What are securities registration exemptions?

What are securities registration exemptions?

If you are looking to raise, but are not ready to go public, the answer is (somewhat) simple: find the applicable exemption.

In raising capital a company offers its securities - whether common stock, preferred stock, membership interest, convertible notes, SAFEs, warrants, et cetera - to potential investors. What many first-time founders forget is that this issuance of securities subjects the company to both federal and state securities laws. On the federal level, the general rule is that offers and sales of securities by means of interstate commerce must be registered with the Securities and Exchange Commission (“SEC”) under Section 5 of the Securities Act of 1933, as amended (the “Securities Act”) unless an exemption applies. The registration of securities is the process by which an issuer (meaning the company raising capital) files the required documents with the SEC to pursue a public offering of its securities to investors. To clarify: the legal framework discussed herein is only federal, and companies must additionally comply with all applicable state securities laws.

What is securities registration?

Even most novice entrepreneurs have heard of one type of registration statement: the Form S-1. The Form S-1 prospectus is a comprehensive document that is typically used when a company is considering an IPO. Its purpose is to ensure that adequate disclosure is accessible to the public so that potential investors may make informed investment decisions. The problem is that preparing a registration statement is an expensive process – costs, including underwriting, legal, accounting, printing, filing fees, as well as other miscellaneous expenses, pose an insurmountable hurdle for most startups.

What are unregistered offerings?

To facilitate capital formation, policymakers designed a number of exemptions to this registration process that allow companies to raise capital without bearing the exorbitant IPO costs. Each exemption constitutes a unique capital raising avenue that requires the issuing company to follow an applicable legal framework. An unregistered offering reliant upon an exemption is often referred to as a private placement (“unregistered offering” in proper jargon). An exemption’s availability generally depends on a number of factors including the size of the offering, the status of the prospective investors (particularly whether the investor is accredited or not), and whether the company wishes to publicly advertise the offering.

What if I don’t comply with securities laws?

Failure to register the securities or meet the requirements of an exemption can expose a company and its leadership to civil and criminal penalties or even incarceration. In some cases, the company and certain related parties can be subject to “bad actor” disqualification, prohibiting them from raising capital in reliance on critical exemptions. Non-compliance may also give rescission or cancellation rights to investors - which allow them to force the issuing company to repurchase the securities and recover the purchase price plus interest. The advice of a securities attorney is always valuable prior to initiating capital raising activities, as companies should be able to identify in advance which exemption from registration is available, which requirements apply to such exemption (under both federal and state law), and what information should be shared with prospective investors.

Author: Côme Laffay, Esq.

First Published: 12/01/2022 on laffaylaw.com

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Roche Legal, PLLC


Alexandre Leturgez-Coïaniz, Esq., LL.M.

Daniel B. Koburger, Esq., LL.M.

Côme Laffay, Esq., LL.M.