Overview of US federal securities law exemptions available for raising capital

Every offering of securities must be registered with the SEC unless it qualifies for an available exemption and I am often asked to describe various types of exemptions and regulations that are available to private companies raising capital.  I go over Regulation D, Regulation CF, Regulation A+ rules with clients about once a week.  I also teach the same at Fordham Law School.  Below I am posting a summary that I hope you will find helpful.  Note that the table does not include all available exemptions and regulations.  Email me if you'd like a nice pdf version.

Regulation CF (Crowdfunding):

Amount to be Raised:	Up to $1,070,000 in a 12-month period
Type of Issuers:	US entities only Other limitations apply
Investors:	Any investor (accredited[1] and non-accredited).  However, there are limits as to how much non-accredited investors can invest depending on their net worth or income.
Marketing Limitations:	Issuers can only communicate and market through a registered crowdfunding portal.  Any type of marketing and communication is permitted through the portal (so long as not misleading).  Outside of the portal platform, only very limited factual communications are permitted.
Resale Limitations:	These are restricted securities that generally cannot be resold for one year unless (i) back to the issuer, (ii) to an accredited investor, (iii) as part of a registered offering, or (iv) to a family member or for estate planning purposes.
Filing Requirements:	Issuers must file Form C with the SEC and update it annually so long as, generally, securities issued in Regulation CF offering are outstanding.
Information Requirements:	In addition to providing disclosures about the company and the offering, the issuers must provide financial statements (which have to be audited if the offering exceeds $535,000 and the issuer has sold securities in reliance on Regulation CF before).
General comments:	Although cheaper than conducting a Regulation A+ offering, the $1.07 million cap on the gross proceeds makes it a relatively expensive undertaking.  Also, the issuer must conduct its offering through one of the registered crowdfunding portals.

Regulation D Rule 506(b):

Amount to be Raised:	Unlimited
Type of Issuers:	Any issuer, including foreign issuers Certain limitations apply (such as that the issuer cannot be a “bad actor”)
Investors:	Unlimited number of accredited investors and up to 35 non-accredited but financially sophisticated investors.
Marketing Limitations:	No general solicitation or advertising is permitted.  Offers and sales should be made only to those investors with whom the issuer has pre-existing relationship.
Resale Limitations:	Restricted securities (i.e., not freely tradeable generally for at least one year)
Filing Requirements:	Issuers must file Form D with the SEC within 15 days after the first sale.  The issuer also needs to make notice filings in every state where the investors reside.
Information Requirements:	If the issuer accepts money from non-accredited investors, it must provide a private placement memorandum with specific mandated disclosures specified in Rule 502 of Regulation D.
General comments:	This exemption may not be suitable for those offerings that are conducted online through unrestricted web portals because of the restriction on solicitation and advertising (because posting offering details on a website is generally considered to be advertising).

Regulation D Rule 506(c):

Amount to be Raised:	Unlimited
Type of Issuers:	Any issuer, including foreign issuers Certain limitations apply (such as that the issuer cannot be a “bad actor”)
Investors:	Accredited investors only
Marketing Limitations:	General solicitation and advertising are permitted.
Resale Limitations:	Restricted securities
Filing Requirements:	Issuers must file Form D with the SEC within 15 days after the first sale.  The issuer also needs to make notice filings in every state where the investors reside.
Information Requirements:	None
General comments:	Many issuers rely on this exemption.  The issuer has to take reasonable steps to verify that purchasers of securities sold in any offering under Rule 506(c) are accredited investors.

Regulation A+ (Tier 1):

Amount to be Raised:	Up to $20 million per year
Type of Issuers:	US and Canadian entities only Certain types of entities (such as shell companies, issuers of penny stock or other types of investment vehicles) are ineligible
Investors:	Accredited and non-accredited investors
Marketing Limitations:	Generally marketing and advertising are permitted, but certain limitations exist.  When using “test-the-waters” marketing or before the registration statement has been qualified with the SEC, the issuer has to specifically state whether a registration statement has been filed and if yes, then provide a link to the filing.  Also, there needs to be a disclaimer saying that no money is being solicited and that none will be accepted until after the registration statement is qualified with the SEC.  All solicitation material must be submitted to the SEC as an exhibit.
Resale Limitations:	Unrestricted securities, but limitations on trading exist
Filing Requirements:	Issuers must file Form 1-A with the SEC and get qualified.  Companies need to count their shareholders for the purposes of Section 12(g) registration.
Information Requirements:	Form 1-A requires detailed disclosures about the issuer, including financial statements which need not be audited unless audited financial statements already exist.  Generally, the level of disclosure is similar to that required in an initial public offering.
General comments:	Issuers raising money in a Regulation A+ Tier 1 offering must comply with the individual "blue sky" laws of each state where they plan to sell their securities.

Regulation A+ (Tier 2):

Amount to be Raised:	Up to $50 million per year
Type of Issuers:	US and Canadian entities only Certain types of entities (such as shell companies, issuers of penny stock or other types of investment vehicles) are ineligible
Investors:	Any accredited and non-accredited investor.  However, there are limits on how much non-accredited investors may invest depending on their net worth or income.
Marketing Limitations:	Generally marketing and advertising is allowed, but certain limitations exist.  When using “test-the-waters” marketing or before the registration statement has been qualified with the SEC, the issuer has to specifically state whether a registration statement has been filed and if yes, then provide a link to the filing.  Also, there needs to be a disclaimer saying that no money is being solicited and that none will be accepted until after the registration statement is qualified with the SEC.  All solicitation material must be submitted to the SEC as an exhibit.
Resale Limitations:	Unrestricted securities (at the federal level)
Filing Requirements:	Issuers must file Form 1-A with the SEC and get qualified.  After the offering, the issuer has ongoing reporting obligations. Tier 2 offerings are exempt from complying with state “blue sky” laws (although states can (and generally will) still require that information provided to the SEC also be filed with the state, and that the issuer pay filing fees.
Information Requirements:	Form 1-A requires detailed disclosures about the issuer, including audited financial statements.  The level of disclosure is similar to that required in an initial public offering. Tier 2 issuers are required to include audited financial statements in their offering documents and to file annual, semiannual, and current reports with the SEC on an ongoing basis.
General comments:	Companies are required to engage the services of a transfer agent.

Regulation S:

Regulation S is an exclusion from the registration requirements of the Securities Act for offerings made outside of the United States by both U.S. and foreign issuers.  A compliant Regulation S offering must follow two general conditions: (i) the offer or sale must occur in an “offshore transaction” and (ii) there be no “directed selling efforts” into the United States. 

Regulation S transactions are divided into three categories.  Category One, which includes offers and sales by “foreign issuers” for which there is no “substantial U.S. market interest” or offerings of securities in “overseas directed offerings” is the least restrictive, with no resale limitations.  Category Two securities, which include securities issued in equity offerings by reporting foreign issuers and offerings of debt securities, non-participating preferred stock by reporting issuers or non-reporting foreign issuers, may not be resold to U.S. persons during a 40-day distribution compliance period.  Category Three is typically the most relevant for the smaller private issuers.  Category Three includes offerings of all other securities, including equity offerings by domestic non-reporting issuers (i.e., private companies with no reporting requirements with the SEC).  Resales to U.S. persons of securities issued in Category Three offerings are restricted for one year unless they are done in compliance with an available resale exemption. 

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[1] Rule 501(a) of the Securities Act defines accredited investors (in the case of natural persons) as those whose individual net worth (alone or with a spouse) exceeds $1 million (excluding the value of their primary residence) or those whose annual income exceeded $200,000 (or $300,000 together with their spouse) in each of the two most recent years and they reasonably expect reaching the same income level in the current year.

This article is not legal advice and was written for general informational purposes only.  It does not express anyone else's views except for the author's.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author Arina Shulga.