The Section 4(a)(2) Exemption – Exempt Offerings

Section 4-a-2 Exemption

Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) provides an exemption from the SEC’s registration statement requirements for transactions by an issuer and do not involve a public offering of securities. Section 4(a)(2) is also known as the private placement exemption and is the most widely used exemption for securities offerings in the U.S. The exemption allows an issuer to raise an unlimited amount of capital in private transactions from sophisticated investors who are able to fend for themselves. Both private and publicly traded companies can rely on the Section 4(a)(2) exemption. Shares sold in reliance upon Section 4(a)(2) are restricted securities and may not be resold by purchasers in the offering absent SEC registration or an exemption therefrom.

In SEC v. Ralston Purina Co., 346 U.S. 119 (1953), the U.S. Supreme Court confirmed the position of the SEC that offers and sales to a large number of Ralston Purina’s employees under its stock grant plan did not qualify for the exemption provided by Section 4(a)(2). The Ralston Purina decision provides important factors to consider when relying on the Section 4(a)(2) exemption from SEC registration:

  • For purposes of determining whether the Section 4(a)(2) is a private offering, both offerees and purchasers are considered,
  • The number of offerees is not an exclusive means of determining the availability of Section 4(a)(2),
  • either have enough knowledge and experience in finance and business matters to be “sophisticated investors” who are able to evaluate the risks and merits of the investment, or be able to bear the investment’s economic risk; and
  • have access to the type of information normally provided in a prospectus of a SEC registration statement such as Form S-1.

The informational requirements of Section 4(a)(2) are commonly satisfied by providing investors with a private placement memorandum containing information similar to that in a registration statement under the Securities Act. In general, public advertising of the offering, and general solicitation of investors, is incompatible with the Section 4(a)(2) exemption. As the number of investors increases and their relationship to the company and its management becomes more remote, it is more difficult to demonstrate that the offering qualifies for this exemption. If a company offers securities to even one person who does not meet the necessary conditions, the securities offering may be in violation of the Securities Act and a rescission offering may be required.

Hamilton & Associates Law Group, P.A provides ongoing corporate and securities counsel to private companies and public companies listed and publicly traded on the Frankfurt Stock Exchange, London Stock Exchange, NASDAQ Stock Market, the NYSE MKT and OTC Markets. For two decades the Firm has served private and public companies and other market participants in corporate law matters, securities law and going public matters. The firm’s practice areas include, but are not limited to, forensic law and investigations, SEC investigations and SEC defense, corporate law matters, compliance with the Securities Act of 1933 securities offer and sale and registration statement requirements, including Regulation ARegulation A+ , private placement offerings under Regulation D including Rule 504 and Rule 506 and Regulation S and PIPE Transactions as well as registration statements on Forms S-1Form F-1,  Form S-8 and Form S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including Form 8-A and Form 10 registration statements, reporting on Forms 10-QForm 10-K and Form 8-KForm 6-K and SEC Schedule 14CInformation and SEC Schedule 14A Proxy Statements; Regulation A / Regulation A+ offerings; all forms of going public transactions; mergers and acquisitions; applications to and compliance with the corporate governance requirements of national securities exchanges including NASDAQ and NYSE MKT and foreign listings; crowdfunding; corporate; and general contract and business transactions. The firm provides preparation of corporate documents and other transaction documents such as share purchase and exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The firm prepares the necessary documentation and assists in completing the requirements of federal and state securities laws such as FINRA and DTC for Rule 15c2-11 / Form 211 trading applications, corporate name changes, reverse and forward splits, changes of domicile and other transactions. The firm represents clients in London, Dubai, India, Germany, India, France, Israel, Canada and throughout the U.S.