Selling private shares part 3: Section 4 (1 1/2)

Section 4 (1 1/2)

First of all, there is no such thing as a Section 4 (1 1/2) in the Securities Act. It is something that was made up by lawyers. We discussed Section 4 (1) already above, and there is a section 4 (2). That is the section that grants exemptions to private companies that are raising capital in a private placement. Ever heard of Regulation D? If you have ever raised funds for a start-up using regulation D, you have used Section 4(2). In fact Regulation D is to Section 4(2) what Rule 144 is to section 4(1), a safe harbor.

So what’s this non-existent Section 4(1 1/2)? Well, lawyers have figured out that the best way to avoid the status of underwriter and comply with Section 4(1), without relying on Rule 144, is to avoid anything that could be qualified as a public offer. The opposite of a public offer is a private placement. If you want to make sure you are not making a public offer when selling your shares in the secondary market, then you should make sure you are doing something that resembles a private placement. Section 4(2) deals with private placements (primary deals), and to comply with Section 4(1) you should look at the requirements of Section 4(2) and comply with those that are appropriate for a secondary deal. This is what is referred to as a Section 4(1 1/2) transaction.

The Key requirements for a Section 4 (1 1/2) transaction is that no general solicitation should occur (only sell to people you have a pre-existing relationship with) and that the buyer should be an accredited investor. More info can be found here.

Templates for SPA are available

  1. SSG said:

    More info link at the end does not work

    • thanks, I’ve put in another link, the previous was went dead since I wrote the article…

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