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Securities Act Registration Exemptions. Section 4(2) Nine big words “qualified investors” “sophistication” plus “access to information”. (last updated 22 Feb 11). How can an issuer avoid registration? . By the way, what are the “costs” of registration?. § 4 Exempted transactions

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securities act registration exemptions

Securities Act Registration Exemptions

Section 4(2)

Nine big words

“qualified investors”

“sophistication” plus

“access to information”

(last updated 22 Feb 11)

how can an issuer avoid registration

How can an issuer avoid registration?

By the way, what are the “costs” of registration?

§ 4 Exempted transactions

The provisions of section 5 shall not apply to–

(1) transactions by any person other than an issuer, underwriter, or dealer.  

(2) transactions by an issuer not involving any public offering.

securities act of 1933
Securities Act of 1933

Universe (Capital Formation)

Securities offerings

  • No registration
  • Section 3(govt, bank, comm paper, non-profit, intrastate, small)
  • Section 4(public trading -- not involving I, UW, D; not public offering)
  • Registration
  • Section 5 (filing, disclosure, SEC review, liability)


sec v ralston purina us 1953
SEC v. Ralston Purina (US 1953)

Artist, bakeshop foreman, chow loading foreman, clerical assistant, copywriter, electrician, stock clerk, mill office clerk, production trainee, production trainee, stenographer, veterinarian

sec v ralston purina us 19531
SEC v. Ralston Purina (US 1953)

Company’s argument: “Key employee is special … and sympathetic to management.”

1935 SEC general counsel:

  • # offerees
  • Relationship offeree-issuer
  • # of units
  • $ size of offering
  • Manner of offering 
sec v ralston purina us 19532
SEC v. Ralston Purina (US 1953)

“The natural way to interpret the private offering exemption is in light of the statutory purpose. … An offering to those who are shown to be able to fend for themselves is a transaction “not involving any public offering”

Rejection: quantity limits based on $ size, # of offerees

Justice Tom Clark

(JD – Texas, son Ramsey)

hypothetical 1
Hypothetical #1

Petroleum Management Ltd. drills for oil in Wyoming and looks to sell limited partnership interests.

Doran wants to invest. He’s a graduated petroleum engineer worth more than $1 million.  He has bought oil/gas properties worth $850,000.  He reviews PML’s drilling logs and has access to other business info.

Besides Doran, Marty (a mystery investor) also invests. Can Doran rescind?

hypothetical 2
Hypothetical #2

Madeline, about whom we know little, is also approached about investing in PML. 

She signs a document. Madeline invests and then wants out.

If she can rescind, can't PML counterclaim on her rep and warranty, and recover any rescission damages?  After all, she induced the issuer into believing she was qualified.



_________________(the "Purchaser") intends to purchase the Securities from the Happy Drilling Limited Partnership (the "Seller"). 

 For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Purchaser certifies, represents and warrants to, and covenants with, the Seller that: 

 1. The Purchaser understand that (a) the Securities have not been registered or qualified under the Securities Act of 1933, as amended (the "Securities Act"), or the securities laws of any state, (b) the Seller is not required, and does not intend, to so register or qualify the Securities and (c) the Securities cannot be resold unless (i) they are registered and qualified under the Securities Act and applicable state securities laws or (ii) an exemption from registration and qualification is available. 

 2. The Purchaser (a) is a substantial, sophisticated investor having such knowledge and experience in financial and business matters, and in particular in such matters related to securities similar to the Securities, that it is capable of evaluating the merits and risks of investment in such business and the Securities, and (b) is able to bear the economic risks of such an investment. 

 3. The Purchaser has been furnished with, and has had an opportunity to review, all financial data and other information relating to Happy Drilling Ltd. and the Securities requested by the Purchaser. The Purchaser has had any questions arising from or relating to such review answered to the satisfaction of the Purchaser. 

 4. The Purchaser is acquiring the Securities for her own account and not with a view to or for sale in connection with a distribution within the meaning of Section 5 of the Securities Act. 

 5. If the Purchaser sells or otherwise transfers any of the Securities, the Purchaser will obtain from any subsequent purchaser the same certifications, representations, warranties and covenants contained in the foregoing paragraphs and in this paragraph. 

Very truly yours,  Madeline

§ 14 Contrary Stipulations Void  

Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this title or of the rules and regulations of the Commission shall be void.

hypothetical 3
Hypothetical #3

Mark, who has just won the state lottery $20 million jackpot (Lottery – dfn: “tax on the math challenged”).

PML sends Mark an offering circular that looks like a prospectus. 

Mark invests and then wants his money back.

hypothetical 31
Hypothetical #3

Mark, who has just won the state lottery $20 million jackpot (Lottery – dfn: “tax on the math challenged”).

PML sends Mark an offering circular that looks like a prospectus. 

Mark invests and then wants his money back.

Warren Buffett

hypothetical 4
Hypothetical #4

Martha manages Oil&Gas Partners III, a $200 million venture capital fund.  She has her VC fund invest in PML – along with 25 other institutional investors.

But Martha never receives drilling logs, though she had requested them. Now she wants out.

hypothetical 5
Hypothetical #5

OGF sells its investment to mystery Marty.  Anything to keep OGF from getting out this way?

Not “qualified” investor

“Qualified” investor


hypothetical 6
Hypothetical #6

Petroleum Management (not a public company) wants to sell shares to its employees. It offers a "Employee Stock Ownership Plan" for any employee who takes the initiative to ask. Many employees participate including riggers, loading foremen, stenographers, office clerks, production trainees, and electricians.  Is registration required? 

What if PML goes public and becomes a reporting company.

esops today
ESOPs today!
  • Public companies
  • See Form S-8
  • Pursuant to written plan
  • Purchasers: Eees, (family members)
  • No limits on amount
  • Disclosure: plan, refer to SEC filings
  • Describe any restrictions

Non-public companies

See Rule 701

  • Pursuant to written plan
  • Purchasers: Ds, Os, Eees, consultants/advisors (family members)
  • Up to each 12 months (greater of)
    • $1,000,000
    • 15% of net assets
    • 15% of outstanding shares
  • Disclosure: plan, Reg A financials, how pay/withdraw
  • Becomes “restricted stock”