The securities sold in a Reg D offering are “restricted” under US securities law and cannot be easily resold for the first year. The one-year holding period applies even if the company has done a Reg A+ offering. The Reg D shares are treated differently from the ones sold under Regulation A, even if they are of the same class. It’s technically not correct to say that there is always a one-year lockup on new investors. The limitations become easier to comply with for people (or entities) who are not affiliates after a year has passed since the securities were first acquired from the issuer (company). There are exceptions to the one-year lockup - four such exceptions are listed below;
Holders of restricted securities of non-reporting companies who are not affiliates, (affiliates are a type of insider) may resell in the following ways:
- Privately in sales under the so-called “Section 4 (1 ½) exemption”, typically only to other accredited investors and on the basis of an opinion of counsel at any time;
- Privately under Section 4(a)(7) of the Securities Act to accredited investors at any time;
- Privately to “qualified institutional buyers” under Rule 144A at any time;
- Outside the United States in reliance on Regulation S at any time;
- Publicly under Rule 144 one year after the securities were issued.
The exemptions for private sales mentioned above all have conditions that have to be met and the securities remain restricted. There may also be contractual restrictions on such resales or requirements set forth in the bylaws and of course in all cases, state law requirements have to be complied with as well.
Officers, directors or investors who hold more than 10% of the company’s securities, might be “affiliates” and their shares will be subject to additional restrictions on resale. They'll likely need a lawyer to advise them whether these restrictions apply.
In the case of affiliates, the securities are both “restricted” and “control” and investors need to hold them a year from the date on which they got them from the company before can be resold publicly. The ways in which investors can sell publicly are the same as discussed above for non-affiliates. Again, for affiliates there are limitations on the number of shares they can sell at any one time, they’ll need to sell through a broker or market maker, they’ll have to file a Form 144 with the SEC and “adequate current public information” must be available about the company, which means it must be compliant with Regulation A’s ongoing reporting requirements. If investors want to resell within that year, they’ll need to resell them in another private offering, probably limited to accredited or institutional investors.
Once the securities are resold publicly they are no longer restricted. Warrants are treated the same way as all other securities sold under Reg D.
Manhattan Street Capital is not a law firm and this is not legal advice. Please contact your lawyer with respect to any of the matters discussed here.