Last month, Congress passed a transportation bill called the Fixing America’s Surface Transportation Act (or FAST Act), signed into law by President Obama. However, buried in the bill was an addition to the Securities Act of 1933. The addition codifies an “unwritten” exemption from the registration requirement for the resale of securities, called “Section 4(a)(1-1/2)” because it combined the exemptions of both Section 4(a)(1), which exempted securities transactions by any person or entity other than an issuer, underwriter, or dealer, and Section 4(a)(2), which exempted transactions by an issuer not involving a public offering.
The new exemption, which is inserted into the Securities Act as Section 4(a)(7), exempts resales of restricted securities so long as the transaction meets several requirements:
1) The securities must be resold to an accredited investors
2) There can be no general solicitation for the resale
3) If the company that originally issued the securities is not subject to reporting requirements, then the seller and prospective purchaser must have access to reasonably current information about the company, including the equity structure, the directors and officers, and financial records
4) The seller is not a subsidiary of the issuer
5) Neither the seller nor anyone being paid in connection with the transaction is a bad actor as defined under Regulation D
6) The original issuing company is not a blank check, blind pool, or shell company
and 7) The class of securities involved in the resale have been outstanding for at least 90 days prior to the transaction.
Section 4(a)(7) provides another statutory resale exemption, in addition to Rule 144, the traditional codified resale exemption. Section 4(a)(7) provides greater flexibility than Rule 144, including having no cap on the amount of securities that can be resold in any one transaction, no holding period for the seller to qualify with, no requirement to report the transaction, and most importantly, an preemption from state registration requirements pursuant to NSMIA.
However, Rule 144 has benefits over Section 4(a)(7), including allowing resales to any person or entity, unlike Section 4(a)(7)’s requirement that the purchaser be an accredited investor. Moreover, securities resold under the Section 4(a)(7) exemption remain restricted securities, unlike in a Rule 144 transaction which unrestricted the securities.Therefore, a purchaser who acquires securities in a Section 4(a)(7) transaction must find an exemption if they wish to resell.