Registering with the SEC vs. Qualifying for an Exemption
LLCs and corporations with security interests are subject to securities laws governed by the Securities Act of 1923 and regulated by the Securities Exchange Commission (SEC). Registering securities can be a complex process requiring that the company provide investors various documents such as financial statements, documentation and other information designed to ensure that potential investors are able to make informed decisions prior to investing. However, the SEC and state regulators have promulgated a number of exemptions allowing LLCs and corporations to avoid the complex process of registering securities. Once the owners of a company determine that the interest being sold is indeed a security, it must next determine whether the sale qualifies for an exemption. State and federal exemptions are not identical but typically sales of securities that qualify for a federal exemption also qualify for state exemptions. If the sale qualifies for an exemption, the next step is to apply for the exemption with the appropriate federal and state securities agencies. This process is far less complicated than registering securities with the SEC.
Summary of Commonly Used Federal Exemptions
The following is a brief summary of the most common exemptions to the federal registration requirement found in the Securities Act:
- Government Securities: Any government treasuries or municipal bonds.
- Non-Public Offering Exemption: Where the sale of the security is to "sophisticated investors" who have the financial means and have sufficient knowledge in business and investments. The investor must have full access to information and agree not to redistribute the securities to the public.
- Single State Offerings: Intrastate companies qualify for a federal exemption to the registration requirement. An intrastate company is a company that does all of its business in a single state. To qualify as an intrastate company, an LLC or corporation must:
- Be incorporated or organized in the state the security is being offered or sold in;
- Have its principal place of business in such state;
- Be owned entirely by investors who are bona fide residents of such state;
- Maintain at least 80 percent of the company's assets in such state;
- Derive at least 80 percent of its gross revenues from such state; and
- Use at least 80 percent of its net proceeds within such state.