Section 4(a)(2) and Rule 506(b) Exempt Offerings – Securities Lawyer 101

Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) exempts Rule 506(b) securities offerings from the SEC’s registration requirements when the transactions are by an issuer and do not involve a public offering of securities. Rule 506(b) is used by both private and public companies seeking to raise capital without the use of general solicitation and advertising.

To qualify a securities offering for the Section 4(a)(2) exemption, investors in the offering must:

• either have enough knowledge and experience in finance and business matters to be “sophisticated investors” who are able to evaluate the risks and merits of the investment, or be able to bear the investment’s economic risk; and
• have access to the type of information normally provided in a prospectus of a SEC registration statement such as Form S-1.

In general, public advertising of the offering, and general solicitation of investors, is incompatible with the Section 4(a)(2) exemption. As the number of investors increases and their relationship to the company and its management becomes more remote, it is more difficult to demonstrate that the offering qualifies for this exemption. If a company offers securities to even one person who does not meet the necessary conditions, the securities offering may be in violation of the Securities Act.

Rule 506(b) of Regulation D is a “safe harbor” under Section 4(a)(2).

Companies can rely on Rule 506 (b) to meet the requirements of the Section 4(a)(2) exemption. Companies conducting an offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors and up to thirty-five non-accredited investors.

Securities Offerings under Rule 506(b), are subject to the following requirements:

• The company cannot use general solicitation or advertising to offer or sell the securities.
• All non-accredited investors, either alone or with a purchaser representative, must meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment.

If non-accredited investors are investing in the securities offering:

• The Company must provide any non-accredited investors disclosure documents that generally contain the same type of information as provided in a registration statement under the Securities Act. Even though the company is not required to provide specified disclosure documents to accredited investors, if it does provide information to accredited investors then it must also provide this information to the non-accredited investors in the securities offering.
• The Company must give any non-accredited investors financial statement information specified in Rule 506.
• Management of the Company should be available to answer questions from prospective non-accredited investors.

Purchasers in a Rule 506(b) offering receive “restricted securities.”

Companies conducting offerings under Rule 506(b) must file a Form D with the SEC within 15 days after the first sale of securities in the offering. Although the Securities Act provides a federal preemption from state registration and qualification of the offering under Rule 506(b), the states still have authority to require notice filings and collect state filing fees.

Rule 506 (b)offerings are subject to “bad actor” disqualification provisions.

This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates Law Group, P.A provides ongoing corporate and securities counsel to private companies and public companies listed and publicly traded on the Frankfurt Stock Exchange, London Stock Exchange, NASDAQ Stock Market, the NYSE MKT and OTC Markets. For two decades the Firm has served private and public companies and other market participants in corporate law matters, securities law and going public matters. The firm’s practice areas include, but are not limited to, forensic law and investigations, SEC investigations and SEC defense, corporate law matters, compliance with the Securities Act of 1933 securities offer and sale and registration statement requirements, including Regulation A/ Regulation A+ , private placement offerings under Regulation D including Rule 504 and Rule 506 and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, Form F-1,  Form S-8 and Form S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including Form 8-A and Form 10 registration statements, reporting on Forms 10-Q, Form 10-K and Form 8-K, Form 6-K and SEC Schedule 14CInformation and SEC Schedule 14A Proxy Statements; Regulation A / Regulation A+ offerings; all forms of going public transactions; mergers and acquisitions; applications to and compliance with the corporate governance requirements of national securities exchanges including NASDAQ and NYSE MKT and foreign listings; crowdfunding; corporate; and general contract and business transactions. The firm provides preparation of corporate documents and other transaction documents such as share purchase and exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The firm prepares the necessary documentation and assists in completing the requirements of federal and state securities laws such as FINRA and DTC for Rule 15c2-11 / Form 211 trading applications, corporate name changes, reverse and forward splits, changes of domicile and other transactions. The firm represents clients in London, Dubai, India, Germany, India, France, Israel, Canada and throughout the U.S.