Section 4 of the Securities Act of 1933 lists seven categories of transactions that are exempt from the SEC’s registration requirements: ordinary secondary-market trades, dealer transactions after a distribution, unsolicited broker transactions, private placements by issuers, offerings sold only to accredited investors, crowdfunding through registered portals, and certain private resales of restricted securities. Each exemption has its own conditions, and missing one of them means the sale is treated as unregistered.
Ordinary Secondary-Market Trades
Section 4(a)(1) exempts any transaction by a person who is not an issuer, an underwriter, or a dealer. It is the exemption behind nearly every trade on the New York Stock Exchange, Nasdaq, and other secondary markets. If you buy or sell shares through a brokerage account and you are not the company that issued the shares, a firm distributing them to the public, or someone in the business of dealing in securities, registration does not apply to your trade.
Without this provision, selling 50 shares of a listed company would in theory require a prospectus and SEC review. The exemption draws a clean line between a company’s initial distribution of securities and the everyday trading that follows.
Dealer Transactions After a Distribution
Section 4(a)(3) exempts most dealer trading, but not during the initial distribution of a new security. A dealer must wait at least 40 days after a security is first offered to the public before the exemption applies. For a company’s very first registered offering, the waiting period is 90 days. The exemption also does not reach shares the dealer is still holding from its own participation in the original distribution.
The reasoning is that during the distribution window, a dealer buying and reselling new shares functions much like an underwriter feeding securities into the market. Once the distribution settles, that concern falls away.
Unsolicited Broker Transactions
Section 4(a)(4) exempts brokers executing customer orders on an exchange or in the over-the-counter market, as long as the broker did not solicit the order. If you call your broker and ask to sell shares you already own, the broker is facilitating your trade, not distributing new securities, and no registration is required.
The limitation is in the phrase “not the solicitation of such orders.” A broker who actively drums up buyer interest in unregistered shares cannot rely on this exemption. It covers the mechanical role of executing trades, not the promotional role of creating demand.
Private Placements
Section 4(a)(2) exempts transactions by an issuer that do not involve a public offering. The statute does not define “public offering,” so courts have. In SEC v. Ralston Purina Co., the Supreme Court held that the exemption turns on whether the people receiving the offer need the protections that registration provides. An offering made to investors who can “fend for themselves” is not a public offering, which means the offerees must be financially sophisticated enough to evaluate the investment and must have access to the same kind of information a registration statement would disclose.1Justia U.S. Supreme Court Center. SEC v. Ralston Purina Co., 346 U.S. 119 (1953)
Because the bare statute offers little guidance, most issuers rely on Regulation D as a safe harbor. Two rules do most of the work:
- Rule 506(b) prohibits advertising and general solicitation. The issuer can sell to an unlimited number of accredited investors and up to 35 non-accredited investors, but the non-accredited buyers must be financially sophisticated enough to evaluate the deal.
- Rule 506(c) allows advertising and broad solicitation, but every purchaser must be a verified accredited investor. Self-certification is not enough; the issuer must take reasonable steps to confirm each buyer’s status.
Under 506(b), general solicitation kills the exemption. Under 506(c), solicitation is permitted, but the verification burden is real. Posting an investment opportunity publicly and then accepting buyers without verifying their accredited status satisfies neither rule.2Investor.gov. Rule 506 of Regulation D
Accredited-Investor Offerings
Section 4(a)(5) exempts offerings made exclusively to accredited investors. The total raised cannot exceed $5 million, no advertising or public solicitation is allowed, and the issuer must file a notice with the SEC. The cap comes from a cross-reference to the small-issues ceiling in 15 U.S.C. ยง 77c(b)(1).3Office of the Law Revision Counsel. 15 USC 77c – Classes of Securities Under This Subchapter
An individual qualifies as accredited with a net worth above $1 million excluding the primary residence, individual income above $200,000 in each of the prior two years with a reasonable expectation of the same in the current year, or joint income with a spouse above $300,000 on the same terms. Holders of certain professional licenses, including the Series 7, Series 65, and Series 82, also qualify regardless of wealth.4U.S. Securities and Exchange Commission. Accredited Investors
For offerings using general solicitation under Rule 506(c), the SEC accepts several methods of verification: reviewing IRS forms like W-2s or tax returns for income, reviewing bank and brokerage statements dated within the prior three months for net worth, or obtaining written confirmation from a registered broker-dealer, investment adviser, licensed attorney, or CPA who has independently verified the investor’s status.5U.S. Securities and Exchange Commission. Assessing Accredited Investors Under Regulation D A box-checked questionnaire alone does not meet the “reasonable steps” standard.
Crowdfunding
Section 4(a)(6), added by the JOBS Act, lets a company raise up to $5 million from the general public in any 12-month period through a registered online platform. Unlike the other exemptions, it is built for small businesses reaching ordinary investors rather than wealthy or institutional ones.6U.S. Securities and Exchange Commission. Regulation Crowdfunding
Investor-level caps depend on financial situation:
- If either annual income or net worth is below $124,000, you can invest the greater of $2,500 or 5% of the larger of your annual income or net worth, across all crowdfunding offerings in a 12-month period.
- If both annual income and net worth are at or above $124,000, you can invest up to 10% of the larger of the two, capped at $124,000 in any 12-month period.
Every crowdfunding transaction must run through a registered broker-dealer or a FINRA-member funding portal. The intermediary handles fund transfers, provides standardized disclosures, and hosts channels where investors can ask the issuer questions before committing money.7Investor.gov. Updated Investor Bulletin – Regulation Crowdfunding for Investors
Private Resales of Restricted Securities
Section 4(a)(7) exempts certain private resales of restricted shares. The seller cannot be the issuer or a subsidiary of the issuer. The buyer must be an accredited investor. The transaction must be private, with no general solicitation, and it cannot be part of a broader plan to distribute shares to the general public. If the issuer is not an SEC-reporting company, the seller and buyer must have access to basic information about it: name, nature of business, and financial statements for the prior two fiscal years.8Office of the Law Revision Counsel. 15 USC 77d – Exempted Transactions
What Restricted Means for the Buyer
Securities acquired through exempt offerings under Section 4(a)(2), 4(a)(5), or 4(a)(6) are typically “restricted.” They carry a legend stating they have not been registered and cannot be resold publicly without registration or another exemption. Receiving shares in a private placement does not mean you can sell them on a public exchange the next day.
The usual path to resale is SEC Rule 144, which imposes a holding period. For securities issued by SEC-reporting companies, the holding period is six months. For non-reporting companies, it is at least one year. Affiliates of the issuer face additional volume limits: they cannot sell more than 1% of the outstanding shares of that class, or the average weekly trading volume over the preceding four weeks, whichever is greater, in any three-month period.9U.S. Securities and Exchange Commission. Rule 144 – Selling Restricted and Control Securities
Running Offerings Close Together
Companies that run multiple offerings in quick succession, such as a private placement followed by a crowdfunding round, have to watch the SEC’s integration doctrine. If two offerings are integrated, the combined deal must satisfy every requirement of whichever exemption it claims. A private placement merged with a public crowdfunding round can lose its private character and leave the issuer in violation of Section 5.
Rule 152 provides safe harbors. The most used one treats offerings as separate when the first terminates or completes at least 30 days before the second begins. When the first offering involved general solicitation, the issuer must also reasonably believe it did not attract any investors in the second offering through that earlier solicitation, or that it established a substantive relationship with each such investor beforehand.10U.S. Securities and Exchange Commission. Integration Integration catches issuers who try to slice a single large offering into smaller pieces to fit under exemption caps.
Form D Filing
An issuer relying on Regulation D must file a Form D notice with the SEC within 15 calendar days after the first sale of securities. The first sale is when the first investor becomes irrevocably committed to invest. If the deadline falls on a weekend or holiday, the filing is due the next business day.11Securities and Exchange Commission. Frequently Asked Questions and Answers on Form D
Missing the Form D deadline does not automatically destroy the exemption under Rules 504, 506(b), or 506(c), but it is still a violation, and the filing should go in as soon as practicable. Many states also require their own notice filings and fees even when federal preemption applies to Rule 506 offerings. Noncompliance can trigger state enforcement and investor rescission rights.
What Happens If the Exemption Fails
If an issuer sells securities without registering them and cannot point to a valid Section 4 exemption, Section 12(a)(1) gives any buyer the right to sue for the full purchase price plus interest, minus any income received from the security. If the buyer has already resold the shares, damages are available instead. This rescission right does not require proof of fraud or intent.12Office of the Law Revision Counsel. 15 USC 77l – Civil Liabilities Arising in Connection With Prospectuses and Communications
The SEC can also bring enforcement actions seeking injunctions and civil penalties. Individuals involved in unregistered offerings may face “bad actor” disqualification under Rule 506(d), which bars them from future Regulation D offerings. Securities-related criminal convictions, regulatory bars, and certain SEC cease-and-desist orders all count as disqualifying events, and the disqualification can follow a person for years.