The Going Public Lawyer’s Guidebook – Securities Lawyer 101

Going Public LawyerThe Going Public Lawyers Guidebook
By Hamilton & Associates Securities Law Group, P.A.
Caution: Use Only as Directed

Going Public transactions can be structured a number of ways.  Traditional sources of capital for companies include loans from financial institutions such as a bank, or from friends and family as well as receivable financing. Companies raising capital in going public transactions often do so by selling their securities prior to filing an SEC registration. Going public is a milestone for any company and there are both advantages and disadvantages that attach to public company status. Many companies going public do so because of the general perception that their new status will make raising capital much easier.  Unlike private companies, public companies can offer investors an exit strategy for their investment.

The Going Public Lawyer’s Guidebook is designed to guide companies through the going public and capital raising process.

Advantages of Public Company Status

Before deciding to raise capital, private companies should consider the advantages of public company status including:

♦ Going Public potentially increases a company’s ability to raise capital;

♦ Going Public creates liquidity for a company’s shares;

♦ Securities of a public company can be used to acquire other businesses and companies for shares;

♦ A public company’s shares can be used to attract and compensate management and other employees; and

♦ Being a public company creates brand awareness, publicity and prestige for the private company.

The Going Public Lawyer’s Guide – Going Public Considerations:

♦  A going public transaction will take time and money to accomplish.

♦ Upon completion of a going public transaction, the company will take on significant new obligations, such as filing SEC reports and keeping shareholders and the market informed about the company’s business operations, financial condition, and management, which will take a significant amount of time for the company’s management and result in additional costs.

♦ The company and its management may be liable if they fail to comply with these new obligations.

♦ The company may lose some flexibility in managing its affairs, particularly when public shareholders must approve the company’s corporate actions.

♦ Information about the company, such as financial statements and disclosures about litigation, claims, material contracts, customers and suppliers, will become available to the general public (including to competitors).

The Laws that Govern the Going Public Process

The Securities Act of 1933, as amended (“Securities Act”), and The Securities Exchange Act of 1934 (“Exchange Act”) apply to securities offerings, going public transactions and public company status.

The Securities Act in Capital Raising Transactions

The Securities Act regulates offers and sales of securities and offers and sales that use the means of interstate commerce, such as the internet, U.S. telephone lines or the U.S mail.

For securities offerings to the public, the Securities Act generally requires the company to file a registration statement containing information about itself, the securities it is offering and the offering.  The SEC staff reviews these registration statements to see if the SEC’s disclosure rules are satisfied.  The SEC does not evaluate the merits of securities offerings, or determine whether the securities offered are “good” investments or appropriate for a particular type of investor.

The Exchange Act in Capital Raising Transactions

The Exchange Act requires companies that meet certain thresholds or that voluntarily register a class of securities to publicly report information regularly about their business operations, financial condition, and management.  These companies must file periodic reports or other information with the SEC.  In some cases, the company must deliver the information directly to investors.

Going Public  and Selling Securities

A small business can raise capital in a number of different ways during a going public transaction, including from borrowings from banks, other financial institutions, friends and/or family and by selling their securities.  If a company is offering and selling securities, even if to just one person, the offer and sale of the securities must either be registered with the SEC or exempted from registration under the Securities Act.

Filing a Registration Statement to Raise Capital in a Going Public Transaction

If a company seeks to raise capital from the public as part of its going public transaction, the Securities Act requires the company to file the registration statement with the SEC before it may offer its securities for sale.  This process is often referred to as an initial public offering, or “IPO.”  The company may not actually sell the securities covered by the registration statement until the SEC staff declares the registration statement effective. Filing a Registration Statement with the SEC will allow the company to sell its securities publicly either in an initial or direct public offering.

Registration Statements under the Securities Act have two principal parts.  Part I is the prospectus, the legal offering or “selling” document.  The company—the “issuer” of the securities—must describe in the prospectus important facts about its business operations, financial condition, results of operations, risk factors, and management.  It must also include audited financial statements.  The prospectus must be delivered to everyone who buys the securities, as well as anyone who is made an offer to purchase the securities.

Part II contains additional information that the company does not have to deliver to investors but must file with the SEC, such as copies of material contracts.

Form S-1 Line Item Disclosures

All companies may use SEC Form S-1 to prepare a registration statement for a securities offering.  The prospectus included in the registration statement should provide clear, readable information written in plain English. If the company decides to prepare and file a registration statement using Form S-1, it must include specified disclosures about the company in the prospectus, including:

♦ a description of the company’s business, properties, and competition;

♦ a description of the risks of investing in the company;

♦ a discussion and analysis of the company’s financial results and financial condition as seen through the eyes of management;

♦ the identity of the company’s officers and directors and their compensation;

♦ a description of material transactions between the company and its officers, directors, and significant shareholders;

♦ a description of material legal proceedings involving the company and its officers and directors; and

♦ a description of the company’s material contracts.

The company must also provide information about the offering, including:

♦ a description of the securities being offered;

♦ the plan for distributing the securities; and

♦ the intended use of the proceeds of the offering.

Information about how to prepare these and other non-financial disclosures in the registration statement is set out in Regulation S-K, which contains form and content rules for non-financial portions of registration statements.  In addition, the SEC staff has issued guidance to aid small businesses in preparing these disclosures for initial public offerings of securities.

Form S-1 Registration statements also must include financial statements that comply with the form and content requirements of Regulation S-X.  For most companies, financial statements must be prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).  Companies that are organized outside of the United States and that meet the requirements to be a “foreign private issuer” under Rule 3b-4(c) may prepare their financial statements under U.S. GAAP or under international financial reporting standards or generally accepted accounting principles in their home jurisdiction, with reconciliation to U.S. GAAP on certain key line items if required.

Annual financial statements must be audited by an independent certified public accountant registered with the Public Company Accounting Oversight Board or “PCAOB.”  The PCAOB registers and regulates public accounting firms that audit financial statements filed with the SEC.

In addition to the information expressly required by Form S-1, the company also must provide any other information that is necessary to make its disclosures complete not misleading.

Smaller Reporting Company Disclosures

Securities laws and SEC rules allow certain smaller companies and newly public companies to prepare their disclosures using rules designed to make compliance easier.

If the company qualifies as a “smaller reporting company,” as defined in Item 10(f)(1) of Regulation S-K, it may choose to prepare the disclosure in the prospectus relying on disclosure requirements that are scaled for smaller companies.  These requirements are found primarily in paragraphs labeled “smaller reporting companies” within Regulation S-K and in Article 8 of Regulation S-X.

A company qualifies as a “smaller reporting company” if its public equity float is less than $75 million or, if it cannot calculate its public equity float, it has less than $50 million in annual revenue.  Public equity float is calculated by multiplying the number of the company’s common shares held by the public by the market price and, in the case of an IPO, adding to that number the product obtained by multiplying the common shares covered by the registration statement by their estimated public offering price.

The disclosure requirements scaled for smaller reporting companies permit a  company, among other things to:

♦ include less extensive narrative disclosure than required of other reporting companies, particularly in the description of executive compensation;

♦ provide audited financial statements for two fiscal years, in contrast to other reporting companies, which must provide audited financial statements for three fiscal years; and

♦ not have to provide an auditor attestation of internal control over financial reporting, which is generally required for SEC reporting companies under Sarbanes-Oxley Act Section 404(b).

Emerging Growth Company

If the company qualifies as an “emerging growth company,” as defined in Section 2(a)(19) of the Securities Act, it may choose to follow disclosure requirements that are scaled for newly public companies.  A company qualifies as an emerging growth company if it has total annual gross revenues of less than $1 billion during its most recently completed fiscal year and, as of December 8, 2011, had not sold common equity securities under a registration statement.  A company continues to be an emerging growth company for the first five fiscal years after it completes an IPO, unless one of the following occurs: its total

♦ its annual gross revenues are $1 billion or more;

♦ it has issued more than $1 billion in non-convertible debt in the past three years; or

♦ it becomes a “large accelerated filer,” as defined in Exchange Act Rule 12b-2.

Emerging growth companies, among other things, are permitted to:

♦ follow the smaller reporting company requirements for disclosure and audited financial statements;

♦ not have to provide an auditor attestation of internal control over financial reporting under Sarbanes-Oxley Act Section 404(b); and

♦ choose not to become subject to certain changes in accounting standards.

Filing the Registration Statement on EDGAR

Registration statements must be filed with the SEC using the SEC’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.  In general, anyone can see the information and documents a public company files as part of Part I and Part II of the Form S-1 registration statement, by looking it up on the SEC website.

If the company is an “emerging growth company,” however, its initial filings can be made on a confidential basis.  If a company is a “foreign private issuer” under Rule 3b-4, it may also submit its initial filings on a non-public basis.

SEC Review of Form S-1 Registration Statements 

The SEC staff examines registration statements for compliance with disclosure requirements, but does not evaluate the merits of the securities offering or determine whether the securities offered are “good” investments or appropriate for a particular type of investor.

If a filing or confidential submission appears incomplete or if the staff has questions regarding the registration statement or the offering, they usually inform the company with an initial “comment letter,” typically within 30 days after filing or confidential submission.  The company may file correcting or clarifying amendments to respond to the comments.  The initial comment letter may be followed by additional comment letters.  The review process is not subject to time limits.

Once the company has satisfied the disclosure requirements, the staff declares the registration statement “effective.”  The company may then complete public sales of its securities.

More information on the process for SEC review of registration statements is available on the SEC website.

Reporting After a Securities Act Registration Statement

Once the SEC staff declares a company’s Securities Act registration statement effective, the company becomes subject to Exchange Act reporting requirements.  These rules require the company to file annual reports on Form 10-k, quarterly reports on Form 10-Q and current reports on Form 8-K with the SEC on an ongoing basis.  If the company qualifies as a “smaller reporting company” or an “emerging growth company,” it will be eligible to follow scaled disclosure requirements for these reports.

Once a public company begins reporting, it will be required to continue reporting unless it satisfies one of the following “thresholds,” in which case its SEC filing obligations are suspended:

♦ the company has fewer than 300 shareholders of record of the class of securities offered (1,200 shareholders of record if the company is a bank or bank holding company); or

♦ the company has fewer than 500 shareholders of record of the class of securities offered and less than $10 million in total assets for each of its last three fiscal years.

If the company is subject to Exchange Act reporting requirements, it must file with the SEC much of the same information about the company as is required in the registration statement for a public offering, described above.

All of this information must be filed electronically with the SEC through its EDGAR system, and will immediately become publicly available upon filing.  The company’s CEO and CFO must certify the financial and certain other information contained in annual reports on Form 10-k and quarterly reports on Form 10-Q.

The company must file current reports on Form 8-K to report a wide range of specified events, some within four business days after occurrence of the event.  Examples of the events that trigger this requirement are:

♦ entry into and termination of a material definitive agreement (a copy of the agreement must also be publicly filed);

♦ completion of an acquisition or disposition of assets;

♦ notice of a delisting or failure to satisfy a continued listing rule or standard or transfer of listing;

♦ unregistered sales of equity securities;

♦ material modifications to rights of security holders;

♦ changes in the company’s certifying accountant;

♦ changes in control of the company;

♦ election of directors, appointment of principal officers, and departure of directors and principal officers; and

♦ amendments to charter and bylaws.

Requirements for Exchange Act Registration Statements

Even if a company has not issued securities under a registration statement declared effective by the SEC staff under the Securities Act, it could still become an SEC reporting company.  Exchange Act registration is often accomplished on Form 10.  In general, a company will be required to file a registration statement under Section 12 of the Exchange Act registering the pertinent class of securities if:

♦ it has more than $10 million in total assets and a class of equity securities, like common stock, that is held of record by either (1) 2,000 or more persons or (2) 500 or more persons who are not accredited investors; or

♦ it lists the securities on a U.S. exchange.

For banks and bank holding companies, the threshold is 2,000 or more holders of record; the separate registration trigger for 500 or more non-accredited holders of record does not apply.

In calculating the number of holders of record for purposes of determining whether Exchange Act registration is required, a company may exclude persons who acquired their securities under an employee compensation plan in a transaction that was exempt from the Securities Actregistration statement requirements.  Once the SEC adopts rules to permit crowdfunding as contemplated by the JOBS Act, which is described in more detail below, a company will also be able to exclude holders of securities issued under the JOBS Act crowdfunding exemption.

The information about the company required for an Exchange Act registration statement on Form 10 is similar to what is required for a registration statement under the Securities Act.

Exchange Act Reporting and Other Requirements

If a company files a registration statement on Form 10 or Form 8-A under Section 12 of the Exchange Act, it becomes an SEC reporting company and subject to the same annual, quarterly, and current reporting obligations that result from Securities Act registration described above.  In addition, the company’s shareholders and management become subject to various requirements discussed below.

Proxy Rules

A company with Exchange Act-registered securities must comply with the SEC’s proxy rules whenever its management submits proposals to shareholders that will be subject to a shareholder vote, usually at a shareholders’ meeting.  These rules get their name from the common practice of management asking shareholders to provide them with a document called a “proxy card” granting authority to vote the shareholders’ shares at the meeting.  The proxy rules require the company to provide certain disclosures in a proxy statement to its shareholders, together with a proxy card in a specified format, when soliciting authority to vote the shareholders’ shares.  Proxy statements describe matters up for shareholder vote, and include management and executive compensation information if the shareholders are voting for the election of directors.

If shareholders will take action on a matter but management is not soliciting proxies, the company must provide shareholders with an information statement that is similar to a proxy statement.  The proxy rules also require the company to send an annual report to shareholders if the shareholders are voting for directors.  The proxy rules also govern when the company must provide shareholder lists to investors and when it must include a proposal from a shareholder in its proxy statement or information statement.

Beneficial Ownership Reporting After Completion of a Going Public Transaction

If a company has registered a class of its equity securities under the Exchange Act, shareholders who acquire more than 5% of the outstanding shares of that class must file beneficial owner reports on Schedule 13D or 13G until their holdings drop below 5%.  These filings contain background information about the shareholders who file them as well as their investment intentions, providing investors and the company with information about accumulations of securities that may potentially change or influence company management and policies.

Reporting by Officers, Directors and 10% Shareholders

Section 16 of the Exchange Act applies to an SEC reporting company’s directors and officers, as well as shareholders who own more than 10% of a class of the company’s equity securities registered under the Exchange Act.  The rules under Section 16 require these “insiders” to report most of their transactions involving the company’s equity securities to the SEC within two business days.

Section 16 also establishes mechanisms for a company to recover “short swing” profits, or profits an insider realizes from a purchase and sale of the company’s security that occur within a six-month period.  In addition, Section 16 prohibits short selling by insiders of any class of the company’s securities, whether or not that class is registered under the Exchange Act.

Loans to Directors and Officers

Section 13(k) of the Exchange Act prohibits SEC reporting companies from making personal loans to their directors and officers.  Loans made in the ordinary course of business at market rates by issuers that are financial institutions or in the business of consumer lending are excepted from the prohibition.

Tender Offers

The SEC’s tender offer rules apply to transactions in which a public company faces a third-party tender offer or “takeover.”  The rules also apply if a public company makes a tender offer for its own securities.  The filings required by these rules provide information to the holders of the securities about the person making the tender offer and the terms of the offer.  The company that is the subject of a takeover must file its responses to the tender offer with the SEC.  The rules also set minimum time periods for the tender offer and provide other protections to shareholders.

Listing Standards

If a company lists its securities on a securities exchange such as the NASDAQ or New York Stock Exchange, it will be subject to the rules or “listing standards” governing all companies listed on that exchange, including rules on corporate governance and audit committees.  Companies whose securities are not listed on an exchange but are traded only through the facilities of the OTC Bulletin Board or OTC Markets Group’s OTC Link typically are not subject to additional standards on corporate governance and audit committees.

Exemptions From SEC Registration

A company’s securities offering may qualify for one of several exemptions from the registration requirements of the Securities Act. All securities transactions, even exempt transactions, are subject to the antifraud provisions of the federal securities laws.  This means that the company and its management will be responsible for false or misleading statements that the Company or others on its behalf make regarding the issuer, the securities offered, or the offering.  The company and its management are responsible for any such statements, whether made by the 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.

In addition, offerings that are exempt from provisions of the federal securities laws may still be subject to the notice and registration requirements of various state laws. Companies should make sure to check with the appropriate state securities regulators before proceeding with a securities offering.  More information can be found about state securities regulators on the website of the North American Securities Administrators Association.

Private Placement Exemption

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.

In general, public advertising of the offering, and general solicitation of investors, is incompatible with the non-public offering exemption.  The precise limits of the non-public offering 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.  If a company offers securities to even one person who does not meet the necessary conditions, the entire offering may be in violation of the Securities Act.

Rule 506(b) provides objective standards that a company can rely on to meet the requirements of the Section 4(a)(2) non-public offering exemption.  Rule 506(b) is part of Regulation D, which is described more fully below.

Regulation D

Regulation D contains Rules 504, 505 and 506, which establish exemptions from Securities Act registration.  The only filing requirement under each of these exemptions is the requirement to file a notice on Form D with the SEC.  The notice must be filed within 15 days after the first sale of securities in the offering.  Many states also require the filing of a Form D notice in a Regulation D offering.  The main purpose of the Form D filing is to notify federal (and state) authorities of the amount and nature of the offering being undertaken in reliance upon Regulation D.

Some rules under Regulation D specify particular disclosures that must be made to investors, while others do not.  Even if a company sells securities in a manner that is not subject to specific disclosure requirements, issuers should take care that sufficient information is available to investors.  All sales of securities are subject to the antifraud provisions of the securities laws.  This means that the issuer should consider whether the necessary information was available to investors, and that any information provided to investors must be free from false or misleading statements.  Similarly, information should not be omitted if, as a result of the omission, the information that is provided to investors is false or misleading.

Felons and other “bad actors” are disqualified from involvement in Rule 505 and 506 offerings.  An issuer seeking reliance on either of these rules is required to determine whether the issuer or any of its covered persons has had a disqualifying event.  The list of covered persons and disqualifying events differs for Rules 505 and 506.  Issuers relying on Rule 505 must refer to the disqualification provisions of Rule 262 of Regulation A.  Issuers relying on Rule 506 will find the applicable disqualification provisions in Rule 506(d). An issuer that is disqualified from these rules may still qualify to apply for a waiver of disqualification.

Rule 504

Rule 504, sometimes referred to as the “seed capital” exemption, provides an exemption for the offer and sale of up to $1,000,000 of securities in a 12-month period.  A  company may use this exemption so long as it is not a blank check company and is not subject to Exchange Act reporting requirements.  In general, a company may not use general solicitation or advertising to market the securities, and purchasers generally receive “restricted securities.”  Purchasers of restricted securities may not sell them without SEC registration or using another exemption, which is further explained below under the heading “Resales of restricted securities.”  Investors should be informed that they may not be able to sell securities of a non-reporting company for at least a year without the issuer registering the transaction with the SEC.

A company may, however, use the Rule 504 exemption for a public offering of its securities with general solicitation and advertising, and investors will receive non-restricted securities, under one of the following circumstances:

♦ It sells in accordance with a state law that requires the public filing and delivery to investors of a substantive disclosure document; or

♦ It sells in accordance with a state law that requires registration and disclosure document delivery and also sells in a state without those requirements, so long as the company delivers to all purchasers the disclosure documents mandated by a state in which it registered; or

♦ It sells exclusively according to state law exemptions that permit general solicitation and advertising, so long as sales are made only to “accredited investors”.

Rule 505

Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period.  Under this exemption, the company may sell to an unlimited number of “accredited investors” and up to 35 persons that are not accredited investors.  Purchasers must buy for investment purposes only, and not for the purpose of reselling the securities.  The issued securities are “restricted securities,” meaning purchasers may not resell them without registration or an applicable exemption, as explained below under the heading “Resales of restricted securities.”  If the company is not an SEC reporting company, investors should be informed that they may not be able to sell securities for at least a year without the company registering the transaction with the SEC.  The company may not use general solicitation or advertising to sell the securities.

Under Rule 505, if an offering involves any purchasers that are not accredited investors, the company must give these purchasers disclosure documents that generally contain the same information as those included in a registration statement for a registered offering.  There are also financial statement requirements that apply to Rule 505 offerings involving purchasers that are not accredited investors.  For instance, if financial statements are required, they must be audited by a certified public accountant.  The Company must also be available to answer questions from prospective purchasers who are not accredited investors.

An issuer may decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws.  If a company provides information to accredited investors, it must make this information available to the non-accredited investors as well.

Rule 506

Rule 506 provides two different ways of conducting a securities offering that is exempt from registration: Rule 506(b) and Rule 506(c).  Rule 506(b) is a long-standing rule.  Rule 506(c) was added in 2013 to implement a statutory mandate under the JOBS Act.

Rule 506(b)

Rule 506(b) is a “safe harbor” for the non-public offering exemption in Section 4(a)(2) of the Securities Act, which means it provides specific requirements that, if followed, establish that a transaction falls within the Section 4(a)(2) exemption.  Rule 506 does not limit the amount of money a company can raise or the number of accredited investors it can sell securities to, but to qualify for the safe harbor, it company must:

♦ not use general solicitation or advertising to market the securities;

♦ not sell securities to more than 35 non-accredited investors (unlike Rule 505, 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);

♦ give non-accredited investors specified disclosure documents that generally contain the same 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);

♦ be available to answer questions from prospective purchasers who are non-accredited investors; and

♦ provide the same financial statement information as required under Rule 505.

Accredited Crowdfunding – Rule 506(c)

To implement Section 201(a) of the JOBS Act, the SEC promulgated Rule 506(c) to eliminate the prohibition on using general solicitation under Rule 506 where all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors.

Under Rule 506(c), issuers may offer securities through means of general solicitation, provided that:

♦ all purchasers in the offering are accredited investors,

♦  the issuer takes reasonable steps to verify their accredited investor status, and

♦ certain other conditions in Regulation D are satisfied.

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.

Purchasers receive “restricted securities” in a Rule 506 offering.  Therefore, they may not freely trade the securities after the offering, as explained below under the heading “Resales of restricted securities.”

Section 18 of the Securities Act provides a federal preemption or exemption from state registration and review of private offerings that are exempt under Rule 506.  The states still have authority, however, to investigate and bring enforcement actions for fraud, impose state notice filing requirements and collect state fees.

Regulation A

Regulation A is an exemption for public offerings not exceeding $5 million in any 12-month period.  If a company relies on this exemption, the company must file an offering statement with the SEC on Form 1-A, consisting of a notification, offering circular, and exhibits.  The SEC staff will review this offering statement.

Felons and other “bad actors” are disqualified from Regulation A.  An issuer seeking reliance on Regulation A is required to determine whether the issuer or any of its covered persons has had a disqualifying event.  The list of covered persons and disqualifying events appear in Rule 262 of Regulation A.  An issuer that is disqualified from these rules may still qualify to apply for a waiver of disqualification.  See “Process for Requesting Waivers of ‘Bad Actor’ Disqualification Under Rule 262 of Regulation A and Rules 505 and 506 of Regulation D” for a description of the waiver process.

Regulation A offerings share many characteristics with registered offerings.  For example, purchasers must be provided with an offering circular similar to a prospectus.  Just as in registered offerings, the securities can be offered publicly, using general solicitation and advertising, and purchasers do not receive “restricted securities,” as explained below under the heading “Resales of restricted securities.”  The principal differences between Regulation A offerings and registered public offerings are:

♦ financial statements for a Regulation A offering are simpler and do not need to be audited unless audited financial statements are otherwise available;

♦ Regulation A issuers do not incur either Exchange Act reporting obligations after the offering or Sarbanes-Oxley Act obligations applicable only to SEC reporting companies, unless the company meets the thresholds that trigger Exchange Act registration;

♦ companies may choose among three formats to prepare the Regulation A offering circular, one of which is a simplified question-and-answer document; and

♦ companies may “test the waters” to determine market interest in their securities before going through the expense of filing with the SEC.

SEC reporting companies are not eligible to use Regulation A.  All other types of companies may use Regulation A, except development stage companies without a specified business such as a blank check company and investment companies registered or required to be registered under the Investment Company Act of 1940.  In most cases, shareholders may use Regulation A to resell up to $1.5 million of securities.

The “test the waters” provisions of Regulation A allow companies to publish or deliver a written document to prospective purchasers or make scripted radio or television broadcasts to determine whether there is an interest in their contemplated securities offering before filing an offering statement with the SEC.  This gives companies the opportunity of being able to determine whether enough market interest in their securities exists before they incur the full range of legal, accounting, and other costs associated with filing an offering statement with the SEC.  Companies may not, however, solicit or accept money for securities offered under Regulation A until the SEC staff completes its review of the filed offering statement and the company delivers offering materials to investors.

The Accredited Investor Exemption—Section 4(a)(5) of the Securities Act

Section 4(a)(5) of the Securities Act exempts from registration offers and sales of securities to accredited investors when the total offering price is less than $5 million.

The definition of accredited investor is the same as that used in Regulation D (summarized above).  Like the exemptions in Rule 505 and 506, this exemption does not permit any form of general solicitation or advertising.  There are no document delivery requirements, but all transactions are subject to the antifraud provisions of the securities laws.

Intrastate Offering Exemption – Intrastate Crowdfunding Under Section 3(a)(11)

Section 3(a)(11) of the Securities Act is generally known as the “intrastate offering exemption.”  This exemption facilitates the financing of local business operations.  To qualify for the intrastate offering exemption, a company must be organized in the state where it is offering the securities; carry out a significant amount of its business in that state; and make offers and sales only to residents of that state.

The intrastate offering exemption does not limit the size of the offering or the number of purchasers. A company must determine the residence of each offeree and purchaser.  If any of the securities are offered or sold to even one out-of-state person, the exemption may be lost.  Without the exemption, the company could be in violation of the Securities Act.

If a purchaser resells any of the securities to a person who resides outside the state within a short period of time after the company’s offering is complete (the usual test is nine months), the entire transaction, including the original sales made within the required state, might violate the Securities Act.

A company may have difficulty relying on the intrastate exemption unless its knows the persons to whom the securities are offered and the actual purchasers, and the sale is directly negotiated with them.  If a company holds some of its assets outside the state, or derives a substantial portion of its revenues outside the state where it proposes to offer its securities, it may also have difficulty qualifying for the exemption.

A company may follow Rule 147, a “safe harbor” rule, to ensure that it meets the requirements for the intrastate offering exemption.  It is possible, however, that transactions not meeting all the requirements of Rule 147 may still qualify for the exemption.

Resales of Restricted Securities

“Restricted securities” are securities that are not freely tradable because the sale transaction from the issuer to the security holders was not registered.  Under these circumstances, the holder can only resell the securitiesusing an “effective” registration statement under the Securities Act or a valid exemption from the registration requirements of the Securities Act for the resale, such as Rule 144 under the Securities Act.

If holders of restricted securities want to resell using an effective registration statement, the issuing company can file a registration statement for them to make sales in a public offering by following the process discussed above for registering a public offering of securities.  This type of registration statement is known as a secondary or resale registration.

Alternatively, a holder of restricted securities can resell using an exemption from registration.  For example, Securities Act Rule 144 provides an exemption that 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.

Shareholders selling shares using Rule 144 must obtain a legal opinion from a securities attorney for the company’s transfer agent.

State Law Requirements

State governments have their own securities laws and regulations that apply to unregistered offerings including Regulation D offerings and crowdfunding.  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).  A particular offering exempt under the federal securities laws is not necessarily exempt from any state laws.  Each state’s securities laws have their own separate registration requirements and exemptions to registration requirements.  State securities regulators and more information about state securities laws, can be found on the website of the North American Securities Administrators Association (NASAA).

For more information about going public, please contact Brenda Hamilton, securities attorney at [email protected].

For further information about this securities law blog post, please contact Brenda Hamilton, Going Public Lawyer at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit  This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  For more information about going public and the rules and regulations affecting the use of Rule 144, Form 8K, crowdfunding, FINRA Rule 6490, Rule 506 private placement offerings and memorandums, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration statements on Form S-1 , IPO’s, OTC Pink Sheet listings, Form 10 OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, direct public offerings and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or [email protected].  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855