Section 4(a)(7) Exemption: Private Resales Under the FAST Act

The Section 4(a)(7) exemption lets an existing shareholder of a private company resell stock to an accredited investor without registering the transaction with the SEC, as long as the seller, the buyer, and the deal itself meet a defined list of conditions. It is a statutory path, added to the Securities Act in 2015, aimed at employees, early investors, and fund holders who need liquidity in shares that would otherwise stay locked on a cap table. Miss any condition and the sale becomes an unregistered offering, with the buyer entitled to rescind and recover the full purchase price.

Who Can Sell and Who Can Buy

The seller must be someone other than the issuer or a subsidiary of the issuer. The company itself cannot use Section 4(a)(7) to raise capital; the exemption is only for people who already hold the shares.

Control persons — officers, directors, and large shareholders who can influence the company — are not shut out, but they carry an extra load. A control-person seller has to give the buyer a short description of their relationship to the issuer and a signed statement that they have no reasonable grounds to believe the company is violating any securities laws.¹ If the company turns out to be in violation and the seller knew or should have known, the exemption falls apart.

On the other side of the table, every buyer must be an accredited investor as defined in Rule 501(a) of Regulation D. The two most commonly used tests are net worth above $1 million (excluding your primary residence) or individual income above $200,000 in each of the prior two years, with a reasonable expectation of the same this year. The joint income threshold for married couples or domestic partners is $300,000.² Banks, insurance companies, and registered investment companies also qualify, as do certain licensed investment professionals and knowledgeable employees of private funds.

The Bad Actor Screen

The seller, and anyone paid to help arrange the sale, has to clear a “bad actor” check. Disqualifying events include:

A criminal conviction connected to buying or selling securities, false SEC filings, or the business of a broker-dealer or investment adviser, disqualifying for ten years from the conviction date (five years if the disqualified person is the issuer or an affiliated issuer).
Any court injunction or restraining order barring securities-related conduct, if entered within the past five years and still in effect.
Final orders from state or federal regulators based on fraudulent or deceptive conduct, disqualifying for ten years.
SEC cease-and-desist orders, disqualifying for five years from issuance while the order remains in effect.

The lookback runs from the date the order or conviction was entered, not the date of the underlying conduct.³ The check covers anyone paid a commission or other remuneration for helping locate the buyer or otherwise participating in the sale.¹

Verifying the Buyer’s Accredited Status

The statute does not spell out a required verification method, but a seller who closes without a reasonable basis for believing the buyer is accredited puts the whole exemption at risk. The SEC has said that a check-the-box representation on its own does not cut it when the seller knows nothing else about the buyer’s finances. Better options include reviewing recent tax returns or brokerage statements, or getting written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a CPA that the buyer qualifies.⁴ How much diligence is enough scales with how well you already know the buyer. A longtime business contact whose wealth is obvious calls for less paperwork than a stranger introduced through a network.

Conditions on the Transaction Itself

Even with an eligible seller and an accredited buyer, the deal has to be structured correctly.

No general solicitation. Neither the seller nor anyone acting for them can advertise the sale or solicit buyers publicly. Public social posts, mass emails, open online listings, and broad outreach to strangers are all out. The sale has to be privately arranged.¹ An offhand LinkedIn post about looking for buyers is one of the more common ways sellers accidentally blow the exemption.

The class must have been outstanding for 90 days. The class of securities being sold has to have been authorized and outstanding for at least 90 days before the transaction. The rule looks at the class, not the specific shares, so newly issued common stock can still be sold as long as the company’s common class itself has existed for at least 90 days.¹

Some sellers and issuers are excluded. Shares that are part of an unsold underwriter allotment cannot move through this exemption. Companies in the organizational stage, in bankruptcy, or operating as shell companies with no real business are also off the table. The issuer needs to be an active operating business.¹

Broker involvement is optional but regulated. The statute does not require a registered broker-dealer. If a broker, dealer, or agent is paid to help with the sale, the seller has to give the buyer that person’s name and address, and the paid participant has to clear the bad actor screen too.¹

Disclosures for Non-Reporting Issuers

When the company does not file periodic reports with the SEC, which is the norm for private companies, the seller has to obtain a specific package of information from the issuer and make it available to the buyer:¹

The exact legal name of the issuer (and any predecessor), the address of its principal offices, and the name and address of the transfer agent or the person handling share transfers.
The title, class, par value, and total amount of the securities outstanding as of the last fiscal year-end.
A narrative description of the company’s business and its products or services.
The names of all officers and directors.
A balance sheet and profit-and-loss statement covering up to the two preceding fiscal years the company has operated, prepared under GAAP (or IFRS for foreign private issuers).
The name of any registered broker-dealer or agent being paid a fee for the sale.

The information has to be “reasonably current.” The statute presumes the business description is current if dated within 12 months of the transaction, the balance sheet is current if dated within 16 months, and the profit-and-loss statement is current if dated within 12 months. Sellers typically get these materials from the company directly, either on request or under a shareholder agreement. Companies that refuse to cooperate can effectively block secondary sales, and that is a frequent friction point for employees trying to sell vested shares.

If the issuer already files reports under Section 13 or 15(d) of the Exchange Act, none of this is required. The information is already public.

State Blue Sky Preemption

Shares sold under Section 4(a)(7) are “covered securities” under Section 18 of the Securities Act, which preempts state-level registration and qualification requirements. You do not have to separately register the sale in each buyer’s home state. That matters most when buyers sit in multiple states, because state Blue Sky rules are inconsistent and can be expensive.

Preemption is not total. States can still require notice filings and charge fees, and they keep full anti-fraud authority. A sale that clears the federal exemption can still draw state enforcement if there is misrepresentation involved.

What the Buyer Inherits

Shares acquired through a Section 4(a)(7) sale remain restricted in the buyer’s hands. The buyer cannot flip them onto a public market without finding a separate exemption, and Rule 144 is the usual exit.⁵ Rule 144 requires the buyer to sit through a holding period:

Six months if the issuer files SEC reports and has done so for at least 90 days before the resale.
One year if the issuer does not file SEC reports.

The clock starts when the buyer pays the full purchase price, not at signing. A promissory note does not start it unless the note is full-recourse against the buyer, secured by collateral worth at least the purchase price (something other than the purchased shares), and paid off before resale.⁵

In narrow situations the buyer can “tack” the seller’s holding period onto their own — gifts, transfers at death, from estates, from trusts, and some partnership distributions and holding company formations. A straight cash purchase resets the clock.⁵

Section 4(a)(7) or Rule 144h2>

Rule 144 is the other main resale path. It does not require an accredited buyer or a disclosure package, but it imposes holding periods, volume limits, and manner-of-sale restrictions. For a non-affiliate of a reporting company, Rule 144 becomes fully available after a six-month holding period with no volume cap.⁵

Section 4(a)(7) has no holding period at all, which is why it is useful for a shareholder who wants to sell soon. The trade-off is a much smaller buyer pool, since every purchaser has to be accredited. The choice generally comes down to speed against flexibility in finding buyers. And because Section 4(a)(7) is a non-exclusive exemption, the older “Section 4(1½)” practice of blending Sections 4(a)(1) and 4(a)(2) remains available if a particular sale cannot meet every 4(a)(7) condition but still fits within a private-resale logic.

Tax on the Gain

Selling private stock is a taxable event. Your gain is the sale price minus your cost basis, which is usually what you paid for the shares or their fair market value when you received them as compensation.

Shares held a year or less produce short-term capital gains, taxed at ordinary income rates. Shares held longer than a year get long-term capital gains rates, capped at 20% for the highest earners.⁶ For 2026, the 0% long-term rate applies to single filers with taxable income up to $49,450, the 15% rate covers income from that threshold up to $545,500, and the 20% rate kicks in above $545,500. For married couples filing jointly, the 15% rate starts at $98,900 and 20% starts at $613,700.

High-income sellers also pay a 3.8% net investment income tax on capital gains when modified adjusted gross income tops $200,000 (single) or $250,000 (married filing jointly). Those thresholds are not indexed for inflation.⁷

One boundary worth flagging: the Section 1202 exclusion for qualified small business stock generally does not apply to shares acquired through a Section 4(a)(7) sale. The exclusion requires that the taxpayer acquired the stock at original issuance from a qualifying C corporation, and a secondary-market buyer is by definition not the original recipient.⁸ The narrow exceptions — transfers by gift, at death, or certain partnership distributions — let the new holder step into the original holder’s shoes. If you received the shares at issuance and held them at least five years, you may qualify when you sell; your buyer almost certainly will not when they resell.

What Happens If the Exemption Fails

A transaction that misses any of the Section 4(a)(7) conditions is a sale of unregistered securities in violation of Section 5 of the Securities Act. Under Section 12(a)(1), the buyer can sue to rescind the purchase and recover the full price plus interest, minus any income received on the securities.⁹ The buyer does not have to prove fraud or intent. It is strict liability.

The most common failure points are thin buyer verification (no documentation that the purchaser is actually accredited), inadvertent general solicitation, and incomplete disclosure packages for non-reporting issuers. A single gap voids the whole exemption. The seller can still try to argue the transaction fits within the older Section 4(1½) practice, but that is a fact-intensive argument with far less certainty than meeting the statutory conditions the first time.

1
Office of the Law Revision Counsel. 15 USC 77d – Exempted Transactions
2
U.S. Securities and Exchange Commission. Accredited Investors
3
U.S. Securities and Exchange Commission. Disqualification of Felons and Other Bad Actors from Rule 506 Offerings and Related Disclosure Requirements
4
U.S. Securities and Exchange Commission. Assessing Accredited Investors under Regulation D
5
eCFR. 17 CFR 230.144 – Persons Deemed Not to Be Engaged in a Distribution and Therefore Not Underwriters
6
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
7
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
8
Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain from Certain Small Business Stock
9
Office of the Law Revision Counsel. 15 USC 77l – Civil Liabilities Arising in Connection with Prospectuses and Communications