Private Placements: Selected Exemption and Disclosure Issues (as of September 15, 2020)

September 15, 2019

By: John A. Eckstein and Gil B. Selinger

For more information please read Information for the Small Businessperson Considering Selling Securities.


The following article provides an overview of the basic private offering and resale exemptions and “safe harbors” available to issuers and investors under the Securities Act of 1933 (the "Securities Act"). The private offering exemption in particular has increasingly been used for offerings of novel or complex securities and during times of market downturns and market uncertainties.  


The term "public offering" is not defined in the Securities Act. The contours of the non-public offering exemption have been established by interpretations of the Securities Act by the Securities and Exchange Commission (the "SEC") and the courts.

In Securities Act Release No. 33-285 (January 24, 1935) the SEC indicated that the following four factors should be considered in determining whether an offering is public:

  • The number of offerees and their relationship to each other and to the issuer. The focus is on the number of offerees, not the actual purchasers. The basis on which the offerees are selected and the relationship between the issuer and the offerees are significant. An offering to the members of a class who should have special knowledge of the issuer is less likely to be a public offering than an offering to the same number of persons who do not have that advantage.
  • The number of securities offered.
  • The size of the offering.
  • The manner of offering. Transactions which are effected by direct negotiation by the issuer are more likely to be considered non-public than those effected through the use of the mechanisms of public distributions.

Absent an exemption from registration, every securities transaction that uses the U.S. mails or other means of interstate commerce must be registered with the U.S. Securities and Exchange Commission. The most common issuer exemptions under the Securities Act are the following:

  • Section 4(a)(2)];
  • Section 4(a)(5);
  • Regulation D, including Rules 504, 506(b) and 506(c);
  • Regulation S; and
  • Rule 701.

Of these, the issuer "private offering" exemptions are:

  • Section 4(a)(2) of the Securities Act, which provides a statutory exemption for "transactions by an issuer not involving any public offering."
  • Rule 506(b) of Regulation D, which provides a “safe harbor” for an issuer engaged in a non-public offering to persons who may or may not be “accredited.”
  • Rule 506(c) of Regulation D, by which Congress provided a new exemption for an issuer engaged in general advertising to accredited investors only.

The issuer must [in Section 4(a)(2) or Rule 506(b)] demonstrate that the offering (a) meets the requisite offeree/purchaser qualification requirements and informational requirements, (b) should not be integrated with another exempt or registered offering, (c) does not [in Section 4(a)(2) or Rule 506(b)] involve any general solicitation or advertisement, and (d) includes appropriate resale restrictions. Effective September 23, 2013, the new exemption Rule 506(c) under the JOBS Act permits general advertising and general solicitations.  Rule 506(c) is discussed below under “III. General Solicitation Issues.”

The securities issued and sold to purchasers are so-called "restricted" securities. There are at least seven ways for investors to resell in a single transaction the restricted securities received in a private placement:

  • register the securities (e.g., in the "public equity" side of a PIPE transaction);
  • sell the securities directly to qualified institutional buyers ("QIBs") pursuant to SEC Rule 144A (which was amended by the SEC to comply with the JOBS Act);
  • resell the securities through an offshore transaction pursuant to the resale provisions of SEC Regulation S;
  • sell the securities to the public in a transaction not involving a distribution as defined by SEC Rule 144;
  • sell the securities pursuant to the SEC Rule 144(k) (fully available to non-affiliates after one (1) year)
  • sell the securities in a "4(a)(1 and 1/2)" transaction; and
  • sell the securities pursuant to the FAST Act (since 2016) under 4(a)(7)

Hereinafter all regulations and rules are as promulgated by the Securities and Exchange Commission unless otherwise indicated.

I.    Section 4(a)(2) and Rule 506(b) Requirements

A. Exemptions Only For Issuers

  • Section 4(a)(2) and Rule 506 are limited to offerings by an issuer; resales by underwriters and affiliates of an issuer must rely on another exemption.

B. Only Qualified Offerees

  • Section 4(a)(2) private offering: Limited to persons capable of fending for themselves. See SEC v. Ralston Purina, 246 U.S. 119 (1953) ("Ralston Purina"). In Ralston Purina the Supreme Court addressed the Section 4(a)(2) exemption [then it was Section 4(2)]. It remains the only Supreme Court interpretation of this exemption.
    • Unlike the earlier SEC Release, the Court did not focus on the "quantity" of offerees involved but instead focused on the "quality" of those persons. The Court stated that "nothing prevents the [SEC], in enforcing the statute, from using some kind of numerical test in deciding when to investigate particular exemption claims. But there is no warrant for superimposing a quantity limit on private offerings as a matter of statutory interpretation." Id. at 125.
    • The Court stated that the "design of the [Securities Act] is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions . . . [T]he applicability of [§4(a)(2)] should turn on whether the particular class of persons affected needs the protection of the Act." Id. at 124-25.
    • The Court noted that an offering to persons who are shown to be able to "fend for themselves" is a transaction not involving any public offering. In determining whether a person is capable of fending for himself, the Court appeared to be concerned with whether the offeree (1) had access to the kind of information which registration would disclose and (2) was financially sophisticated.
    • In Lively v. Hirschfeld, 440 F.2d 631, 633 (10th Cir. 1971), the Court of Appeals limited the private offering exemption to include "only persons of exceptional business experience, and [those in] a position where they have regular access to all the information and records which would show the potential for the corporation." In SEC v. Continental Tobacco, 463 F.2d 137 (5th Cir. 1972), the Court of Appeals required the issuer to prove that each offeree had a relationship with the issuer giving access to the kind of information that registration would have disclosed. In Doran v. Petroleum Management Corp., 545 F.2d 893, 903 (5th Cir. 1977), the Court of Appeals determined that access to information about the issuer can be provided either through direct disclosure to the offeree or by means of effective access through family relationship, employment or economic bargaining power.
  • Rule 506(b) safe harbor: Need to ensure that the offering is made to accredited investors and not more than thirty-five (35) sophisticated yet unaccredited investors.
    • The definition of “accredited investor” is outlined in Rule 501(a). The concept of "accredited investor" is critical in the private offering context, both from the standpoint of establishing an exemption for the offers and sales and in determining the required level of disclosure as discussed below. An accredited investor means any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:
      • a bank or savings and loan, insurance company, registered investment company, business development company, or small business investment company;
      • a registered broker or dealer or financial adviser or an adviser to private funds;
      • an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decision, or if the plan has total assets in excess of $5 million;
      • a trust with assets exceeding $5 million and a sophisticated investment manager;
      • a charitable organization, business trust, corporation, limited liability company, or partnership with assets exceeding $5 million;
      • a director, executive officer, or general partner of the company selling the securities;
      • a "family office" or a family client of a "family office" which has assets over $5 million and a sophisticated money manager;
      • an entity in which all the equity owners are accredited investors;
      • a natural person who has individual net worth, or joint net worth with the person's spouse or spousal equivalent, that exceeds $1 million at the time of the purchase (and, effective on July 22, 2010, this net worth cannot include “the value of the person’s primary residence” or the mortgage or debt secured by the primary residence if the amount of that debt is less than the fair market value of that residence);
      • a natural person with income exceeding $200,000 in each of the two most recent years of joint income with a spouse or spousal equivalent exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
      • a trust or other entity with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases are directed by a sophisticated person.
    • Neither Section 4(a)(2) nor Rule 506(b) (other than the thirty-five (35) sophisticated unaccredited investor limit) contains any numerical caps on the number of offerees and purchasers. The general solicitation prohibition and market practice typically set the outer parameters.  “General solicitation” and “general advertising” are not defined in Rule 506(c).  However, in other contexts, these have been defined to include advertising offerings through the Internet (including via social media and email), newspapers, magazines, television, seminars, and radio.

C. Information Disclosure Requirements

Section 4(a)(2) and Rule 506(b) contain informational requirements. If a disclosure obligation exists, the information must be provided to the offeree prior to the time of sale.

  • Section 4(a)(2): Each offeree must possess or have access to the type of information that would be included in a registration statement and which would enable the offeree to make an informed investment decision. In Sorrell v. SEC, 679 F.2d 1323 (9th Cir. 1982), the Court of Appeals focused on both "quantity" and "quality" of offerees and stated that the private offering exemption under Section 4(a)(2) depended on the number of offerees, their sophistication, the size and manner of the offering and the relationship of the offerees to the issuer. In holding that Sorrell failed to meet his burden that the sale of 16 limited partnership interests was exempted from registration, the Court of Appeals noted that access by the offerees to financial information about the investment, similar to what would be found in a registration statement, would be "crucial." At trial, Sorrell offered no evidence of the number of offerees and no evidence of the information they received. Such information generally should include information concerning the issuer's business, financial condition, results of operations, property, and management.
  • Rule 506(b):

(i) There are no informational requirements for accredited purchasers. The rationale is that these investors are sophisticated and have sufficient bargaining power to obtain all relevant information from the issuer. However, SEC Rule 10b-5, promulgated pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), which imposes liability for material misstatements or omissions, still applies to sales of securities to all offerees, including these accredited investors.

(ii) Each non-accredited purchaser (i.e. the 35 sophisticated investors) must receive certain information, which varies based on the nature of the issuer and the size of the offering.

Non-Reporting Issuers: Must provide each purchaser with certain non-financial information and with specific types of financial statement information depending upon the size of the offering.  This is most often with reference to the dictates of the Model Circular of Part II of Regulation A.  See Rule 502(b).  Note that the Model Circular is revised effective June 19, 2015.

Reporting Companies:

Reporting companies must furnish the same disclosure, regardless of offering size. Such information may either be:

(a) An issuer's most recent annual report to shareholders that meets the requirements of Exchange Act Rule 14a-3 (which specifies the information required to be delivered in connection with proxy solicitations) or Rule 14c-3 (annual report information requirements delivered in non-proxy solicitations prior to an annual meeting or other shareholder meeting), the definitive proxy statement filed in connection with that annual report, and, if requested in writing, the issuer's most recent Form 10-K.

(b) The information contained in the issuer's most recent annual report on Form 10-K or a Form 10 under the Exchange Act or a Form S-1 under the Securities Act. Under this option, the actual form documents need not be delivered because the relevant rule refers to the information contained in the forms, not the forms themselves.

An issuer is obligated to update and supplement any such disclosures with additional information and must provide disclosures regarding material changes in the issuer's affairs that are not covered in documents furnished to purchasers.

  • Foreign Private Issuers: Financial statements of foreign private issuers may be prepared using U.S. generally accepted accounting principles ("U.S. GAAP") or non-U.S. GAAP statements, provided the statements are reconciled with U.S. GAAP.

D.  “Bad Actor” Limitations Upon Issuers Who Want to Use Rule 506(b) or Rule 506(c)

Section 926 of the Dodd-Frank Financial Reform Act required the SEC to adopt rules which would make Rule 506 unavailable for securities offerings in which certain felons and other “bad actors” are involved.  On July 10, 2013 the SEC adopted final rules in this regard effective September 23, 2013.

The “bad actor” rules are set out in paragraph (d) of Rule 506.  Under the new rule, the involvement of “covered persons” who are the subject of “disqualifying events” disqualify securities offerings from exemption under both Rule 506(b) and Rule 506(c).

  • The following persons, among others, are “covered persons”:
    • The issuer and any predecessor or affiliate issuer
    • Any director, executive officer, or officer participating in the offering
    • Any beneficial owner of 20% or more of the issuer’s voting securities
    • Any promoter connected with the issuer at the time of sale
    • Any investment manager of  a pooled fund issuer
    • Any placement agent or compensated solicitor in the offering
  • The following types of events, among others, are “disqualifying events”:
    • Criminal convictions in connection with the sale of a security or a false filing with the SEC, or arising out of the conduct of an underwriter, broker-dealer, investment adviser, or placement agent within the last ten years
    • Court injunction or restraining orders with regard to the foregoing persons or activities within the last five years
    • Final orders of certain state (such as securities, banking and insurance) regulators, federal regulators, and the CFTC
    • SEC disciplinary orders relating to SEC regulated persons
    • SEC cease and desist and stop orders
    • Suspension or worse by FINRA or an exchange
    • U.S. Postal Service false representation orders

The rule includes a “reasonable care” exception if the issuer can establish that it did not know, and, in the exercise of reasonable care, could not have known, of the disqualifications.  Also, an issuer may seek a waiver of the disqualification if the issuer shows “good cause” and the SEC determines “that it is not necessary under the circumstances that an exemption be denied.”

II.   Integration Issues In Private Placements

A. Integration Doctrine

  • The doctrine is intended to prevent issuers from circumventing the registration requirements of the Securities Act and is used to determine whether:
    • two or more purportedly discrete exempt offerings are really one offering that does not qualify as an exempt offering, or
    • an exempt offering is really part of a registered public offering.

B. Integration Analyses

  • Five factor test
    • Securities Act Release No. 33-4552 (Nov. 6, 1962) sets forth the five factor test that is used as a guideline in determining whether or not the separate offerings of an issuer that occur within a short time of one another will be integrated. The same factors are in the Note to Rule 502(a) of Regulation D. The factors considered are:

(a) whether or not the offerings are part of a single plan of financing;

(b) whether the offerings involve the issuance of the same class of securities (convertible securities, warrants, and other derivative instruments generally are deemed to be the same class as the underlying security unless the terms of the primary security prohibit exercises until at least the one year anniversary date);

(c)  whether the offerings are made at or about the same time;

(d) whether the same type of consideration is to be received; and

(e) whether the offerings are made for the same general purpose.

  • Practitioners should also consider a sixth factor: Are the offerees in each offering of the same class or character?
  • The five factor test has not brought certainty to the area because its application is subjective and the staff has not provided definitive guidance as to what weight to give to the various factors or indeed how many of them have to be met. See Sonnenblick, Parker & Selvers (avail. Jan. 1, 1986).
  • However, there is no guidance as to how many of the five factors must be satisfied. In Sonnenblick, the staff stated that it considered the two most important factors to be (a) whether the financings constituted a single plan of financing, and (b) whether the offerings were for the same general purpose.
  • In NABA Sports Corp.; North American Baseball Association, Inc. (avail. Sept. 9, 1987), the staff considered whether simultaneous offerings of different securities by the same issuer were to be treated as part of the same offering. The staff concluded that a Rule 504 offering of Class A common stock to raise start-up money need not be integrated with a Rule 506 offering of options to purchase Class B common stock made to selected investors to solicit interest in becoming team owners in the baseball league. The staff stated that the offerings appeared to involve different securities because "the Class B common stock will be non-transferable, have liquidation preference and contain a limited forfeiture provision" and the offerings appeared to be for different purposes.
  • In Monitrend Investment Management, Inc. (avail. May 3, 1988), the staff determined that a public offering of common stock and preferred stock did not need to be integrated with a private placement of notes and common stock purchase warrants made less than six (6) months later. The staff concluded that the offerings "appear to involve different classes of securities" (the common stock purchase warrants were not exercisable and generally were nontransferable for a period of five (5) years), and the offerings "appear to be for different purposes and involve different plans of financing." The proceeds of the note and warrant offering were to be used for acquisitions.
  • In Anthem Insurance Companies, Inc. (avail. Oct. 25, 2001), the staff found that a proposed demutualization converting the company from a mutual insurance company into a stock insurance company and the distribution of common stock in connection with the demutualization should not be integrated with a coincident IPO. The staff, in applying the five factor test, found that the demutualization and the IPO were not part of the same plan of financing nor were the offerings made for the same general purpose. The two events had two (2) separate goals: the demutualization to provide the company with greater financial flexibility and the IPO to raise capital for the Company. See also The Prudential Insurance Company of America (avail. April 6, 2001).
  • Six-month safe harbor
    • Rule 502(a) provides that multiple private offerings that are conducted at least six (6) months apart will not be integrated; also, a private offering that is conducted at least six (6) months before or after a registered or exempt public offering will not be integrated with the public offering.
  • Rule 152
    • Rule 152 and staff interpretations provide that an otherwise valid private placement will not be integrated with a subsequent registered public offering. See, e.g., Verticom, Inc. (avail. Feb. 12, 1986); Vulture Petroleum Corporation, (avail. Feb 2, 1987); Quad City Holdings Inc., (avail. Apr. 8, 1993).
    • The closing date for the private offering may occur after filing of the registration statement so long as all closing conditions, other than customary conditions such as no material adverse change, are outside the control of the private investors.
    • In Black Box Incorporated, the SEC stated that, pursuant to Rule 152, a private placement is completed on the date the agreement to purchase securities is signed provided the purchaser's obligations are binding and subject only to satisfaction of conditions that are not within the purchaser's control. In Squadron, Ellenoff, Pleasant & Leher, the SEC cautioned that the position taken in its Black Box no-action letter is limited to unregistered offerings made to Rule 144A qualified institutional investors and no more than two or three large institutional accredited investors. See Black Box, Inc., (avail. June 26, 1990) and Squadron, Ellenoff, Pleasant & Lehrer (avail. Feb. 28, 1992).
  • General:
  • Black Box/Squadron Ellenoff Policy Positions
  • Rule 155 Safe Harbors for Abandoned Private and Public Offerings (Release No. 33-7943, effective Mar. 7, 2001) [as amended February 27, 2012]
    • The Rule creates safe harbors to allow (i) a public offering immediately following an abandoned private offering and (ii) a private offering thirty (30) days after an abandoned public offering, without integrating the public and private offerings in either situation. These safe harbors provide issuers with more flexibility to react to volatile capital market conditions.
    • The safe harbors will not be available if the Commission finds that transactions, while technically in compliance, are part of a plan or scheme to evade the registration requirements of the Securities Act.
    • Rule 155 does not replace the traditional integration analysis and in that respect, the traditional five factor test will be used whenever the safe harbor specifications are not met.
    • Rule 155 does not address whether two or more private offerings should be integrated with each other. The traditional five factor test would apply to this scenario.
    • Rule 155 recognizes only Sections 4(a)(2) and 4(a)(5) (which exempts transactions not exceeding $5 million if offers and sales are made only to "accredited investors" as defined in Section 2(a)(15) of the Securities Act and Rule 215 and if certain other conditions are met) and Rule 506 offerings as exempt offerings.
    • Rule 155 is not available for shelf registration statements.
  • The Rule 155(b) safe harbor for abandoned private offerings is available if:
    • no securities were sold in the private offerings;
    • the issuer or its intermediary terminates all offering activity in the private offering before the issuer files the registration statement (proof of which the Commission has encouraged the staff to monitor closely to avoid abuse of Rule 155(b));
    • any prospectus filed as a part of the registration statement discloses information about the abandoned private offering including (a) the size and nature of the private offering, (b) the date on which the issuer terminated all offering activity in the private offering, (c) that any offers to buy or indications of interest in the private offering were rejected or otherwise not accepted, and (d) that any prospectus delivered in the registered offering supersedes any selling materials used in the private offerings; and
    • the issuer does not file the registration statement for a period of thirty (30) calendar days from termination of offering activity related to the abandoned private offering; there is no waiting period if offers in the private offering were made only to accredited or sophisticated investors.
    • Any issuer that relies on the Rule 155(b) safe harbor must first satisfy the private offering exemption (i.e., the private offering must be bona fide). Rule 155 defines a private offering as an unregistered offering of securities that is exempt from registration under Section 4(a)(2) or 4(a)(5) of the Securities Act or Rule 506[b only?] of Regulation D. This requirement is intended to insure that the initial private offering is a serious offering by the issuer and that the issuer initially has the intention to consummate the offering when commenced.
    • The SEC has stated that it intends to closely monitor the use of Rule 155(b) to prevent its misuse and the Staff has the authority to request additional information from the issuer regarding the termination of all offering activity in the private placement.
    • Any issuer that, although in technical compliance, intends to use either of the Rule 155 safe harbors as a plan or scheme to evade the registration requirements under the Securities Act will be denied the right to use the safe harbor. These measures are designed to insure that any gun jumping that may occur as a result of the utilization of Rule 155(b) is incidental to a bona fide private offering and not a plan to avoid the gun jumping restrictions of the Securities Act.
    • no securities were sold during the registered offering. (This requirement will not be met if the issuer or its intermediary received any money or other form of consideration, including escrowed monies, for the securities);
    • the issuer withdraws the registration statement. See Rules 477 and 478 under the Securities Act:
    • the issuer and its intermediary do not commence the private offering earlier than thirty (30) calendar days after the effective date of withdrawal of the registration statement;
    • the issuer notifies each offeree in the private offering that the offering is not registered under the Securities Act and of the consequences that accompany a private placement, which include informing the investor that (a) the securities are restricted securities that cannot be resold without registration unless an exemption is available and (b) purchasers do not have the protection of Section 11 of the Securities Act, which imposes civil liabilities on issuers on account of false registration statements; a registration statement for the abandoned public offering was filed and withdrawn;
    • any disclosure document used in the private offering discloses any changes in the issuer's business or financial condition that occurred after the issuer filed the registration statement and that are material to the investment decision in the private offering;
    • The SEC has instituted several measures to prevent the use of the Rule 155(b) safe harbor to facilitate any intentional “gun jumping,” by which an issuer distributes offering materials and solicits offers before a registration statement is filed.
    • Rule 701(f) that separates out employee benefit plans;
    • Preliminary Note 7 to Regulation D and the note to Rule 502(a), as well as Release No. 33-6863 (Apr. 24, 1990), providing that offshore offerings under Regulation S generally will not be integrated with domestic offerings;
    • ING Bank, N.V. (avail. July 8, 2002), providing that an onshore private offering of short-term paper conducted in compliance with Rule 506 of Regulation D should not be integrated with an offshore public offering carried out under Regulation S;
    • Rule 144A(e), stating that resales to QIBs pursuant to Rule 144A will not affect the availability of a prior or subsequent exempt offer or sale by an issuer or investor;
    • Rule 147’s six month intrastate offering safe harbor;
    • Rule 155(c) safe harbor for abandoned public offerings is available if:
    • Under Rule 155(c), general solicitations occurring prior to the commencement of a 30-day cooling-off period do not affect the subsequent private offering. However, the private placement must otherwise be free of general solicitations and must otherwise qualify for an exemption from registration under Section 4(a)(2) or 4(a)(5) of the Securities Act or Rule 506 of Regulation D. In the SEC's view, this requirement will ensure that the private offering following the abandoned public offering is a bona fide private offering. The ban on general solicitations in private placements has not been lifted. However, in the SEC's view, a 30-day cooling-off period cures the impact of impermissible solicitations.
    • Other Integration Positions

III.  General Solicitation Issues

For the SEC, a fundamental premise of a private placement has been the prohibition of general solicitation and advertising. "Negotiations or conversations with or general solicitations of an unrestricted and unrelated group of prospective purchasers for the purpose of ascertaining who would be willing to accept an offer of securities is inconsistent with a claim that the transaction does not involve a public offering even though ultimately there may only be a few knowledgeable purchasers." Securities Act Release No. 33-4552 (Nov. 6, 1962).

  • The prohibition applies to both issuers and anyone acting on behalf of the issuer. Before the JOBS Act, Rule 502(c) precluded the use of:
    • any advertisement, article, notice or other communication published in any newspaper magazine, or similar media or broadcast over television or radio, and
    • any seminar or meeting whose attendees have been invited by any solicitation or general advertising.
  • To avoid engaging in a general solicitation, the Commission staff indicated that one should:
    • look to the existence of a substantive relationship that evidences a person's investment sophistication. See, e.g., E.F. Hutton & Co. (avail. Nov. 3, 1985) (finding that broker dealers could ensure Rule 502(c) compliance by establishing a substantive and preexisting relationship with the offerees.) and
    • use third-party QIB lists.
  • The Commission does not condone the practice of investor "self-certification" of accreditation of sophistication prior to gaining access to a private offering.

A. No General Solicitations under Section 4(a)(2) and Rule 506(b)

Commission interpretations before the JOBS Act indicate the following:

  • A broker dealer or issuer using an internet website can ensure compliance with Rule 502(c) by establishing a substantive relationship.
    • A pre-existing relationship may be established if (1) the issuer or broker dealer gathers information on a potential investor by means of a generic questionnaire that does not refer to a specific transaction, (2) a password protected page containing offerings is only available to a particular investor after the issuer or affiliated broker dealer determines an investor is sophisticated or accredited, (3) a potential investor can purchase securities only after the investor is qualified by the issuer or affiliated broker dealer as accredited or sophisticated, and (4) "period of time" must pass after this investor is qualified. See, e.g., IPONET (avail. July 26, 1996); Lamp Technologies (avail. May 29, 1997) (SEC recognized 30 day waiting period after the qualification of investors).
  • Before the JOBS Act, the mere fact that solicitations are directed to accredited investors could be insufficient to prove to the Commission that solicitations are limited if no safeguards are taken to ensure that non-accredited offerees are not solicited. See In re CGI Capital Inc., Securities Act Release No. 33-7904 (Sept. 29, 2000) ("CGI Capital"). In CGI Capital, the company sent e-mail messages to several thousand potential investors regarding a private placement offering but failed to establish any pre-existing relationship with some of the investors contacted and failed to verify adequately the sophistication of the investors contacted. The company also provided an e-mail password to the investors contacted which granted access to the private offering website. The e-mail containing the password did not restrict those contacted forwarding the password nor did it warn those contacted about the restricted use of the password. Consequently, given CGI's failure to verify the sophistication or accreditation of its purchasers and given the forwarding of the password, the Commission found the company had engaged in a general solicitation in violation of Rule 502(c).

B. Exceptions to the Prohibition Against General Solicitations.

  • Rule 135c: Rule 135c provides a safe harbor for an issuer's announcement of offerings not registered or not required to be registered under the Securities Act. Domestic and foreign reporting issuers and foreign companies claiming an exemption from the Exchange Act reporting requirements pursuant to Rule 12g3-2(b) may claim the safe harbor if:

(a) the announcement contains a legend stating that the securities have not been registered and may not be sold in the United States absent registration or an exemption from registration, and

(b) the announcement only includes the (i) the name of the issuer, (ii) the title, amount, and basic terms of the securities offered, the amount of the offering made by selling security holders, the time of the offering, and a brief statement of the manner and purpose of the offering, without naming the underwriters, and (iii) any statement or legend required by foreign or state law or administrative authority. In addition, other information must be included in the case of rights offerings, exchange offerings, and offerings to employees.

  • Rules 138 and 139: Rule 138 provides a research safe harbor for publication of research on an issuer's common stock or debt securities, or preferred stock convertible into common stock, where the issuer proposed to offer non-convertible debt or non-convertible, non-participating preferred stock and vice versa, if the research is distributed by a broker or dealer in the regular course of its business. Rule 139 allows publication and distribution of reports by a broker or dealer even if such reports are related to securities being offered and even if the broker or dealer is or will be a participant in the distribution of the securities to be registered.  These rules are not available for blank check companies, shell companies, or penny stock companies.

C.  JOBS Act and SEC Rule 506(c) Exemption to Enable General Solicitations to Obtain Accredited Investors

  • Section 201(a) of Title II of the JOBS Act directed the Commission to revise its rules to provide that the prohibition against general solicitation and general advertising contained in Rule 502(c) of Regulation D not apply to offers and sales of securities made pursuant to Rule 506, provided that all purchasers of the securities are accredited investors.
  • As noted above, on July 10, 2013, the SEC adopted a new Rule 506(c), effective on September 23, 2013.  Rule 506(c), in the opinion of the SEC, creates a new exemption for offerings that meet the following:
  • All the purchasers of the securities are accredited investors;
  • The issuer has taken reasonable steps to verify that the purchasers of the securities are accredited investors; and
  • The provisions of Rule 501 (definitions), 502(a) (integration), and 502(d) (resales restrictions) of Regulation D.
  • Persons properly relying on Rule 506(c) for their offerings will not be subject to the prohibition against general solicitations and general advertising found in Rule 502(c).
  • The SEC has addressed “reasonable steps to verify” each person’s accredited investor status in two ways:
  • Generally, issuers should take an objective principle-based approach, considering the facts and circumstances of each purchaser and transaction, including, among other things, the following:
    • The type of purchaser and the type of accredited investor that the purchaser claims to be;
    • The amount and type of information that the issuer has about the purchaser;
    • The nature of the offering, including
      1. The manner in which the purchaser was solicited to participate in the offering, and
      2. The terms of the offering, such as a minimum investment amount.
  • Specifically, the SEC adopted a non-exclusive list of four methods of verification for natural persons
    • Income – examining copies of any IRS form that reports purchaser’s income for the two most recently completed tax years (e.g. W-2s, 1099s, Schedule K-1 to Form 1065, From 1040) and obtaining a written representation that purchase reasonably expects earning the same income in the current year
    • Net worth – examining bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessment, or appraisal reports, and consumer reports from a national agency, or obtaining a written representation that purchaser has disclosed all liabilities
    • Receiving a written representation from a registered broker-dealer for investment advisor, licensed attorney, or CPA that such person has taken reasonable steps to verify that the purchaser is an accredited investor within the last three months and has determined that such purchaser is an accredited investor
    • In regard to any purchasers who purchased in a prior Rule 506(b) offering of the issuer before September 23, 2013, a written verification that such person is still accredited.

An offering made only to accredited investors would still fail to meet the exemption under Rule 506(c) if the issuer did not in every instance also take “reasonable steps to verify” that status.

Again, an offering under Rule 506(b) is a “safe harbor” promulgated by the SEC under Section 4(a)(2) of the Securities Act, but the SEC contends that an offering under Rule 506(c) is a separate “exemption” created by Congress (and not an SEC “safe harbor”) only by virtue of Section 201(a)(1) of the JOBS Act.  This is a distinction as yet untested in the courts, but one which creates difficulties in risk assessment when considering the use of general advertising.  We will update this memorandum as and when this position is clarified.

Another unanswered question regarding general advertising in the context of an offering pursuant to Rule 506(c) relates to the applicability of Securities Act Section 12(2) (which provides private rights of action to buyers) to claims arising from material misstatements or omissions in an issuer’s original securities offering.  In Gustafson v. Alloyd Co., 513 U.S. 561 (1995), the US Supreme Court held in a 5-4 decision that Section 12(2) does not extend to a “private” securities sale contract since that contract ‘was not held out to the public’ by means of a prospectus or oral communications related to a prospectus.  This was prior to the enactment of the JOBS Act, and in 1995 most commentators agreed that offerings compliant with Section 4(a)(2) and SEC Rule 506(b) would fall within the private sale aspects of the Court’s reasoning. However, given the SEC proposition that Congress created Rule 506(c) explicitly without regard to Section 4(a)(2) and the Rule 506(b) prohibitions on general advertising and general solicitation, there is an open question as to whether the rescission provisions of Section 12(2) apply to securities acquired in offerings exempt solely pursuant to Rule 506(c).  There are as yet no reported court decisions on this matter.

D. Regulation FD and General Solicitations

Publicly reporting issuers must consider the SEC's fair disclosure rules in Regulation FD in connection with general solicitation matters. Unlike registered public offerings, there is no carve-out for private offerings.  See, e.g., Securities Act Release No. 33-7881 (Aug. 21, 2000).

  • Regulation FD mandates an issuer, or a person acting on its behalf, to disclose to the public material, nonpublic information that an issuer has provided to securities market professionals or holders of the issuer's securities whenever it is reasonably foreseeable that the security holder will trade on the basis of that information. The required disclosure may be made by filing a Form 8-K or by methods such as Internet webcasting or teleconferencing that are reasonably designed to effect broad, non-exclusionary distribution of the information to the public.
  • Disclosure of non-public information by public companies involved in a private offering is not exempted from Regulation FD.
  • Measures that may be taken to ensure compliance with Regulation FD while preserving a private exemption may consist of the following:
    • advise the issuer to limit the information it decides to make public at road shows in connection with a private placement (i.e., avoid disclosure of material, non-public information);
    • advise the issuer that it may be able to use information walls;
    • depending on the type of issue, encourage an issuer to enter into a FD compliant confidentiality agreement whereby the purchaser agrees not to trade in the issuer's securities until the non-public information becomes public (typically, however, investors are very reluctant to sign such agreements);
    • prior to alerting the broker dealer's sales force, advise the issuer to issue a press release disclosing the transaction, and
    • encourage broker dealers to make public any material information prior to the offering. Although general solicitation concerns are implicated with the issuance of news releases, the SEC has indicated that if the information is required for FD purposes and is of the kind that is told to stockholders, then the Commission will consider whether or not to classify the release as a general solicitation.

IV.  Limitation on Resales of Securities Sold in Private Placements and Some Strategies Used to Resell

To repeat, precautions that issuers typically take to prevent premature sales and the loss of the private offering and Rule 506(c) exemptions should include:

  • making a reasonable inquiry to determine if the purchaser is acquiring the securities for its own account or on behalf of others including obtaining a written representation from the purchaser;
  • making a written disclosure to each purchaser prior to sale as to the absence of registration and to the restrictions on resale, and
  • placing legends on the certificate for the securities as to the absence of registration and restrictions on transfers (i.e., stop-transfer orders).

See also Securities Act Release No. 5121 (Dec. 30, 1970).

A. Resale Strategies

  • Rule 144
    • allows sales of restricted securities by any affiliate of an issuer, any person selling for his/her own account the securities purchased from an issuer, or any person selling for the account of an affiliate of an issuer. Sales by such persons are not deemed a "distribution" of securities and the sellers are not categorized as Section 2(11) underwriters if all of the terms and conditions of the rule are met;
    • mandates a minimum of a six month holding period before the restricted securities of a reporting issuer may be "dribbled out" by affiliates.  After six months, Rule 144 allows non-affiliates to freely resell securities acquired from a reporting issuer; non-affiliates may freely resell any restricted securities held for one year. The manner in which the holding period is calculated and the "tacking" of holding periods in certain cases for holders who acquired certain types of securities is outlined in the rule;
    • limits the amount of securities sold to the greater of one percent of the class outstanding or, if traded on an exchange, the average weekly volume on all such exchanges during the four weeks preceding a sale transaction; and
    • mandates that adequate information regarding the issuer of the securities being sold is publicly available.
  • "Exxon Capital" A/B Exchange Offers

An Exxon Capital A/B exchange offer refers to the practice whereby an issuer performs a private placement and, within a short time after completion of the private placement, effects a registered exchange offer for the securities previously offered in the private placement. The practice, therefore, results in the exchange of the restricted securities for freely tradable securities.

  • The procedure is only available for non-convertible debt securities, certain types of preferred stock and initial public offerings of common stock of foreign issuers to eliminate the Rule 144A facility.
  • The staff positions are set forth in Exxon Capital Holding Corp. (avail. May 13, 1988), Morgan Stanley & Co. Incorporated (avail. June 5, 1991), Mary Kay Cosmetics, Inc. (avail. June 5, 1991) Epic Properties, Inc. (avail. Oct. 21, 1991), Vitro, S.A. (avail. Nov. 19, 1991), Corimon C.A.S.A.C.A. (avail. May 14, 1993) and Brown & Wood LLP (avail. Feb. 7, 1997), and Shearman & Sterling (avail. July 2, 1993).
  • Registration Rights (Demand and Piggyback)
  • “Rule 4(a)(1½)” legal opinion letters
    • This refers to the practice whereby law firms opine that securities have “come to rest” after a private placement and thus may be resold under certain conditions.  The legends will often remain in place and thus the securities will require subsequent activities to become tradable.
    • The new limited resale statutory exemption codified as Section 4(a)(7) was adopted in the FAST Act on December 4, 2015; its use is limited to accredited investors who are not “bad actors,” among other things, so the practice of legal opinion letters will continue in addition to this new exemption.
  • Regulation S
    • The SEC has also recognized a non-statutory "exemption" for securities offered and sold outside the United States. Regulation S, Securities Act Release No. 33-6863 adopted in 1990, provides non-exclusive safe harbors for (x) offers and sales by issuers, distributors and their affiliates and (y) resales by others. In general, in order to qualify, (i) there must be an "offshore transaction" (i.e., an offer cannot be made to a person in the United States and the buyer must be outside the United States or the seller must reasonably believe the buyer is outside the United States) and (ii) neither the issuer nor any distributor (or any affiliate of either) may engage in any "directed selling efforts" (i.e., activities that may condition the United States market for the securities). In addition, for many offerings (i) there was a distribution compliance period during which no offer or sale may be made to a U.S. person for forty (40) days or, in some cases, for one year, and (ii) the offering documents and underwriting agreements must reflect certain restrictions on sales to U.S. persons.
    • In February 1998, the SEC adopted amendments to Regulation S designed to prevent perceived abusive practices in connection with offerings of equity securities to domestic issuers. Securities Act Release No. 33-7505 (Feb. 17, 1998). In addition to extending the distribution compliance period to one year for such securities (and requiring purchasers to agree that hedging transactions with respect to such securities will be conducted in compliance with the Securities Act), the amendments classify such securities as "restricted securities" under Rule 144. As a result, for such securities to be resold in the United States or to United States persons without registrations, the requirements of Rule 144 must be met, including the one year/two year holding period.

V.   State Law Issues

  • National Securities Markets Improvement Act of 1996 ("NSMIA"):
    • preempts state registration and review of transactions involving seven classes of "covered securities."
    • Rule 506(b) and 506(c) offerings of “covered securities” preempt state securities laws except for applicable mandated notice and fee requirements.
    • Offerings effectuated pursuant to Section 4(a)(2) do not preempt any state laws. Among other things, issuers should consider including on any internet site containing an offering of securities, a general legend that alerts viewers that no offers or sales will be made in any jurisdiction in which such offers or sales are not qualified or otherwise exempt. In our experience, particular concern should be taken when privately offering securities in New York and California.
    • Issuers should review NSMIA and the securities laws of the states into which offers or sales of securities are made and/or take the necessary precautions to ensure compliance with such laws.
    • States retain the authority to investigate and bring anti-fraud proceedings.


In the opinion of the SEC and the courts, the factors relevant to the availability of the private placement exception to issuers under Section 4(a)(2) of the Act include the number of offerees, the relationship of the offerees to the issuer, the relationship of the offerees to each other, the sophistication of the offerees, the value of the offering, the number of securities offered, the manner in which the offer to sell is conveyed, and whether the securities have come to rest with the purchaser, as opposed to their further distributions. Integration issues among discrete private offerings remain subjects of concerns for issuers which can be overcome through reliance under SEC rules and "safe harbors", including, but not limited to, Rules 135, 138, 139, 144, 144A, 147, 147A, 152, 155, 504, 506, 701 et seq., and 901 et seq. Finally, there are significant legal issues arising under federal and state laws for persons other than issuers who act as agents for issuers in private placements.


This article is published for general information, not to provide specific legal advice.  The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis by a lawyer of the specific facts involved.

Comments or inquiries may be directed to John A. Eckstein, 303.894.4448, or Gil Selinger, 303.894.4478.