherwise be disqualifying are, however, required to be disclosed. The table below provides the effective dates for each of these rules.

Rule or Regulation Effective Date of the Rule or “Bad Actor” Amendment
Rule 504 of Regulation D January 20, 2017
Rule 506 of Regulation D September 23, 2013
Regulation Crowdfunding May 16, 2016

For offerings under Regulation A, please see the Small Business Compliance Guide to determine whether or not an event is considered to be a disqualifying event.

Waivers

The Commission may waive Regulation A, Regulation D and Regulation Crowdfunding disqualifications upon a showing of good cause that the disqualification is not necessary under the circumstances. The Commission has delegated authority to grant waivers of this kind to the Director of its Division of Corporation Finance, and the authority has been subdelegated to certain officials of the Division, including the Chief of the Division’s Office of Small Business Policy. The Commission itself retains authority to grant these waivers.

Granted waivers are made publicly available at the Division of Corporation Finance’s website page on No-Action letters. The Division of Corporation Finance issued a policy statement describing the factors it considered in waiver requests.  In Release No. 33-9414 (July 10, 2013), the Commission also identified a number of circumstances (such as change of control, change of supervisory personnel, absence of notice and opportunity for hearing, and relief from a permanent bar for a person who does not intend to apply to reassociate with a regulated entity) that could be relevant to an evaluation of a Rule 506 waiver request.

Submitting Your Waiver Request

Specify Grounds for Granting Waiver
The text of your waiver request should discuss the background of the matter, including the facts and legal issues involved, and your suggested grounds for granting the waiver. To meet the governing legal standard, you should show good cause that disqualification is not necessary under the circumstances.

Draft Requests
The Division of Corporation Finance will not grant waivers before a disqualifying event has occurred, such as before a disqualifying injunction or administrative order has been issued.

If you wish to receive Commission staff feedback on your application before a disqualifying event has occurred, you may submit it in advance in draft form. For example, if you are negotiating a settlement of a Commission enforcement action and want your waiver to be effective at the same time as the injunction or administrative order settling the matter is issued, you should contact Commission staff as soon as practicable beforehand to discuss your timing requirements, and submit the application in draft form.

Your contact point should be the Office of Small Business Policy at (202) 551-3460.

Final Requests
Your final application must be manually signed and submitted before your waiver will be granted. All waiver requests should be made to the attention of Sebastian Gomez Abero, Chief, Office of Small Business Policy, Division of Corporation Finance, U.S. Securities and Exchange Commission.

In the context of settlement of an enforcement action, you may submit a dated manually signed application on the day your injunction or order is issued. 

Requesting Confidential Treatment of Your Request

If you wish to seek confidential treatment of information contained in your waiver submission (such as information relating to an ongoing investigation), you should request confidential treatment in accordance with the Commission’s confidential treatment procedures in 17 C.F.R. § 200.83. These types of applications should be submitted under cover of another letter explaining the circumstances of the request.