The Poor Man’s Security Resale Exemption

The Poor Man’s Security Resale Exemption

Heads-up to anyone holding restricted securities:

Better act now because

Congress’s Fixing America’s Surface Transportation Act

could fix you pretty good!

Woe to the person holding securities of a company that is not freely traded. People who are affiliates/controlling persons of the company or people who have bought in a private placement or hold restricted securities are in a bind if they want to liquidate any of their holdings.

Until recently there were very few ways to sell their non-freely traded securities. They could try to sell under SEC Rule 144, but this is subject to holding period and, in the case of affiliates (controlling persons), limits on amounts sold. They could try to sell under SEC Rule 144A, but then only to Qualified Institutional Buyers. That is a buyer who generally has $100 million in securities owned or under their management.

Congress changed this with the Fixing America’s Surface Transportation Act. It added section 4(a) (7) to the Securities Act of 1993. This exempts from the Securities Act’s registration requirements sales by other than the issuer or a subsidiary, subject to the following additional seven (7) conditions:

1. The purchaser(s) must be an “accredited investor” as defined in SEC Regulation D;
2. There can be no general solicitation or advertising;
3. If the company is not an SEC reporting company, specified information must be furnished to a requesting prospective purchaser;
4. The seller and anyone participating in the offering for compensation can’t be a “bad actor” as defined in SEC Rule 506(d)(1);
5. The issuer must be engaged in business, can’t be in the organizational stage or in bankruptcy, and is not a blank check, blind pool or shell company;
6. The transaction is not part of an unsold underwriting allotment; and
7. The security being sold must be of a class that has been outstanding for at least 90 days.

There is even more good news. Sales under Section 4(a)(7) are exempt from the requirements to register or qualify the security under state Blue Sky Laws.

The only bad news is that buyers of these securities are deemed to have purchased restricted securities, and can’t resell them other than pursuant to an exemption from the Securities Act registration requirements, e.g. Section 4(a)(7).

If you have any questions, comments or would like to discuss this further please feel free to contact me (phone 212 455 0476; cell 914 646 8035; email msimkin@securitiesregslawyer.com).