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The New Section 4(a)(7): More Than a Codification of Section “4(a)(1½)”

On December 4, 2015, the Fixing America’s Surface Transportation Act (the “FAST Act”) was signed into law by President Obama. Although the FAST Act is primarily a transportation bill, buried in this legislation is a new statutory exemption under Section 4(a)(7) of the Securities Act of 1933 (the “Securities Act”) that explicitly permits private resales of restricted securities. This new exemption may increase investor liquidity by facilitating the development of secondary markets in private securities.

Section 5 of the Securities Act requires that sales of securities be registered with the SEC unless an exemption is available. Resale transactions have historically been governed primarily by Section 4(a)(1), also known as the “ordinary trading” exemption, which allows a holder of restricted securities to resell them without registration as long as the holder is not the issuing company, an underwriter, or a dealer. However, resellers run the risk that they might be deemed an underwriter. So, in order to conduct resales without registration, resellers have historically relied primarily on Section “4(a)(1½),” a reseller exemption based on a combination of Sections 4(a)(1) and 4(a)(2) that many resellers have used but which was never codified into law.

The new Section 4(a)(7) exempts certain resales from the registration requirements of Section 5 as long as particular conditions are satisfied. For example, each purchaser of the resold securities must be an accredited investor; the securities may not be offered by means of a general solicitation; the company whose securities are being resold must be engaged in business (i.e., it cannot be a shell company with no specific business plan of its own); and the reseller must provide the purchaser with certain information, such as updated company financials.

Although Section 4(a)(7) is in many ways a codification of Section 4(a)(1½), it differs in certain key respects, such as the disclosure requirements that 4(a)(7) imposes on resellers, which will require significant issuer cooperation. How willing issuers will be to provide the requisite information, which we expect will be dictated at least in part by their potential liability for misstatements made in connection with this process (the scope of which is currently unknown), will have a real impact on the usefulness of 4(a)(7). Furthermore, and most significantly, unlike 4(a)(1½) transactions, in which securities would typically be held for at least six months to ensure that they were not initially purchased with an intent to distribute, 4(a)(7) does not require a holding period, such that purchasers of restricted securities may resell them immediately as long as they have been authorized and outstanding for at least 90 days.

We believe that this exemption will provide holders of restricted securities with improved liquidity and greater predictability, thereby laying the foundation for more robust secondary markets. That said, because the precise implications of 4(a)(7) are unknown, whether or not it really is a game-changer remains to be seen: in order to truly have its intended effect of fostering predictability, 4(a)(7) may require further clarification from courts and the SEC.

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About this Author

Samuel Effron, Securities Law Attorney, Mintz Levin, Capital Financing Lawyer,Venture Capital & Emerging Companies Securities & Capital Markets
Member

Sam’s practice focuses on venture capital and other private securities transactions, counseling start-ups and emerging growth companies, funds and crowdfunding platforms. Sam is heavily involved in the start-up community in New York and regularly advises and mentors young companies and entrepreneurs regarding the legal and business issues that they face, and speaks at many of the local accelerators, incubators and co-working spaces.

Sam is a co-editor of MintzEdge, an online resource...

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Cliff M. Silverman, Mintz Levin Law Firm, New York, Corporate, Securities Litigation Attorney
Associate

Cliff’s practice focuses on corporate and securities matters, with an emphasis on securities offerings, venture capital, and corporate governance.  Cliff regularly represents both issuers and investment banking firms in a broad range of capital markets transactions, and counsels public companies on compliance and disclosure obligations under the U.S. securities laws.  He also advises emerging companies, venture funds and private equity investors on a variety of issues, including early-stage financing structures, mergers and acquisitions, entity formation and commercial contracts. 

Cliff’s pro bono experience includes representing indigent parties in the Bronx County Family Court, as well as helping not-for-profit clients to obtain federal tax exempt status. 

Prior to joining Mintz Levin, Cliff was an associate in the New York office of another international law firm, where he gained experience in all aspects of litigation, including in matters involving the fiduciary duties of officers and directors, class actions under the U.S. securities laws, and regulatory investigations.  After law school, he served as a foreign law clerk to Justice Eliezer Rivlin of the Supreme Court of Israel.

As an undergraduate, Cliff was a member of the men's varsity tennis team at Brandeis University.

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