SEC Exemptions
Regulation D Offerings and Private Placement Restrictions
 Jun 01, 2020
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 made a Reg A+ offering.

Lockup restrictions are reduced for people or entities who are not affiliates after a year has passed since the securities were first acquired from the issuer (company).

It is important to know that there are exceptions to the one-year lockup in the Reg D context - 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, and state law requirements have to be complied with as well.

There are currently a limited number of trading forums for the shares of early-stage privately-owned companies, whether that trading takes place in private transactions with accredited investors, or publicly to all investors.

New trading forums are being developed, however, a company can choose to explore having their securities (shares) quoted or posted on these trading forums so that non-affiliates could sell them. When a company takes these steps, there can be no assurance that management will succeed in doing so, and there can be no confidence ahead of time in how much liquidity or how viable a market might develop if they did. 

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+ 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.

About Capital Engine®

Capital Engine® is a fast-growing FinTech company facilitating the creation of efficient and trusted online private capital and alternative investment marketplaces, through our tiered business ecosystem: private label platforms, strategic partnerships and inhouse marketplace for private placements. 

Capital Engine® business model is to partner with industry experts in venture capital, renewable energy, impact investing, healthcare, real estate, philanthropy and alternative investments, in setting up investment platforms, online marketplaces and trading exchanges using our proprietary software.