The Handbook of Financing Growth: Compliance With Securities Laws

Raising capital requires knowledge of not only the financial markets but the securities markets. A company must comply not only with federal securities laws, but also with the securities laws of each state in which the issuer sells a security. The sad fact is that hundreds of deals fail because of poor decisions made as to its financing structure.

Privately held companies rely on two primary transactional exemptions from registration under federal securities laws. The first exemption from registration is provided by Section 4(2) of the 1933 Securities Act. This section provides an exemption for sales of securities by an issuer that does not involve a public offering. Privately held companies have relied on the so-called 4(2) exemption for the private placement of securities, but the exemption is not a defined set of rules. Consequently, issuers were forced to interpret and rely on federal case law that interpreted the legislation, but the cases evolved over time so issuers were always struggling to determine the most recent interpretation of the statute.

In contrast, the second exemption from registration is provided by a set of rules promulgated by the SEC and known as Regulation D. If an issuer follows the rules set forth in Regulation D, the issuer is afforded a safe harbor from registration for the securities issuance. It should be noted that transactional exemptions afforded by Section 4(2) and Regulation D are still subject to the SEC’s antifraud provisions.

by Kenneth H. Marks, Larry E. Robbins, Gonzalo Fernandez, John P. Funkhouser et al

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