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.

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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.

Discussion: Why do you think the securities laws allow for a statutory exemption from registration of private offerings that meet the requirements of section 4(a)(2)? What about 4(a)(5)? Can you see how the restrictions on section 4(a)(5) make it a rarely-used exemption?

Practice Question: ABC Corp is your employer and is considering a private issuance of securities. As a consultant for ABC Corp, you want to make certain that they understand the limitations and restrictions that apply to an issuance under Section 4. If asked, can you explain the limitations that apply to section 4(a)(2) and 4(a)(5)?