Federal Exemptions (15 United States Code § 77)

Small Offerings – Regulation A

Regulation A (17 Code of Federal Regulations § 230.251 to § 230.262) permits the offering of up to $5 million of securities in a year without complying with all registration and disclosure requirements. If the Regulation A exemption is available, a shorter form of federal registration is permitted. Full state registration may be required, however.

A simplified disclosure form may be used. Although the federal securities laws generally do not permit advertising prior to registration, recent amendments to Regulation A allow small companies to test investor interest through a written solicitation of interest document before proceeding with a full, and costly, registration.

The Intrastate Exemption

The intrastate exemption applies to securities offerings which are confined to a single state and which are purely local in nature. The scope of the intrastate exemption is extremely narrow, and even though the offering is exempt from federal regulation, it is subject to state law requirements. To qualify for the intrastate exemption, the securities must be part of an issue that is offered and sold only to residents of a single state. The issuer must be a resident of the same state and must have its principal place of business there. If the issuer is a corporation it also must be incorporated in that state. There are restrictions on subsequent sales of the securities, and the issuer must take certain precautions against interstate offers and sales.

Private Placements and Limited Offerings – Regulation D Exemption

The Regulation D exemptions (17 Code of Federal Regulations § 230.501 to § 230.508) authorize the offer and sale of securities through certain private placement transactions. There are restrictions on the number and amount of sales, and on publicity, advertising or solicitation, and resale. Notice of Regulation D offerings must be filed with the Securities and Exchange Commission, but the full registration and disclosure requirements of a public offering need not be met.

Regulation D includes three exemptions:

  • Rule 504 provides an exemption for offerings up to $1 million during the twelve months before the start of and until the completion of the offering. Purchasers need not meet any suitability test and there is no limit on the number of purchasers to whom the offerer can sell.
  • Rule 505 provides an exemption for offerings up to $5 million during the twelve months before the start of and until the completion of the offering. Sales may be made to an unlimited number of accredited investors (defined below), but may not be made to more than 35 non- accredited investors.
  • Rule 506 permits a company to sell an unlimited dollar amount of securities. Sales may be made to an unlimited number of accredited investors, but may not be made to more than 35 non-accredited investors, each of whom must be a “sophisticated investor.”

For the purpose of Rules 505 and 506, an “accredited investor” includes:

  • certain types of financial institutions such as banks, broker-dealers and investment companies;
  • entities with total assets in excess of $5 million (not formed for the purpose of investing in the offering);
  • any director, executive officer or general partner of the company;
  • any natural person whose net worth (alone or jointly with spouse) exceeds $1 million not including the value of the investor’s primary residence. The exclusion of the value of the primary residence was added by Section 413 of the Dodd Frank Wall Street Reform and Consumer Protection Act which was signed into law on July 21, 2010. The Securities and Exchange commission has indicated that the new exclusion has immediate effect;
  • any natural person whose individual income exceeds $200,000 (or jointly with spouse, $300,000) for each of the past two years, and is expected to exceed that amount in the current year;
  • any trust with assets greater than $5 million that are managed by a sophisticated trustee (and not formed for the specific purpose of investing in the offering); and
  • any entity in which all of the equity owners are accredited investors.

CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.