Section 4(a)(7)’s Private Securities Resale Exemption

As a crowdfunding attorney, most of my attention has been focused on the US federal JOBS Act, the new federal legislation that President Obama signed into law in 2013, the final rules of which only went into effect in 2016.

Another significant, recent amendment to the federal securities laws was enacted on December 4, 2015 when President Obama signed the Fixing America’s Surface Transportation (FAST) Act.  Remarkably, the primary emphasis on this legislation was not to change the securities laws, but rather to provide long-term funding for surface transportation infrastructure planning and investment.

Despite being focused on transportation infrastructure financing, the FAST Act added a new securities registration exemption, codified as Section 4(a)(7) of the Securities Act of 1933, as amended.  Section 4(a)(7) applies to resales of securities that investors purchase in a private placement offering.  These types of issuers are almost exclusively the types of clients I have represented in my career.  In the past, the SEC rules required investors to hold their private securities for at least a year before re-selling (provided that the company itself allowed such resale).  The SEC was primarily concerned with underwriting transactions involving a broker/dealer who would purchase the shares of the private company stock and immediately sell them to their investor network, much as an issuer does in an IPO.  This prohibition against underwriting is included in the new Section 4(a)(7) exemption, which provides that resales may occur without regard to the investor’s holding period if all of the following conditions are satisfied:

The purchaser must be an “accredited” investor.  Note that there is no language in the statute requiring the verification of the investor’s status as “accredited” so self-verification is acceptable.

No general solicitation or advertising is allowed in connection with the transaction.

I am assuming for the sake of this article that the issuer is not a “reporting” company (that is, its business information is not required to be reported publicly under the Exchange Act).  In that case, the issuer must have agreed to make available the following information: its name and the names of any of its predecessors; the address of its principal executive offices; the exact title and class of the security; the par or stated value of the security; the number of shares or total amount of the securities outstanding as of the end of the issuer’s most recent fiscal year; the name and address of the transfer agent, corporate secretary, or other person responsible for transferring shares and stock certificates; a current statement of the nature of the business of the issuer and the products and services it offers; the names of the officers and directors of the issuer; the names of any persons registered as a broker, dealer, or agent that shall be paid or given, directly or indirectly, any commission or remuneration for such person’s participation in the offer or sale of the securities; the issuer’s current balance sheet and profit and loss statement and similar financial statements for the prior 2 years or for such part of the 2 preceding fiscal years as the issuer has been in operation, prepared in accordance with GAAP.

If the seller is a control person with respect to the issuer, a brief statement regarding the nature of the affiliation, and a statement certified by such seller that they have no reasonable grounds to believe that the issuer is in violation of the securities laws or regulations.

The seller cannot be subject to the disqualification provisions of Rule 506(d).  These provisions primarily preclude the use of either Rule 506 exemption by persons who previously have been convicted of, or found liable for (through an administrative determination), securities fraud.

The issuer must actually be engaged in business and is not in the organizational stage, in bankruptcy or receivership, and is not a blank check, blind pool, or shell company that has no specific business plan or purpose or has indicated that the issuer’s primary business plan is to engage in a merger or combination of the business with, or an acquisition of, an unidentified person.

As noted above, no underwriter may be involved in the transaction.

The sale must be with respect to a security of a class that has been authorized and outstanding for at least 90 days prior to the date of the transaction.

Note that the issuer must agree to permit transfers.  The issuer is obligated to disclose the rules regarding transferability in advance of the time that the purchaser acquires their shares, and typically, the issuer’s primary concerns are that it can keep track of who its shareholders are, and that the exemption that it relied on to sell its private securities is not affected adversely by the subsequent resale of the securities.

To learn more about how this new Section 4(a)(7) exemption might be able to help you in your business, please call me to discuss.