By: Krishnakala Busani
United States Securities Act of 1933
Businesses that sell stock or debt securities to investors are typically required to comply with the registration requirements of U.S. Securities Act of 1933. However, some businesses can avoid registration requirements if they qualify for certain exemptions or structure their offerings to fall into exempt categories.
There are many benefits for a business to shape their offerings to offer more exempt options; as exempt offerings are less expensive, require less time, require limited disclosures, and limit liabilities to the business.
Options for Business’s Considering Exempt Offerings
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Section 4(a)(2)
Businesses can claim this exemption by limiting the offering to a limited number of “Sophisticated Investors”, subject to other additional requirements. In order to be eligible for this exemption, only ‘Sophisticated Investors’ may receive the offerings. A ‘Sophisticated Investor’ is primarily defined as someone with the knowledge and experience to evaluate the risks and merits of an investment.
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Regulation D
Regulation D offers three “safe harbors” for conducting a valid private placement. The first is only available to non-reporting companies. This exemption applies when the aggregate price of the offering is limited to $10 million in a 12-month period. The other safe harbors are available to both reporting and non-reporting companies. These offerings are limited to “Accredited Investors”, who are defined by SEC and include, high-net worth investors, related parties, etc.
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Rule 144A
This is another safe harbor exemption that is applicable to “Qualified Institutional Buyers”- a term that is defined by the SEC to include the most sophisticated investors who own and invest in an aggregate at least $10 - $100 million (depending on the nature of investor) in securities.
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Sections 4(a)(1/2) and 4(a)(7)
These are additional exemptions that are available to sophisticated investors and qualified investors. Businesses should consult an expert to determine if these exemptions can apply.
Conclusion
Structuring an unregistered offering depends on the type of securities being offered, the registration exemptions and safe harbors being relied on, and the time frame involved. There are many additional exemptions that may apply, and businesses looking to avoid registration requirements should research different possible offerings to make sure they choose the best option for their business. Please contact the Chugh, LLP legal team if you need any assistance in structuring a private placement offering or would like to learn more about which exemptions may apply to your business.
