Securities Laws for Reselling Shares:
How Section 4(a)(7) Compares to Other Available Securities Exemptions

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In 2015, Congress passed the FAST ACT “Fixing America’s Surface Transportation.” As the name indicates, this legislation is mostly geared toward improving transportation, but an amendment to the Securities Act is tucked in that creates a new registration exemption for private resales of securities: Section 4(a)(7).

To see how 4(a)(7) stacks up against other available exemptions for securities resales, here is a pared down (non-comprehensive) chart highlighting some differences and similarities between exemptions for securities of non-public issuers (not including the rules for affiliate resellers):

 

	Rule 144	Rule 144A	“Rule 4(a)(1½)”	Section 4(a)(7)
Who can sell?	Individuals who acquired securities directly from Issuer	Any person other than the issuer	Any person other than issuer	Any person other than issuer or direct or indirect subsidiary (no “bad actors”)
Who can buy?	Public	“Qualified Institutional Buyers”	Accredited Investors	Accredited Investors
What manner?	Public resale	Private resale	Private resale	Private resale
Information?	Certain basic info must be publicly available	Seller must make certain info available to purchaser upon request	Seller should share info about issuer that seller has available	Seller must deliver certain info to purchaser
General Solicitation and Advertising allowed?	N/A	Yes	No	No
Timing constraints?	1-year holding period prior to sale for non-reporting companies		Generally recommended 6-month minimum holding period	No holding requirement, but shares must be of a class authorized and outstanding for at least 90 days prior to sale
Federal Filing requirement?	No	No	No	No, PLUS pre-empts state Blue Sky Laws

NOTES:
- Different requirements apply to sellers who are “affiliates” of the issuer and are not addressed above. - Regulation S, not included above, sets out circumstances where resales to Non-U.S.-resident purchasers in offshore transactions are not subjected to U.S. securities laws (to be discussed in a separate post).

Rule 144

Section 4(a)(1) of the Securities Act provides the pre-existing exemption from securities registration for resales by individuals other than issuer, "underwriter", or dealer. Since the term “underwriter” is ambiguous, startup stockholders seeking to resell shares will look to Rule 144 because it creates a safe harbor for avoiding underwriter status that applies to individuals who acquired shares directly from the issuer for exemption from registration. As set forth in the table above, Rule 144 requirements include limits on the amount of shares that can be resold (only up to 1% of the shares or other units of that class outstanding within a 3 month period ) and constraints on timing of resales (1-year holding period requirement prior to sale for non-reporting companies).

Rule 144A

This rule similarly provides a safe harbor to avoid “underwriter” status under Section 4(a)(1). However, Rule 144A is for private resales and the purchaser must qualify as a Qualified Institutional Buyer, meaning the purchaser must be one of the specified types of entities that “in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers that are not affiliated with the entity.”

Rule 144A could also be conceptually understood as codifying “Rule 4(a)(1-½)” specifically for institutional buyers.

“Rule 4(a)(1½)”

This rule is in quotation marks because this isn’t a codified rule. Section 4(a)(1) and the Rule 144 safe harbor permit a holder of securities that were acquired privately from the issuer to resell shares on a public trading market. Section 4(a)(2) allows the issuer to be exempt from registration for the issuer’s sales of securities in a “private placement.”

If a holder wishes to resell shares privately under Section 4(a)(1), again the transaction has to be “private” enough to avoid getting into the murky water of being considered an “underwriter” under Section 4(a)(1). The requirements noted in the chart (along with a few others not listed out there) reflect a general consensus developed over time by lawyers, case law, and guidance from the SEC that essentially combines elements of 4(a)(1) and 4(a)(2), resulting in the so called “Rule 4(a)(1½)” exemption.

Section 4(a)(7)

4(a)(7) is a non-exclusive safe harbor. It is generally understood to be an effort to codify 4(a)(1½), but does not perfectly mirror it and does not replace it.

Although 4(a)(7)’s requirements create more limitations than 4(a)(1½), 4(a)(7) provides more certainty around qualifying resales to purchasers who are individuals rather than institutional purchasers. The pre-emption of Blue Sky laws also helps to facilitate resales to individual purchasers.

In comparison to Rule 144, 4(a)(7) does not have the holding period requirement. We didn’t cover rules for affiliates in the chart, but it is worth mentioning that Rule 144 also has volume restrictions on sales by affiliates (if you are an affiliate, under Rule 144, the number of equity securities you can sell during any three-month period cannot exceed 1% of the outstanding shares of the same class being sold). Section 4(a)(7) does not have such a limitation for affiliates, meaning 4(a)(7) may open the way for more possible liquidity for affiliate resellers.

In comparison to Rule 144A requiring purchasers to be Qualified Institutional Buyers, Section 4(a)(7) applies to a broader category of “Accredited Investors.” The information requirement is heavier under Section 4(a)(7) because it requires delivery of information to the purchaser whereas Rule 144A only requires that certain information be made available upon request. The Section 4(a)(7) information requirement may seem concerning for smaller startups, but compliance with this requirement should not be too burdensome since the information does not have to be audited or reviewed. It would, however, require that the issuer cooperate with the reseller to help make the necessary information available.