Alert November 04, 2015

House Passes Act to Codify Section 4(a)(1½) Exemption for Resales of Restricted Securities


The House has passed and sent to the Senate a bill that is intended to codify the so-called “Section 4(a)(1½)” exemption for resales of restricted securities. If enacted, the RAISE Act of 2015 would provide a clear legal framework for secondary markets of restricted securities and set forth specific criteria for the seller, purchaser and issuer of the securities and other conditions to be satisfied to qualify for the exemption.

On October 6, 2015, the U.S. House of Representatives unanimously approved the Reforming Access for Investments in Startup Enterprises Act of 2015 (H.R. 1839), also known as the RAISE Act of 2015. The RAISE Act has been received in the Senate and was referred to the Committee on Banking, Housing and Urban Affairs.

The purpose of the RAISE Act is to codify the Section 4(a)(1½) exemption – an existing, informal, case law-based exemption for the resale of privately placed securities – in a new subsection (a)(7) to Section 4 of the Securities Act of 1933. The bill provides that the Section 4(a)(7) exemption would not be the exclusive means for establishing an exemption from the registration requirements of the Securities Act.

If passed by the Senate and signed by the President, Section 4(a)(7) would require that resales of restricted securities satisfy a number of specified conditions to be exempt under Section 4(a)(7), including:

  • Resale Transactions Only. The securities may not be offered by the issuer or a direct or indirect subsidiary of the issuer, and must not be part of an unsold allotment to, or a subscription or participation by, an underwriter of the security.
  • Accredited Investors. Each purchaser must be an accredited investor, as defined in Rule 501(a) of Regulation D.
  • Security and Issuer Requirements. The securities must have been authorized and outstanding for at least 90 days prior to the date of the transaction. The issuer may not be in the organizational stage, bankruptcy or receivership and must not be a blank check, blind pool or shell company.
  • No General Solicitation or Advertising. Neither the seller nor any person acting on its behalf may offer or sell the securities by any form of general solicitation or general advertising.
  • Bad Actor Disqualification. Neither the seller, nor any person who has been or will be paid any remuneration or commission for their participation in the offer or sale of the securities, is a “bad actor” under Rule 506(d)(1) or is subject to statutory disqualification under Section 3(a)(39) of the Securities Exchange Act of 1934.

Information Requirements. Section 4(a)(7) would also impose additional information requirements for issuers that are not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act or are exempt from reporting under Rule 12g3-2(b) of the Exchange Act. The issuer must make available to both the seller and purchaser, upon request of the seller, and the seller in all cases must make available to the prospective purchaser, certain additional information, which includes:

  • general information regarding the issuer (name, address, officers, directors, transfer agent, corporate secretary and nature of business), the security (title, class, par or stated value, shares outstanding) and the names of any persons registered as a broker, dealer or agent who will be paid or given, directly or indirectly, any commission or remuneration; 
  •  “reasonably current” balance sheets and income statements for its two preceding fiscal years (or such lesser period as the issuer has been in operation) and potentially an interim income statement for certain periods, each prepared in accordance with U.S. GAAP, or in the case of a foreign private issuer, IFRS; and
  • if the seller is a control person with respect to the issuer, (i) a brief statement regarding the nature of the seller’s affiliation and (ii) a statement certified by the seller that the seller has no reasonable grounds to believe that the issuer is in violation of securities laws or regulations.