Blue Sky Exemptions

The Securities Act of 1933 mandates that any offer to sell securities be registered through the SEC, or qualify for an exemption. There are many different ways for securities to be considered exempt, however three common ways are through Regulation D (Reg D). Reg D provides three rules, 504, 505, and 506 that all outline exemptions. These rules allow some companies to sell and offer securities without registering these securities with the SEC.

Rule 504: Provides an exemption for companies who offer and sell up to $1,000,000 of their securities within a 12-month period. Blank check companies are prohibited from using this exemption. This rule typically restricts companies from soliciting or marketing their securities to the public, and purchasers receive “restricted securities”. This means that the securities may not be sold for one year without registration or a valid exemption.

Rule 505: Companies may qualify for this registration if they: only offer and sell up to $5,000,000 million of its securities in a 12-month period, sell to an unlimited number of accredited investors but only up to 35 other persons who do not qualify as an accredited investor, inform buyers that they are receiving “restricted securities”, do not use general solicitation to sell these securities. Companies are also able to decide what information they provide to accredited investors, providing that this information does not violate the antifraud prohibitions.

Rule 506: This rule is considered a “safe harbor” for the private offering exemption. Companies that rely on this exemption are able to raise an unlimited amount of money. Purchasers of securities under this regulation also receive “restricted securities”.

Companies that rely on Reg D are exempt from registering their securities with the SEC, however they must file a “Form D” with the SEC after first selling their securities. Form D includes the names and addresses of the company’s promoters, executive officers and directors and brief details about the offering.