Series 7

Securities Markets - Regulation A & D


Regulation A
Under an SEC rule called Regulation A, companies raising less than $5 million from capital markets in a 12-month period may be exempt from registering their securities.


Instead of filing a registration statement through the Commission's online EDGAR database, these companies need only file with the SEC a printed copy of an "offering circular" containing financial statements and other information to conform to "Reg A".

Regulation D
Under another SEC rule known as Regulation D, which exempts companies that seek to raise less than $1 million from capital markets in a 12-month period, some smaller companies can offer and sell securities without registering the transaction.
  • "Reg D" also exempts companies seeking to raise up to $5 million, as long as the companies sell either to no more than 35 individuals or to any number of "accredited investors" who must meet high net worth or income standards.

  • This regulation also exempts some larger private offerings of securities. While companies claiming an exemption under Reg D do not have to register or file reports with the SEC, or provide much information about the company, they still have to file a brief notice listing the names and addresses of owners and stock promoters.
Terminology
  • Private placements occur when securities are sold directly to such institutional investors as banks, mutual funds and pension funds. They do not require SEC registration, provided the securities are bought for investment purposes rather than resale.

  • Words to that effect should be stated in a letter written by the investor which establishes the length of time he intends to hold the securities. These constitute restricted securities, and there are barriers to selling them in the open market.

  • The same can be said for control securities, shares representing such a large proportion of the issuer's equity as to afford the shareholder authority over the operating company.
SEC Rule 144
The SEC's Rule 144 allows public resale of restricted and control securities under the following conditions:
  • the investor held them for at least one year;

  • adequate, current information exists about the issuer of the securities, usually in the form of the standard periodic financial reports;

  • the number of shares sold during any three-month period does not exceed the greater of 1% of the outstanding shares of the same class being sold or 1% of the average reported weekly trading volume;

  • the sales are handled as routine trading transactions with normal commissions; and

  • a notice is filed with the SEC.
Rule 144 is not to be confused with Rule 144A, which governs private placements of unregistered securities among qualified institutional buyers - sophisticated financial institutions managing at least $100 million.




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