What are some common securities regulation exemptions?

This article will discuss a few of the most common securities regulation exemptions. However, extreme caution is urged toward the reader. This article is NOT enough for you to navigate the world of securities regulation on your own. You MUST consult a competent lawyer before proceeding. One small mistake and you may be committing a state and federal crime! I will first discuss some common Texas exemptions and then a few common federal exemptions. Please note that each state's exemptions are different.

Texas Exemptions

You can have two kinds of exemptions in Texas (1) exempt securities, and (2) exempt transactions. Exempt securities usually don't play as large a role in small-business transactions, except that they exempt non-profit corporation securities. And many exempt securities must be sold through registered broker/dealers in order to maintain their exempt security status. There are more exemptions there but this article does not discuss them.

Exempt transactions are the exemptions that we rely on the most for Texas exemptions. They include limited offerings, sales to certain institutional investors, and other miscellaneous exemptions.

The main exemption used by this office is that Texas exempts the sale of any security by the issuer provided that the total number of security holders is 35 persons or less. Another exemption is sales to only 15 persons in a twelve-month period. There are numerous restrictions on these exemptions such as how to calculate the number of purchasers, that the sale had no public advertising or solicitation, whether each investor is sophisticated, whether each investor is well informed, whether each investor has a close personal tie to you, the geographic location of the purchasers, whether the investor's are buying the securities for their own account and not for distribution, and other factors.

Federal Exemptions

The SEC and the federal securities laws have several exemptions from registration. The Securities act of 1933 exempts intrastate securities through section 3(a)(11) and safe harbor Rule 147. It exempts several different transactions including the Section 4(a)(2), and Regulation D Rules 501, 502, 503, 505, and 506. The details of these exemptions are highly technical and beyond the scope of this article. Typically, a Regulation D exemption can be found for most small businesses if they don't meet the intrastate offering safe harbor.

The big picture I want to impress upon the reader is that you really need to consult your lawyer before you even start talking about the business idea to outside investors, to help prevent securities regulation violations.


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