Common exemptions from the registration requirement include:
- Regulation D: The SEC’s Regulation D exempts transactions that meet certain requirements. Generally, these include limits on the amounts raised and the number of buyers who are non-accredited investors, requirements for the information provided to investors, and restrictions on resale of the securities. Two most commonly used exemptions are under rules 506 (b) and 506 (c) of Regulation D. These rules differ in limitations on general solicitation and advertising and the requirements for accredited investors. Rule 506(c) exemption also preempts state securities laws that require registration. The main drawback is that the securities offered under a Rule 506(c), meaning they cannot be traded freely.
- Regulation A: Reg A+ exempts public offerings that satisfy certain criteria as to the issuer, type of security, investors, and disclosures. It allows for general solicitation and both accredited and unaccredited investors. In addition, securities offered in Reg A+ are freely tradable. Under Regulation A, offerings of up to $50 million during a 12-month period can be exempted. However, compliance with Tier II of Reg A (up to $50 million) requires significant upfront costs for going through SEC review and ongoing reporting requirements.
- Regulation S: Reg S exempts offers and sales of securities “that occur outside the United States”. Thus, the Reg S exemption is useful only when all the offers and sales activities are completed entirely outside of the US and made only to non-US Persons. Sometimes, a combination of Reg S and another exemption for US investors is a viable option. The limitation of Reg S is that it is only a federal exemption. A company that relies on Reg S must separately seek a state securities exemption.
Failure to Register When Required Has Severe Consequences
Offering or selling a security without first registering it with the SEC can lead to substantial negative consequences, including:
Significant penalties and sanctions imposed by the federal government through criminal, civil and administrative proceedings
Civil liability to the buyer for damages or rescission of the sale. If the seller is an entity, then any person with control over it will be jointly and severally liable for such damages
How KStechlaw Helps Clients Comply with SEC Rules
KStechlaw is a New York City law firm that assists clients who develop and launch virtual tokens in understanding, planning for and complying with federal securities laws.