Exempt Offerings Beyond Regulation D

Regulation A: the public offering that is not registered

Regulation A, Rules 251 through 263, is an exemption under Securities Act Section 3(b), and it behaves less like a private placement than like a small registered offering. The securities are sold publicly and come out freely tradeable. What the issuer avoids is full Securities Act registration and Exchange Act reporting.

It has two tiers, and the caps are measured as the aggregate offering price plus gross proceeds from other offering statements in the twelve months before and during the offering.

Tier 1 is capped at twenty million dollars, of which no more than six million may be sold by selling securityholders who are affiliates of the issuer.

Tier 2 is capped at seventy-five million dollars, of which no more than twenty-two and a half million may be affiliate secondary sales.

Tier 2 carries three things Tier 1 does not. An investment limitation: where the securities will not be listed on a national securities exchange on qualification, a purchaser who is not an accredited investor may not invest more than ten percent of the greater of their annual income or net worth, and the issuer may rely on the purchaser's representation unless it knows otherwise. Audited financial statements. And ongoing reporting under Rule 257 — an annual report on Form 1-K, a semiannual report on Form 1-SA covering the first six months of each fiscal year, and current reports on Form 1-U.

Tier 2 offerings are also covered securities preempted from state registration. Tier 1 offerings are not, and must clear blue sky in every state where they are sold.

The issuer files an offering statement on Form 1-A, which the Commission QUALIFIES rather than declares effective. Rule 255 permits "testing the waters": before qualification, and even before filing, the issuer may communicate orally or in writing to gauge interest. Two conditions matter. Those communications are deemed offers for purposes of the antifraud provisions — so they may not be misleading. And no money, consideration or binding commitment may be solicited or accepted until the offering statement is qualified.

Regulation A is not available to every issuer. Investment companies, blank-check companies, issuers of fractional undivided interests in oil, gas or mineral rights, and issuers disqualified under Rule 262's bad-actor provision are excluded, as are companies delinquent in their Regulation A reporting.

Regulation S: offshore, and the two things that must be true

Regulation S, Rules 901 through 905, rests on a territorial reading of Section 5: the registration requirement does not reach offers and sales that occur outside the United States. Rule 901 states that general principle; Rules 903 and 904 are safe harbours, 903 for the issuer and its distributors and 904 for resales.

Two general conditions apply to both safe harbours.

The sale must be an OFFSHORE TRANSACTION — broadly, the offer is not made to a person in the United States and either the buyer is outside the United States when the buy order originates, or the transaction is executed on a designated offshore securities market.

There must be no DIRECTED SELLING EFFORTS in the United States. The rule defines these as any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the US market for the securities — and names, as an example, placing an advertisement in a publication with a general circulation in the United States that refers to the offering.

Rule 903 then sorts securities into three categories by the risk that they flow back into the United States.

Category 1 carries no conditions beyond the two general ones. It covers securities of foreign issuers with no substantial US market interest, offerings directed to a single foreign country under local law, and certain employee benefit plans.

Category 2 applies to equity of a reporting foreign issuer and to debt of a reporting issuer or a non-reporting foreign issuer, and imposes a 40-day distribution compliance period.

Category 3 is everything else — including equity of a domestic issuer — and imposes a one-year distribution compliance period, or six months if the issuer is a reporting issuer, plus certification, legending and other conditions.

Rule 905 is the one to remember for a US company: equity securities of DOMESTIC issuers acquired from the issuer, a distributor or their affiliates under Regulation S are deemed restricted securities as defined in Rule 144, and stay restricted even after an offshore resale. Regulation S is not a laundry for domestic restricted stock.

One practical note connecting back to the last lesson: Rule 152(b)(2) says Regulation S offerings are never integrated with domestic ones, so a concurrent Regulation S and Regulation D offering is a normal structure rather than a problem to be solved.

Crowdfunding and the intrastate rules

Regulation Crowdfunding implements Securities Act Section 4(a)(6). The statute says one million dollars, and it is one of the clearest examples of why you read the rule rather than the statute: the Commission indexes these figures for inflation, and Rule 100 of Regulation Crowdfunding currently caps the aggregate amount sold in reliance on Section 4(a)(6) in the preceding twelve months at five million dollars.

Where the purchaser is not an accredited investor, there is also a limit across ALL issuers in the preceding twelve months: the greater of two thousand five hundred dollars or five percent of the greater of the investor's annual income or net worth, if either is less than one hundred and twenty-four thousand dollars; or ten percent of the greater of income or net worth, capped at one hundred and twenty-four thousand dollars, if both are at or above that figure.

The transaction must be conducted exclusively through a single intermediary that is a registered broker or a registered funding portal. An issuer may not use more than one intermediary for an offering.

The two intrastate rules matter less in practice but are cleanly tested because they differ in exactly two ways.

Rule 147 is a safe harbour under the statutory intrastate exemption in Section 3(a)(11). Offers AND sales may be made only to residents of the state in which the issuer is resident and doing business.

Rule 147A is a standalone exemption from Section 5, adopted in 2016. It permits general solicitation and advertising, so OFFERS may reach out-of-state persons — but SALES may be made only to residents of the state. And the issuer need only have its principal place of business in the state; it need not be incorporated there, which Rule 147 effectively requires.

Both use the same "doing business within" test, satisfied by any ONE of: at least 80 percent of consolidated gross revenues from the state; at least 80 percent of consolidated assets located in the state; at least 80 percent of the net proceeds used in the state; or a majority of employees based in the state.

Both impose a six-month limitation on resales, running from the issuer's sale, during which resales may be made only to residents of that state — enforced by a legend and by written disclosure to every offeree and purchaser.

Getting out: Rule 144

Rule 144 is a safe harbour that lets a holder of restricted or control securities sell without being deemed an "underwriter" under Section 2(a)(11) — which is what would otherwise cost them the Section 4(a)(1) exemption. It is the answer to the question every private placement customer eventually asks.

The holding period, in Rule 144(d), depends on the issuer, not the holder. Six months must elapse if the issuer is, and has been for at least 90 days, an Exchange Act reporting company. One year must elapse if it is not. The clock runs from the later of acquisition from the issuer or from an affiliate of the issuer, and where the securities were bought, it does not start until the purchase price has been fully paid.

Most private placement customers hold securities of a non-reporting issuer. For them the number is one year, and it is the beginning of the answer rather than the end, because a private company may have no market to sell into at all.

What happens after the holding period depends on whether the seller is an affiliate.

A NON-AFFILIATE — someone who is not an affiliate at the time of sale and has not been one during the preceding three months — selling restricted securities of a NON-reporting issuer needs only the one-year holding period. Nothing else. For a reporting issuer, after six months they need current public information, and after one year that requirement drops away too.

An AFFILIATE, or anyone selling for an affiliate's account, must satisfy every condition of the rule, permanently.

Current public information about the issuer must be available.

Volume limits apply: in any three-month period, sales may not exceed the greatest of one percent of the outstanding shares of the class, the average weekly reported trading volume during the four calendar weeks preceding the notice filing, or the average weekly volume reported under an effective transaction reporting plan over that same period. For debt securities there is an alternative ten percent of the tranche.

Manner of sale conditions apply to equity — broker's transactions, or directly with a market maker, or through a riskless principal transaction — and the broker may not solicit orders.

And a Form 144 must be filed with the Commission if the amount to be sold in any three-month period exceeds 5,000 shares or units OR has an aggregate sale price above 50,000 dollars, transmitted concurrently with placing the order.

Getting out: Rule 144A and Section 4(a)(7)

Rule 144 is slow. Two other routes are faster, and both appear in the content outline.

Rule 144A permits resales of restricted securities to QUALIFIED INSTITUTIONAL BUYERS without a holding period. Its conditions are few: the securities are sold only to a QIB or to a purchaser the seller reasonably believes is a QIB; the seller takes reasonable steps to ensure the purchaser is AWARE the seller may be relying on Rule 144A; the securities are not, when issued, of the same class as securities listed on a US exchange or quoted in an automated inter-dealer system; and, for a non-reporting issuer, the holder and prospective purchaser have the right to obtain certain basic financial information from the issuer.

That last condition is the one people forget. Rule 144A is not a pure institutional free pass — it carries an information right.

General solicitation is permitted in a Rule 144A offering, provided the securities are sold only to persons the seller reasonably believes are QIBs. That is why a 144A offering can be marketed far more openly than a Regulation D 506(b) deal.

Rule 144A is why the institutional private market has liquidity that the retail private market does not. A hedge fund can sell a restricted bond to another QIB on day one. Your individual customer cannot.

Section 4(a)(7), added by statute in 2015, is a resale exemption for sales to accredited investors. Its conditions, set out in Section 4(d): each purchaser is an accredited investor as defined in Rule 501(a); neither the seller nor anyone acting on the seller's behalf engages in general solicitation or general advertising; and, where the issuer is not an Exchange Act reporting company and not exempt under Rule 12g3-2(b), the seller must make specified reasonably current information about the issuer available to the prospective purchaser — the issuer's exact name, its business, its officers and directors, its most recent balance sheet and profit and loss statements, and more.

Securities sold under Section 4(a)(7) remain restricted securities. The exemption gets one holder out; it does not free the stock.