common federal securities exemption

Common Federal Securities Exemptions for Small Businesses

If you offer securities for sale, the federal securities laws require you to register the securities with the Securities Exchange Commission unless an exemption applies. But what are some of the common federal securities exemptions that may apply to your business as you start raising money or giving equity to your employees?

Let’s start with some preliminary definitions:

  • A “security” is defined as an investment contract based on the expectation of profits solely from the effort of others, and it can include everything from a loan to purchase of stock.
  • An “offer” means any attempt to solicit purchase of a security, regardless of the form of consideration. That means offering equity to someone in your company in exchange for either cash or service triggers securities laws.

Because registration is a very time-consuming and expensive process (think an Initial Public Offering, or IPO), special care should go into finding an exemption from the registration requirements of the securities laws.

Common Federal Securities Exemptions

Below is a breakdown of some of the common federal securities exemptions that may apply to your enterprise including the intrastate exemption under Section 3(a)(11); the Regulation D exemptions under Rule 504, Rule 505, and Rule 506; and the proposed crowdfunding exemption pursuant to Title III of the JOBS Act under the new Section 4(a)(6).

Keep in mind that where the federal exemption does not preempt state blue sky laws, as in a Rule 504 or 505 offering, an applicable state exemption must also be found. In California, the state securities exemptions are found in Section 25102 of the California Corporations Code.

Common Federal Securities Exemptions
Intrastate – § 3(a)(11)*Rule 504Rule 505Rule 506(b)Rule 506(c)Crowdfunding – § 4(a)(6) **
Limit on Amount Raised?No limit$1M every 12 months$5M every 12 monthsNo limitNo limit$1M every 12 months
Restrictions on who Can Purchase?Persons residing in-stateNo restrictionsUnlimited # of accredited investors + up to 35 non-accreditedUnlimited # of accredited investors + up to 35 “sophisticated” investorsUnlimited number of accredited investors onlyNo restrictions
General Solicitation or Advertising Permitted?YesYesNoNoYes, but only if all purchasers are accredited and issuer takes reasonable steps to verify accredited investor statusYes
State Blue Sky Preemption?NoNoNoYesYesYes
Disclosure required?Based on applicable state blue sky lawsBased on applicable state blue sky lawsAudited financial statementsNone for accredited; Audited financial statements and others for non-accredited NoneAudited financial statements if raising over $500,000

* For the intrastate exemption under Section 3(a)(11) of the Act, organization must be organized and operating in the state, and offers may only be made to persons residing in that state. Offering to even one person outside of the state makes the exemption unavailable.

** Based on proposed SEC rules—final rules still pending.

Beware of Integration

The securities laws are designed to prevent a company from splitting a large offering into smaller offerings and applying a different exemption to each of the smaller offerings. In these situations, the smaller offerings are “integrated,” and the result is that the availability of an exemption for either or all of the offerings may be destroyed.

In deciding whether two or more offerings should be integrated, there are 5 factors to consider:

  1. Whether the offerings are part of a single plan of financing. The focus here is largely on whether the company intended the offerings to be separate or if it has a single plan for all of them.
  2. Whether the same class of security was issued. For example, debt and equity are different classes of securities, as are preferred stock and common stock.
  3. Whether the offerings occurred at or about the same time.
  4. Whether the same type of consideration—cash, services, etc.—is involved.
  5. Whether the offerings served the same general purpose, which is a slightly broader question than the first.

However, there are safe harbors under both the intrastate exemption and Regulation D (Rules 504, 505, and 506) listed above that allow a company to offer securities separated by more than six months without running into integration issues. If possible, the six month safe harbor should be used to avoid the fact-intensive inquiry outlined above.

For more information on common federal securities exemptions, check out the SEC’s website.

Contact us to discuss what securities exemptions will be a good fit for your business.


DISCLAIMER: The information in this article is provided for informational purposes only and should not be construed or relied upon as legal advice. This article may constitute attorney advertising under applicable state laws.

Hash Zahed

Hash is a business law attorney in Oakland, CA. He is passionate about using entrepreneurship as a force for good. Hash's practice focuses on assisting founders with entity formation, startup financing, employment compliance, business contracts, trademark, data privacy, and nonprofit organizations.

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