What Are the Legal Licenses Required to Sell Shares of Private Companies and What Are the Exemptions from Such Licenses?

Question from Jimmymichael, What Are the Legal Licenses Required to Sell Shares of Private Companies and What Are the Exemptions from Such Licenses?

Answer from AI:

Selling shares of private companies in the United States involves navigating a complex regulatory landscape. This process is primarily governed by federal securities laws, particularly the Securities Act of 1933, and various state laws, often referred to as “Blue Sky” laws. Below is a general explanation of the legal licenses required and the exemptions available.

Licenses Required to Sell Shares of Private Companies

To sell shares of a private company, certain licenses and registrations are typically required:

• Broker-Dealer Registration: Individuals or entities that facilitate the sale of securities must generally register as broker-dealers with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934. This involves:
  • Filing Form BD with the SEC
  • Registering with a self-regulatory organization (SRO) like the Financial Industry Regulatory Authority (FINRA)
  • Registering in each state where they plan to do business
• Investment Adviser Registration: If the sale involves providing investment advice, the individual or entity may need to register as an investment adviser under the Investment Advisers Act of 1940.

Exemptions from Licensing Requirements

There are several exemptions that can allow the sale of shares without the need for full registration:

1. Regulation D: This is a set of rules under the Securities Act of 1933 that provides exemptions for private placements. Key provisions include:
   • Rule 504: Allows for the sale of up to $10 million in securities in a 12-month period without registration.
   • Rule 506(b): Permits an unlimited amount of money to be raised from up to 35 non-accredited investors and an unlimited number of accredited investors, provided no general solicitation is used.
   • Rule 506(c): Allows general solicitation but requires that all investors be accredited and the issuer takes reasonable steps to verify this status.
2. Regulation A: Also known as “Reg A,” this exemption allows companies to raise up to $75 million in a 12-month period through a simplified registration process.
3. Intrastate Offering Exemption: Under Rule 147 and Rule 147A, companies can sell securities within a single state without federal registration, provided they meet certain conditions.
4. Rule 144A: Allows the sale of securities to qualified institutional buyers (QIBs) without registration.

When to Consult a Legal Professional

Given the complexity of securities laws and the severe penalties for non-compliance, it is crucial to consult with a legal professional when planning to sell shares of a private company. A securities attorney can provide personalized advice and ensure that all regulatory requirements are met.

Additional Resources

For more detailed information, you can refer to the following primary sources:

• SEC’s Guide to Exempt Offerings
• FINRA’s Broker-Dealer Registration Information

Understanding the legal requirements and exemptions for selling shares of private companies is essential for compliance and successful fundraising. Always seek professional legal advice to navigate these regulations effectively.