INTRASTATE OFFERING EXEMPTION
 

Section 3(a)(11) of the Securities Act is commonly known as the "intrastate offering exemption." This exemption facilitates the financing of local business operations. To qualify for the intrastate offering exemption, your company must: Be incorporated in the state where it is offering the securities; Carry out a significant amount of its business in that state; and Make offers and sales only to residents of that state

There is no fixed limit on the size of the offering or the number of purchasers. Your company must determine the residence of each purchaser. If any of the securities are offered or sold to even one out-of-state person, the exemption may be lost. Without the exemption, the company could be in violation of the Securities Act registration requirements. If a purchaser resells any of the securities to a person who resides outside the state within a short period of time after the company's offering is complete (the usual test is nine months), the entire transaction, including the original sales, might violate the Securities Act. Since secondary markets for these securities rarely develop, companies often must sell securities in these offerings at a discount.

It will be difficult for your company to rely on the intrastate exemption unless you know the purchasers and the sale is directly negotiated with them.

If your company holds some of its assets outside the state, or derives a substantial portion of its revenues outside the state where it proposes to offer its securities, it will probably have a difficult time qualifying for the exemption.

You may follow Rule 147, a "Safe Harbor" rule, to ensure that you meet the requirements for this exemption.

It is possible, however, that transactions not meeting all requirements of Rule 147 may still qualify for the exemption.

Section 4(2) of the Securities Act exempts from registration "transactions by an issuer not involving any public offering."

To qualify for this exemption, the purchasers of the securities must:
 

Have enough knowledge and experience in finance and business matters to evaluate the risks and merits of the investment (the "sophisticated investor"), or be able to bear the investment's economic risk; Have access to the type of information normally provided in a prospectus; and Agree not to resell or distribute the securities to the public.

In addition, you may not use any form of public solicitation or general advertising in connection with the offering.

The precise limits of this private offering exemption are uncertain. As the number of purchasers increases and their relationship to the company and its management becomes more remote, it is more difficult to show that the transaction qualifies for the exemption. You should know that if you offer securities to even one person who does not meet the necessary conditions, the entire offering may be in violation of the Securities Act.

Rule 501-508, provide objective standards that you can rely on to meet the requirements of this exemption. These rules are part of Regulation D discussed below.

REGULATION A

Section 3(b) of the Securities Act authorizes the SEC to exempt from registration small securities offerings. By this authority, the SEC created Regulation A, an exemption for public offerings not exceeding $5 million in any 12-month period. If you choose to rely on this exemption, your company must file an offering statement, consisting of a notification, offering circular, and exhibits, with the SEC for review.

Regulation A offerings share many characteristics with registered offerings. For example, you must provide purchasers with an offering circular that is similar in content to a prospectus. Like registered offerings, the securities can be offered publicly and are not "restricted," meaning they are freely tradable in the secondary market after the offering. The principal advantages of Regulation A offerings, as opposed to full registration, are:
 

• The financial statements are simpler and don't need to be audited;
• There are no Exchange Act reporting obligations after the offering unless the company has more than $1 million in total assets and more than 500 shareholders; Companies may choose among three formats to prepare the offering circular, one of which is a simplified question-and-answer document; and
• You may "test the waters" to determine if there is adequate interest in your securities before going through the expense of filing with the SEC.
   

All types of companies which do not report under the Exchange Act may use Regulation A, except "blank check" companies, those with an unspecified business, and investment companies registered or required to be registered under the Investment Company Act of 1940. In most cases, shareholders may use Regulation A to resell up to $1.5 million of securities.

If you "test the waters,"

you can use general solicitation and advertising prior to filing an offering statement with the SEC, giving you the advantage of determining whether there is enough market interest in your securities before you incur the full range of legal, accounting, and other costs associated with filing an offering statement. You may not, however, solicit or accept money until the SEC staff completes its review of the filed offering statement and you deliver prescribed offering materials to investors.

REGULATION D

Per the SEC: Regulation D establishes three exemptions from Securities Act registration and is by far the most utilized exemption provision.

Rule 504

Rule 504 provides an exemption for the offer and sale of up to $1,000,000 of securities in a 12-month period. Your company may use this exemption so long as it is not a blank check company and is not subject to Exchange Act reporting requirements. Like the other Regulation D exemptions, in general you may not use public solicitation or advertising to market the securities and purchasers receive "restricted" securities, meaning that they may not sell the securities without registration or an applicable exemption. However, you can use this exemption for a public offering of your securities and investors will receive freely tradable securities under the following circumstances:
 

• You register the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors;
• You register and sell in a state that requires registration and disclosure delivery and also sell in a state without those requirements, so long as you deliver the disclosure documents mandated by the state in which you registered to all purchasers; or,
• You sell exclusively according to state law exemptions that permit general solicitation and advertising, so long as you sell only to "accredited investors," a term described in more detail below in connection with Rule 505 and Rule 506 offerings.

Even if you make a private sale where there are no specific disclosure delivery requirements, you should take care to provide sufficient information to investors to avoid violating the anti-fraud provisions of the securities laws. This means that any information you provide to investors must be free from false or misleading statements. Similarly, you should not exclude any information if the omission makes what you do provide investors false or misleading.

Rule 505

Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period. Under this exemption, you may sell to an unlimited number of "accredited investors" and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions. Purchasers must buy for investment only, and not for resale. The issued securities are "restricted." Consequently, you must inform investors that they may not sell for at least six months without registering the transaction. You may not use general solicitation or advertising to sell the securities.

• A bank, insurance company, or registered investment company.
• A business development company, or small business investment company.  
• An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
• A charitable organization, corporation or partnership with assets exceeding $5 million;
• A director, executive officer, or general partner of the company selling the securities;
• A business in which all the equity owners are accredited investors;
• A natural person with a net worth of at least $1 million;
• A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
• A trust with assets of at least $5 million, not formed to acquire the securities offered, and whose purchases are directed by a sophisticated person.
   

It is up to you to decide what information you give to accredited investors, so long as it does not violate the anti-fraud prohibitions. But you must give non-accredited investors disclosure documents that generally are the same as those used in registered offerings. If you provide information to accredited investors, you must make this information available to the non-accredited investors as well. You must also be available to answer questions by prospective purchasers.

Here are some specifics about the financial statement requirements applicable to this type of offering:

• Financial statements need to be certified by an independent public accountant;
• If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company's balance sheet, to be dated within 120 days of the start of the offering, must be audited; and Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under the federal income tax laws.
   

Rule 506

Rule 506 is a "Safe Harbor" for the private offering exemption. If your company satisfies the following standards, you can be assured that you are within the Section 4(2) exemption:

• You can raise an unlimited amount of capital;
• You cannot use general solicitation or advertising to market the securities;
• You can sell securities to an unlimited number of accredited investors (the same group as identified in the Rule 505 discussion) and up to 35 other purchasers. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated - that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
• It is up to you to decide what information you give to accredited investors, so long as it does not violate the anti-fraud prohibitions. But you must give non-accredited investors disclosure documents that generally are the same as those used in registered offerings. If you provide information to accredited investors, you must make this information available to the non-accredited investors as well;
• You must be available to answer questions by prospective purchasers;
• Financial statement requirements are the same as for Rule 505; and
• Purchasers receive "restricted" securities. Consequently, purchasers may not freely trade the securities in the secondary market after the offering.

REGULATION S

Pursuant to SEC Regulation S, for the purposes of section 5 of the Securities Act the terms “offer,” “offer to sell," "sell,” “sale,” and “offer to buy” include offers and sales that occur within the United States and do not include offers and sales that occur outside the United States. An offer or sale of securities by the issuer, a distributor, any of their respective affiliates, or any person acting on behalf of any of the foregoing, is deemed to occur outside the United States, within the meaning of Sec. 230.901, if (1) the offer or sale is made in an offshore transaction; (2) no directed selling efforts are made in the United States by the issuer, a distributor, any of their respective affiliates, or any person acting on behalf of any of the foregoing; and (3) other specified conditions of the section are satisfied.

Regulation S is the traditional exemption relied upon by U.S. companies listing with the Alternative Investment Market (“AIM”) – a market operated by the London Stock Exchange plc (“Exchange”). AIM is a public trading market established by the Exchange to list newly issued shares of companies and provide a market for shares held by existing stockholders. Regulatory hurdles and listing standards are generally regarded as less onerous than those in the U.S. and for U.S. markets.

ACCREDITED INVESTOR EXEMPTION - SECTION 4(5)
 

Section 4(5) of the Securities Act exempts from registration offers and sales of securities to accredited investors when the total offering price is less than $5 million.The definition of accredited investors is the same as that used in Regulation D. Like the exemptions in Rule 505 and 506, this exemption does not permit any form of advertising or public solicitation. There are no document delivery requirements. Of course, all transactions are subject to the anti-fraud provisions of the securities laws.

EXEMPTION FOR SALES OF SECURITIES THROUGH EMPLOYEE BENEFITS PLANS - RULE 701

The SEC's Rule 701 exempts sales of securities if made to compensate employees. This exemption is available only to companies that are not subject to Exchange Act reporting requirements. You can sell at least $1,000,000 of securities under this exemption, no matter how small your company is. You can sell even more if you satisfy certain formulas based on your company's assets or on the number of its outstanding securities. If you sell more than $5 million in securities in a 12-month period, you need to provide limited disclosure documents to your employees. Employees receive "restricted securities" in these transactions and may not freely offer or sell them to the public.