On December 4, 2015, the Fixing America’s Surface Transportation Act (the FAST Act) was signed into law. While the FAST Act primarily dealt with transportation and infrastructure improvements, it included a new subsection to Section 4 of the Securities Act of 1933. Specifically, it added Section 4(a)(7), which provides a new registration exemption for the private resale of securities. Previously, private holders of securities wishing to resell without registration had two options: (i) comply with a holding period before selling securities on a public market pursuant to Rule 144, or (ii) fall within the so-called “Section 4(a)(1½)”.

Generally, Section 5 of the Securities Act requires registration for all offers and sales of securities unless an exemption applies. Two common exemptions to registration exist under Sections 4(a)(1) and 4(a)(2) of the Securities Act. Section 4(a)(1) offers an exemption for transactions by any person other an issuer, underwriter or dealer. Section 4(a)(2) offers an exemption for transactions by an issuer that are not a public offering. However, private resales of securities fell into unclear territory. That uncertainty gave rise to the so-called “Section 4(a)(1½)”.

Section 4(a)(1½) is an exemption derived from case law and certain elements and principles of Sections 4(a)(1) and 4(a)(2). Section 4(a)(1½) essentially applies the Section 4(a)(1) exemption to a transaction with private characteristics similar to a private issuance under Section 4(a)(2). However, unlike a codified exemption, the little guidance that existed with regards to Section 4(a)(1½) was conflicted and incomplete.

Section 4(a)(7) creates more certainty by specifying the circumstances where a private resale of securities is exempt from registration. A resale of securities is exempt under Section 4(a)(7) if:

1. The purchaser is an “accredited investor” as defined by Regulation D
2. The seller, or any person acting on the seller’s behalf, refrains from any form of general solicitation or advertising
3. The seller is not the issuer or a subsidiary of the issuer
4. The seller, or any person that has been or will be paid for participating in the sale of the securities, is not qualified as a “bad actor” under Regulation D
5. The issuer is engaged in business, is not in the organizational stage or in bankruptcy or receivership, and is not a blank check, blind pool, or shell company that has no specific business plan or purpose and has not indicated that the issuer’s primary business plan is to merge or acquire an unidentified person
6. The transaction does not relate to an unsold allotment to, or a subscription or participation by, a broker or dealer as an underwriter of the securities
7. The transaction is with respect to a class of securities that has been authorized and outstanding for at least 90 days prior to the transaction
8. For securities of issuers not subject to periodic reporting and eligible to register securities under Schedule B, certain information must be provided to prospective purchasers, including financial statements prepared in accordance with generally accepted accounting principles or, for foreign issuers, International Financial Reporting Standards

Securities sold under Section 4(a)(7) are “restricted securities” under Rule 144. They are also “covered securities” within the meaning of Section 18(b) of the Securities Act, and are therefore exempt from state securities registration requirements. Further, Section 4(a)(7) does not replace Section 4(a)(1½), meaning resellers can still rely on procedures that fell under Section 4(a)(1½) if they are unable to comply with the requirements of Section 4(a)(7).

The SEC has issued some new Compliance & Disclosure Interpretations regarding the staff’s view on general solicitation in a variety of contexts, including "demo days," websites and angel groups. While much of what’s in the new C&DIs has been previously stated by the staff, it is helpful to see it all in one place in writing.