Table of Contents
Many exempt offerings are limited to accredited investors
Which exemptions do companies often use?
Why is there controversy around the SEC’s exemption rules?
Jun 22, 2022
6 min read
The SEC exempt offerings allow private companies to offer and sell securities without registering the securities with the SEC, it's a starting process for small businesses.
Many private companies raise money by selling equity to investors. However, to comply with the federal Securities Act of 1933 (the ‘33 Act), the companies have to either register their securities offerings with the U.S. Securities and Exchange Commission (SEC) or meet an exemption.
Registering by going public through an initial public offering (IPO) orthrough a special purpose acquisition company (SPAC) can be a long and costly process. So, many small companies start with one of the many types of exempt offerings—also called a private placement or unregistered offering—that the ‘33 Act allows. Some larger companies that decide to stay private also raise money through unregistered offerings instead of dealing with the requirements that come with being publicly listed on a stock exchange.
There’s a lot of money flowing through these securities offerings. In fact, the SEC found that in fiscal year 2021, companies raised over $1.9 trillion through Regulation D offerings (a type of exempt offering) and only $317 billion from registered public offerings. Much of this money comes from accredited investors.
The ‘33 Act was passed in the wake of the stock market crash of 1929 to help protect investors. It prohibits fraudulent or deceitful sales of securities and requires organizations that are issuing securities—such as bonds and stocks—to disclose helpful information about the investment when they register the security.
Some types of securities, such as municipal bonds, are generally exempt from the registration requirement and available to all investors. But the private companies that raise money from exempt offerings generally get most of the funds from accredited investors—individuals or entities that are wealthy or financially knowledgeable enough to take on the risk associated with investing in unregistered offerings.
There are exemptions that allow companies to raise money from both accredited and non-accredited investors. However, raising money from non-accredited investors can require lengthy disclosures and some exemptions have fundraising caps. As a result, the limitations aren't practical for startups with big ambitions, which generally turn to angel investors, private equity funds, and other types of accredited investors.
The ‘33 Act allows for a number of exempt offerings, and defines who can participate and what limits issuers must observe. The six most common types of exempt offerings are:
The company can accept an unlimited amount of investments from accredited investors and up to 35 sophisticated but non-accredited investors—people who have sufficient knowledge and experience to understand the risk they’re taking. However, the company generally can’t solicit or advertise the offering, must give non-accredited investors disclosure documents, and has to be available to answer non-accredited investors’ questions.
The company can accept an unlimited amount of investments and broadly solicit and generally advertise its securities offering. However, all the investors must be accredited investors and the company has to take reasonable steps to verify their accredited status.
The company can raise up to $10 million from accredited and non-accredited investors, but can only generally solicit investments in limited situations.
The company can raise up to $5 million during a 12-month period from accredited and non-accredited investors (with limits based on their income). All the sales must be online via an SEC-registered intermediary.
A company that does a significant amount of its business in the state where it’s organized can use an intrastate offering to raise money from investors who are based in the same state. Accredited and non-accredited investors can participate, but the funding amount is often limited to $1 to $5 million depending on the state’s laws.
A two-tiered “mini-IPO” process that companies can use to raise up to $95 million from accredited and non-accredited investors.
There are other options as well, such as the statuary accredited investor exemption in Section 4(a)(5) of Act 33. However, some of the exemptions above are more popular because they offer more benefits with similar requirements.
Many of the exemptions also have “bad actor” disqualifications that limit who can use the exemption, and rules that affect when a purchaser can resell the security.
Many exempt offerings are subject to the bad actor disqualification provision that applies if the issuer or a covered person has a disqualifying event. The SEC outlines who is considered a covered person and what’s a disqualifying event.
For example, an issuing company and its affiliates, along with an owner, director, or executive of the issuer are all covered persons. And a disqualifying event can include certain criminal convictions and SEC disciplinary orders related to purchasing or selling securities.
Issuers can apply for a bad actor disqualification waiver from the SEC if they have a good cause (as determined by the SEC) or if the court or agency that oversaw the disqualifying event decides that the issuer shouldn’t be disqualified from the offering.
Investors who purchase securities from an exempt offering often receive restricted securities, which means the investor can’t immediately resell them. This keeps someone from buying a security solely to resell it to someone who wouldn’t otherwise have qualified.
Under Rule 144, accredited investors who purchased securities and aren’t affiliated with the company may be able to sell the securities if they hold onto the security for at least six to 12 months. However, even then, the security can’t necessarily be sold to a non-accredited investor.
Not everyone agrees with the regulations that effectively keep many non-accredited investors from investing in private companies.
Proponents of the accredited investor exemption rules point out that companies offering securities through exemptions may have limited disclosure requirements, and the rules protect people from high-risk investments. But others feel that they only help the rich get richer. They'd prefer a broader definition of accredited investor, or the elimination of accredited investor requirements altogether.
As it currently stands, an individual needs to either make at least $200,000 a year ($300,000 when combined with a partner’s income) or have a household net worth of over $1 million to qualify as an accredited investor. In August 2020, the SEC expanded the definition to include people who hold certain professional certifications or designations. But these requirements might still feel like barriers that keep most people out of an exclusive club.
The SEC exempt offerings allow private companies to offer and sell securities without registering the securities with the SEC. It might seem complex—and the specifics certainly can be—but it's a process that many small businesses and tech startups go through when they get started, and some larger companies continue to use to raise capital.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
Get started today.
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.
You might also like
Accredited Investor vs. Qualified Purchaser: Main Differences
Accredited investors and qualified purchasers are people and entities that meet specific federal criteria that allow them to purchase unregistered securities.
Accredited Investor: What It Is and How to Become One
A person or entity that qualifies based on the SEC’s definition, they are able to invest in security offerings and other investments that aren’t generally available.
Understand Updates to Accredited Investor Rule 501(a)
Rule 501(a) of Reg D of the ‘33 Act defines how a person or entity can qualify as an accredited investor—a requirement for purchasing some unregistered securities.
How to Become an Accredited Investor: Paths, Requirements, Verification
Becoming an accredited investor can be important for anyone who wants to invest in a private company, such as a startup, or buy other types of unregistered securities.
© Copyright 2023 Titan Global Capital Management USA LLC. All Rights Reserved.
Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.
Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.
The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.
Cryptocurrency advisory services are provided by Titan. Cryptocurrency trading is provided by Bakkt Crypto Solutions LLC ("Bakkt Crypto"). Bakkt Crypto is not a registered broker-dealer or a member of SIPC or FINRA. Cryptocurrencies are not securities and are not FDIC or SIPC insured. Bakkt Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency execution services are provided by Bakkt Crypto (NMLS ID 1828849) through a software licensing agreement between Bakkt Crypto and Titan. Please ensure that you fully understand the risks involved before trading: bakkt.com/disclosures.
Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.
Contact Titan at email@example.com. 508 LaGuardia Place NY, NY 10012.