Exemption regulations
Registration exemptions
Exempt securities
There are securities that are exempt from the regulations, the registration and prospectus requirements, of the Securities Act of 1933. There are additional, but the primary ones you want to make sure to remember would include;
- Municipal securities (bonds and municipal funds)
- Direct government securities (treasuries, etc)
- Securities issued by banks and savings and loan (S&Ls), but not bank holding companies
- Money market securities, including commercial paper, bankers acceptances, jumbo CDs and repos/reverse repos
- Securities that are issued by nonprofit or charitable organizations
Exempt Offerings
These are issuances, or some other way the securities are being offered that provides the exemption from registration requirements. There must be a good reason, and most often it’s one of the following 3 reasons;
- It is a small amount of securities being offered, and the capital is limited
- Securities aren’t based in the US directly, offshore, or otherwise mostly handled overseas
- Private offerings of the securities, generally to limited numbers of persons, and often with qualifications for those persons to be able to participate.
Regulation A
A common small issuer exemption. The maximum amount that can be offered under Reg-A is $75m, but there are 2 forms, 2 tiers, of Reg-A. This is not as complete as other exemptions, as the issuer is still required to file an offering statement with the SEC, and provide and offering circular. An offering circular is going to be very similar to a prospectus, but it is not a prospectus, as this is effectively exempt from the prospectus requirements. Similar to how municipal bonds are also issued with an offering circular, and not a prospectus.
Reg-A Tier 1 is up to $20 million issued in a 12-month period, of that only $6million can be from current shareholders selling in the issuance. Form 1-Z is required to report at the end of the offering, things like securities sold, proceeds, and service providers. No ongoing reporting requirements. Tier 1 needs its offering to be qualified by state regulators in the states the issuer plans to sell the securities.
Reg-A Tier 2 is up to $75 million issued in a 12-month period, of which only $22.5million can be from current shareholders selling in the issuance. A company issuing less than $20 million, could use either Tier 1 or Tier 2. Tier 2 requires audited financial statements and continual reports, including final status report similar to 1-Z. Tier 2 does not need to register in the state, but they still must file the offering with the SEC. The continuing reports include the 1-K annually, 1-SA semiannually, and 1-U, as necessary for events. The 1-K is like the 10-K, the 1-SA is like the 10-Q, and the 1-U is like the 8-K forms for larger companies.
Accredited investors have no limits on what they can contribute to a Reg-A Tier 2 offering, but non-accredited investors are limited to 10% of their income or net worth (whichever is higher)
Regulation D
Often referred to as a “Reg-D private placement”, this is one of the most commonly tested exemptions, as it is one of the more commonly used.
The basic rule is that no more than 35 non-accredited investors can participate. There are no limits to the numbers of accredited investors that can participate. We could do a Reg-D offering, and invite 10 friends or family members, the non-accredited, and then 1000 banks, insurance companies, and other financial institutions. Provided we do not sell to more than 35 non-accredited, it would fit in the exemption.
Advertising under Reg-D can be a little confusing, as there are 2 rules within it. 506(b) and 506(c). If the Reg-D is filed under 506(b), that is where we have at most 35 non-accredited investors, the most common way, and there can be no general advertising of the securities offering. 506(c) on the otherhand, eliminated the non-accredited investors. To file under Reg-D 506(c), there can be 0 non-accredited investors, only accredited investors, but in that case, there can be general advertising, provided of course “only accredited investors” is featured in the ad.
Private placements, including Reg-D private placements, are not for immediate resale. There is a waiting period of at least 6 months, sometimes 12 months, before the buyer can resell the restricted, private offering security. Usually there will be a document signed by participants in the Reg-D offering, that they will not sell the securities until they are registered.
Regulation S
This is an offering exemption for American companies that are issuing securities overseas. These are not expected to be sold in the United States. The US company can issue any type of security, in any quantity they wish, outside the country, without filing any documentation with the SEC. They will of course, have to follow all of the laws of the country they are in fact issuing the securities in. To qualify the transaction must be executed offshore. An offshore transaction is one where no offer has been made to persons in the US, and at the time the buy order was placed, the buyer was outside the US, or the transaction is entirely executed through facilities of a designated offshore securities market or exchange.
No US persons can purchase a Reg-S offering. Only non-US persons can transact in these securities.
Private Investments in Public Equity (PIPE)
This is when private investors, often hedge funds and similar, directly purchases shares from the issuer, without going through a public offering, without going through exchanges. Directly purchasing shares from the issuer, at a discount from current market price, for several reasons. It helps encourage the speed, if you give the buy a discount. It helps offset the dilution caused by the additional shares, and the fact that if they need to use a PIPE, the issuer likely is in strong need of the money, and has few ways to raise it. These are used to very quickly raise capital for a company.