Written by attorney Peter Jay Wilke

How Can My Company Sell Free Trading Stock without Registering with the SEC?

Generally, issued stock or other securities are either "restricted" or "unrestricted." If it's restricted, then it cannot be sold to just anyone, if at all. There may be avenues available to sell restricted securities through a private placement exemption (to securities registration), but then the securities sold are still "restricted." The restricted status of the securities certificate is evidenced by the placement of a "restrictive legend" on it.

There is a federal rule governing the removal of the restrictive legend from stock or other security certificates. This is Rule 144 of the SEC. It provides guidelines and timelines for when the restrictive legend can be removed and when the newly unrestricted stock or other security can be resold. This is an important tool in the money raising strategy for many emerging companies, but beyond the scope of this legal guide.

Herein, we're examining what an emerging company can do to sell unrestricted securities without having to file (register) with the Securities and Exchange Commission (the "SEC"). Generally, there are two possible methods to consider. One involves a limited registration with at least one state securities agency (but not the SEC) and the other is for sales to certain well off investors, known as "accredited investors."

The limited state registration is commonly known as a "SCOR," which stands for Small Corporate Offering Registration. Basically, a fill-in-the-blanks disclosure form is provided for the issuer's use (the issuer is the company offering the stock or other security for sale). Once filed and cleared by a state securities administrator, the SCOR offering can be made to residents of the state without regard, generally, to the financial status or qualification of the offeree/purchaser. These offerings are limited to a raise of $1 million in any consecutive 12 month period. The securities purchased, because of the limited registration, are unrestricted or "free trading." There's no waiting period to sell them. SCOR registrations are available in states around the nation.

The other choice allowing for the direct sale of unrestricted securities to an investor is known in most circles as a "Rule 504/MAIE" offering. Like the SCOR, this rule limits investment to $1 million in any consecutive 12 month period. Rule 504 is one of 3 substantive rules within Regulation D of the SEC. Rule 504 is the basis for the amount/time limitation of this type of securities offering. "MAIE" stands for the Model Accredited Investor Exemption. This legislation has been enacted in about half of the states. In these states, a notice of reliance on the rule is sent into the state securities agency within 15 days of the first sale in each state. A federal sales notice is also filed.

In securities law, especially those involving unregistered, or private placement, securities offerings, investors are either "accredited or "non-accredited." A few states have their own definitions, but by and large, the federal definition of these two categories, also found in Regulation D of the SEC, is what matters. There is a list of several types of accredited investors found in Regulation D. However, for most private offering purposes, the important definitions include investors with a net worth of at least $1 million or those having certain levels of income over the past few years. I've included a reference citation in the section below for more information on accredited investors.

Non-accredited investors cannot participate in Rule 504/MAIE offerings. However, knowing the "do's and don't's" concerning non-accredited investors are important when private placement offerings are concerned. This is a subject for another legal guide.

Unrestricted securities sales can play an important part in the initial fund-raising stages of developing companies. Check with your local attorney for more information. Thanks for listening and keep on truckin'!

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