What is a Section 4 exemption from registration under the 33 Act?
Section 4 provides for two statutory exemptions from registration of securities by an issuer. The exemptions available under Section 4 of the 33 Act provide for transactional exemptions for the securities, rather than a blanket exemption for the security itself.
What is Section 4(a)(5)?
Statutory Exemption for Accredited Investors – Section 4(a)(5) -Section 4(a)(5) of the 33 Act provides a statutory exemption for securities sold in accordance with its provisions.
Note: The notable difference between Section 4(a)(5) and Regulation D exemptions is that Regulation D also allows for sales to non-accredited investors. Section 4(a)(5) is rarely used as a stand-alone exemption. The reason is because this statutory exemption generally fits within the rule-based exemptions of regulation D (Rules 505 and 506, for example), but does not contain many of the benefits.
What are the Limitations of a Section 4(a)(5) statutory exemption?
The following limitations apply to a Section 4(a)(5) issuance:
- Disclosure – The issuer must provide a prospectus to purchases that complies with 33 Act disclosure provisions;
- Accredited Investors – The issuer can only offer and sell securities to accredited investors;
- General Solicitation – The issuer cannot undertake any advertising or other forms of general solicitation of purchasers;
- Dollar Value – The maximum offering amount cannot exceed $5,000,000;
- Notice – The issuer must provide notice of sale to the SEC;
- Restricted Securities – Securities sold under section 4(a)(5) constitute “restricted securities” under Rule 144(a)(3) and cannot be resold in the future without registration or perfection of a separate exemption; and
- State Registration – Securities exempted under section 4(a)(5), like some other statutory exemptions, do not fall within the meaning of a federally covered security. The result is that federal law does not preempt state laws regulating the securities.
