U.S. SEC Exemptions - Legal Counsel Guides 18

To determine whether your transaction needs SEC registration, you can apply the Howey Test. This legal test, established by the U.S. Supreme Court in SEC v. W.J. Howey Co., helps identify if a transaction involves an "investment contract," which is considered a security under U.S. law. If your transaction is deemed to involve a security, you may need to register with the SEC unless an exemption applies.

The Howey Test

A transaction qualifies as an investment contract (and thus a security) if it meets all four of these criteria:

1. Investment of money: You or others are investing money or something of value (e.g., work, services).
2. In a common enterprise: The investment is part of a shared venture with other investors.
3. Expectation of profits: The investors expect to earn a financial return or profit.
4. Solely from the efforts of others: The return depends primarily on the work or management of third parties, not on your own involvement.

If your deal meets these criteria, it may be subject to SEC regulation unless you qualify for an exemption such as Reg D or Reg A+

SEC Registration Process for Public Offerings

When a company decides to offer securities (such as stocks or bonds) to the public, it generally must register with the Securities and Exchange Commission (SEC) unless it qualifies for an exemption. The registration process involves several steps and is designed to ensure transparency and protect investors by providing them with all necessary information to make informed decisions.

1. Filing a Registration Statement (Form S-1)

The most common registration form is Form S-1, which is required for initial public offerings (IPOs) and other public offerings. This form consists of:

• Part I: Prospectus – This is the legal offering document provided to potential investors. It includes detailed information about the company, its business, risks, and financial statements.
• Part II – Contains additional documents like contracts, signatures, and legal certifications required by the SEC but not provided directly to investors.

The purpose of this registration is to disclose everything that investors need to evaluate the risk and merits of the investment. The company must include audited financial statements, risk factors, management information, and other key data.

2. SEC Review Process

Once the Form S-1 is submitted:

• The SEC will review the filing, typically within 30 days.
• The SEC may send comments or request revisions to ensure that all disclosures are complete and meet the requirements.
• The company must address these comments and make any necessary changes.
• Once the SEC is satisfied, the registration statement is declared effective, and the company can proceed with selling securities.

Exemptions from SEC Registration

Companies can avoid the complex and costly registration process by relying on certain exemptions. These exemptions allow private companies to raise capital without going through the full SEC registration process. Below are the most common exemptions:

1. Regulation D (Reg D)

• Rule 506(b): Companies can raise an unlimited amount of money from an unlimited number of accredited investors and up to 35 non-accredited investors, as long as no general solicitation (advertising) is used. The company must file Form D within 15 days after the first sale(
• Rule 506(c): Allows general solicitation and advertising, but all investors must be accredited, and their status must be verified.
• Rule 504: This exemption is for smaller offerings, allowing companies to raise up to $10 million in a 12-month period. Some states may require additional filings for Rule 504 offerings.

2. Regulation A+

Regulation A+ offers a streamlined process with reduced disclosure requirements, often called a mini-IPO. There are two tiers:

• Tier 1: Allows companies to raise up to $20 million in a 12-month period. State-level approval is required.
• Tier 2: Companies can raise up to $75 million with federal oversight and without needing to comply with state securities laws

3. Rule 701

This exemption is specifically for compensatory offerings, where companies issue stock to employees, contractors, or consultants in exchange for services. Companies can issue up to $10 million worth of securities annually without needing SEC registration, but larger offerings may require additional disclosure.

4. Regulation Crowdfunding (Reg CF)

Regulation Crowdfunding allows companies to raise up to $5 million from a large number of investors through a registered online platform. There are limits on how much individual investors can invest based on their income, and companies must file specific forms with the SEC.

5. Intrastate Offering Exemption (Rule 147 and 147A)

These rules allow companies to sell securities only within their home state. Rule 147A permits broader use of modern communication technologies, while Rule 147 restricts offers to state residents.

Why Exemptions Matter

If your company qualifies for one of these exemptions, it can save time and money by avoiding the full SEC registration process. However, the company must still comply with the specific rules governing the chosen exemption to avoid penalties or legal issues.

For a deeper dive into the specifics of these regulations and the steps involved in the registration process, consult legal counsel or refer to the SEC’s official guidance.

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