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What is Section 4(a)(7) of the Securities Act?

Section 4(a)(7) of the Securities Act is an exemption for security resale transactions. To rely on the exemption, the transaction must meet the following criteria:

  • the purchaser must be an accredited investor;
  • the seller and any person acting on the seller's behalf may not engage in general solicitation or general advertising;
  • in the case of a company that is not required to file reports under the Securities Exchange Act of 1934, the purchaser must receive information about the issuer, including, among other things, (i) the nature of its business; (ii) the names of its directors and officers; (iii) financial statements for the past two years (which do not need to be audited); and (iv) the nature of any affiliation between the issuer and the seller;
  • the seller and any broker that it uses may not be disqualified pursuant to the bad actor provision in Rule 506 under the Securities Act or the disqualifications contained in Section 3(a)(39) of the Exchange Act;
  • the issuer may not be in the organizational stage nor in bankruptcy, and it may not be a blank check company, a blind pool, or a shell company;
  • the securities subject to the transaction may not be not part of an underwriter's unsold allotment; and
  • the securities subject to the transaction must be part of a class that has been authorized and outstanding for at least 90 days.

The securities transferred in reliance on Section 4(a)(7) will remain "restricted securities," as defined in Rule 144(a)(3). However, the FAST Act preempts the application of state blue sky registration requirements to resale transactions under the new exemption. In addition, because the FAST Act added a provision to clarify that Section 4(a)(7) will not be the exclusive means for establishing an exemption from registration for a resale transaction, the Section 4(1 ½) exemption, as it has developed and been used over the years, should continue to be available to sellers in resale transactions.

This content is from Proskauer.