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Last Updated on May 1, 2019 by John Fischer

Under the Reg D exemption from registration under the Securities and Exchange Act of 1933 investors that purchase securities through a private offering are purchasing “restricted” securities.  This means that they cannot be sold to the general public without meeting specific criteria.  The SEC has put these rules in place to ensure that “private” offerings are truly private.

Accredited Investors should be aware that they will typically need to hold onto these securities for at least one year.  If investors want to sell their securities they need to use an “effective” registration statement under the Securities Act.  Investors should speak with companies issuing private offerings to discuss what their future registration plans are prior to finalizing their investment.

The SEC does provide an exemption for selling restricted securities.  Accredited Investors that bought securities through a private offering can sell them after meeting the following:

  • Hold the securities for a specific amount of time as set forth by the SEC. If you bought restricted securities from a company that is reporting to the SEC the holding period is only six months.  If they are not reporting to the SEC the holding period is one year.
  • Company information needs to be publically available.  For reporting companies this is easy as they have to submit information to the SEC anyway.  Non reporting companies need to have their business information, officer information, and financial reporting available publically.  This could be through their website.
  • If you are an affiliate of the company you cannot sell any more than 1% of the outstanding shares in that same class within a three month period.
  • Normal brokerage practices can be utilized but only if the broker does not get a higher than normal commission.
  • If you are an affiliate you need to inform the SEC that you are selling the securities if you are selling more than $50,000 worth in shares over a three month period.  This is done using Form 144.  If you don’t sell the shares you have to amend it and let the SEC know.

Accredited Investors that are not affiliates of the company have less restrictions or rules to follow.  You still can’t sell them publically until you get a transfer agent to remove the restricted legend on the certificate.  Find out what the companies long term strategy is prior to investing and incorporate that into your financial plan.

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