The Private Offering Exemption From SEC Registration Requirements
Section 4(2) of the Securities Act of 1933 exempts sales of a company’s securities from federal registration requirements if the sales do not involve a public offering. In such private offerings, the company remains liable for damages arising from false or misleading statements and may still remain subject to registration or disclosure requirements under state laws. However, if the private offering exemption of Section 4(2) applies, some of the burden and expense of SEC registration and reporting requirements may be avoided.
In making the private offering, the company must not use any public solicitation such as “cold” sales calls or general advertising concerning the offering. Providing private offering securities to just one person who does not meet the requirements for purchasers may make the entire offering a violation of the Securities Act. Beyond that bright line, however, applicability of the private offering exemption becomes less defined as the number of purchasers of the private offering increases and their relationship to the seller becomes more remote.
Rule 506 of the Commission provides a “safe harbor” rule that also may be used to determine applicability of the private offering exemption. Rule 506 provides that securities may be sold to an unlimited number of “accredited investors” such as banks or higher net worth individuals and up to 35 other purchasers. However, even the non-accredited investors must be considered “sophisticated” or able to evaluate the risks of the proposed investment.
“Accredited investor” is a term of art that includes:
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