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Federal Security Exemptions for Small Businesses

Posted by attorney Todd Gallinger

If you have recently created a company you may be required to register with the Securities and Exchange Commission (SEC) if you are going to be selling stock of your company. However, the SEC allows for certain companies to be exempt from registering, provided that they meet the requirement of one of the three following rules of exemption. If the company meets the requirements for one of these rules and wishes to be considered exempt from registering with the SEC, they still must complete the SEC Form D. This form is simply a way for the company to formally claim their exemption from registering and is reviewed by the SEC. The first rule or Rule 504 as it is technically referred states that registration is not required for companies that sell less than $1,000,000 worth of securities per year. This rule also does not allow for companies to advertise or solicit their securities to the public and for the most part also only allows for the sale of restricted securities, meaning the sale is done privately between affiliate and user. It also means that the buyer of the security may not resell it publicly either. A company can at times sell unrestricted securities if they properly register their offering in the state they wish to sell in (not with the SEC) and follows those specific state requirements. The second rule or Rule 505 is a bit more stringent in what it takes to be qualified to not register. First a company can only offer and sell up to $5,000,000 worth of securities per year and it can only sell these to accredited investors and up to 35 random people. All information disclosed to accredited investor, must also be disclosed to a non-accredited investor as well under this rule. Again like in the rule before you cannot explicitly advertise and solicit for the sale of securities and they must be only restricted securities. Secondly purchasers of the restricted securities must be informed they need to register their purchases with the SEC and cannot resell them for six months. If your company meets all of these requirements then it can qualify for exemption. The final and third rule or Rule 505 to that allows for companies that fall under this rule can raise unlimited amounts of money, so long as they meet the requirements of Section 4(2) of the Securities Act. This means the company cannot explicitly advertise and solicit for the sale of securities, may sell an unlimited amount of securities to accredited investors and up to 35 random other people, all information given to accredited investors must also be disclosed to non-accredited investors and purchasers of the companies restricted securities must register them and not resell them within one year. Business owners thinking about raising money should contact a qualified attorney in their jurisdiction. In addition to federal regulations, they likely must be concerned with state level "blue sky" regulations as well. An post about California's security regulations exemptions for small business will be forthcoming next week.

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