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Section 4(a)(5) Statutory Exemption to Accredited Investors

Section 4(5), Statutory Exemption to Accredited Investors

Under Section 4(a)(5) of the 33 Act (formerly Section 4(6)), offerings solely to accredited investors where there is no advertising or public solicitation are exempt from the registration and prospectus delivery requirements of the 33’ Act. The maximum offering amount cannot exceed $5,000,000 and a notice of sale must be filed with the SEC. 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. For example, the securities sold under section 4(a)(5) constitute “restricted securities” under Rule 144(a)(3).  This means that any future sales of the securities by purchasers may require registration. Failure to do so may affect the validity of the original section 4(6) offering. Another negative is that securities exempted under section 4(a)(5), like some other statutory exemptions, don’t fall within the meaning of a federally covered security. The result is that federal law does not preempt state laws regulating the securities. This would largely defeat the benefits of the limited exemption.

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  1. Securities sold under Regulation D exemptions also constitute “restricted securities” under Rule 144(a)(3) do they not? The discussion above is confusing in this respect; the distinction the author meant to highlight is unclear.

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