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 a Private Offering Exemption?

Section 4(a)(2) - Section 4(a)(2) provides that, the provisions of section 5 shall not apply to transactions by an issuer not involving any public offering. The SEC has deemed certain transactions to constitute private offerings and fall outside of the scope of a public offering. That is, the securities are not being sold in a public offering and, therefore, are exempt from the registration and reporting requirements of Section 5. 

Note: Rule 506, discussed in a separate lesson, is a safe harbor for the Section 4(a)(2) exemption. That is, if you follow the requirements of Rule 506, but fail to perfect the exemption, you may still qualify for an exemption under Section 4(a)(2). The requirements for exemption under Rule 506 are less stringent than those under Section 4(a)(2). For example, Rule 506 allows for purchase by non-sophisticated investors through an agent (purchaser representative). The main advantage of having this safe harbor provision is that, in the event the issuer fails to meet the requirements, it may still attempt to claim the exemption under Section 4(a)(2) or another exemption. 

What are the Characteristics of a Section 4(a)(2) Exemption?

The characteristics of a section 4(a)(2) offering are as follows: 

Exempt Transactions - Section 4 provides for a long list of exempt transactions that include: transactions falling under Section 4(2) and Reg. D and Rule 144A; securities issued as compensation Rule 701; cross-border rights and exchanges for business combinations: Rule 800-802; and foreign issuances: Reg. S (Rules 901-905). 

What are the Benefits of Section 4(a)(2)?

Section 4(a)(2) allows for the following benefits: there is no geographical limitations on the issuance within the United States, an unlimited number of offerees and investors, and there is no limit upon the amount of money raised in the issuance. 

What are the Limitations of Section 4(a)(2)? 

The following limitations apply to a section 4(a)(2) exemption: 

• Disclosure - Prospective purchasers must receive the pre-sale, statutory disclosures in the form of a private placement memorandum. 
• Sophistication Requirement - The issuer may offer or sell securities only to investors who are sophisticated and are not in need of the public protections afforded under the SECs regulations. Courts have interpreted this standard to mean that an investor must have the financial ability to bear the risk of loss in the investment or extensive business experience and open access to necessary information. Note: There is no bright-line test for sophistication and financial ability to bear risk under the statute. If the potential investor does not meet the standard of sophistication, the exemption could be lost. If so, any investor who purchased securities within twelve months of the unauthorized offer will have an action to rescind the purchase of the security. 
• Integration - This offering may be integrated with prior offerings within the past 12 months. 
• General Solicitation - The offering cannot involve the general solicitation of purchasers. This concept is discussed further below. 
• Restricted Securities - These are restricted securities. They cannot be resold unless they are held for 6 months (reporting company) or 12 months (not a reporting company), or they are registered prior to resale, or the seller perfects another transactional exemption.

Related Topics

• Securities Law (Intro)
• What are Securities Laws?
• What is a Security?
• What qualifies as an Investment contract?
• What are the primary federal securities laws?
• What are the regulatory goals of security laws?
• What is the Securities and Exchange Commission?
• What is an Initial Public Offering?
• What is a Direct Public Offering?
• What is Crowdfunding?
• Securities Act of 1933
• What is an Offer to Sell securities?
• Who are the parties regulated in an offer to sell securities?
• What are the primary disclosure documents required in an offer to sell securities?
• Forward Looking
• Red Herring Prospectus (Securities) Definition
• Registration of Securities
• What is an issuer allowed to do at each stage of the registration process?
• How are issuers classified for purposes of the registration and offering process?
• What is an issuer allowed to do during the Pre-filing Period?
• What are the limitations on the issuer during the Post-filing, Waiting Period?
• What is an issuer allowed to do during the Post-Effective Period?
• What is an Emerging-Growth Company?
• What type of information must an issuer disclose?
• What laws govern the mechanics of disclosure in a securities offering?
• Deficiency Letter (Securities Law)
• Registration Exemptions Securities Act of 1933
• What are Exempt Securities and Exempt Transactions?
• What are Restricted Securities?
• Section 3(a)?
• Section 3(b)?
• What is a Rule 147 Exemption?
• What is a Section 4(a) Exemption?
• Section 4(a)(5)?
• What is a Regulation A Exemption?
• What are Regulation D Exemptions?
• What is a Rule 504 Exemption?
• What is a Rule 505 Exemption?
• What is a Rule 506(b) Exemption?
• What is a Rule 506(c) Exemption?
• What is Rule 502(d) and the Rule 144 Safe Harbor?
• Rule 144a
• What are the disclosure requirements for companies employing an exemption?
• What is the requirement to file Form D?
• What is the effect of failing to register an offering under Section 5?
• Liability Under the Securities and Exchange Act of 1933
• What is civil liability under Section 11 of the 33 Act?
• What is civil liability under Section 12 of the 33 Act?
• What are defenses available to charges under Sections 11 and 12?
• What is civil liability under Section 17 of the 33 Act?
• What is potential criminal liability under the 33 Act?
• The Security Exchange Act of 1934
• When must an issuer register pursuant to the 34 Act?
• What disclosures are required of reporting companies under the 34 Act?
• What is liability under Section 10(b) and Rule 10(b)(5)?
• What is insider trading under Rule 10(b)(5)?
• What damages are available under Section 10 and Rule 10(b)(5)?
• What is insider trading under Section 14 of the 34 Act?
• What is liability under Section 16 of the 34 Act?
• What is liability under Section 18 of the 34 Act?
• What is criminal liability under the 34 Act?
• Liability under the Securities Enforcement Remedies Act?
• Blue Sky Laws State Securities Laws
• What are Blue Sky Laws?
• When is an issuer required to comply with state securities laws?
• What are the registration requirements under state law?
• What is Coordinated Registration under state law?