
Dan Brecher
Counsel
212-286-0747 dbrecher@sh-law.comFirm Insights
Author: Dan Brecher
Date: August 14, 2018
Counsel
212-286-0747 dbrecher@sh-law.comYou bought stock in a private placement and the company is growing. Now you want to sell half of that stock to your neighbor or to transfer portions to your wife and children. How is this accomplished? What laws and rules apply? Where do you go for guidance?
These are common questions we often hear from investors. Thankfully, the federal government has eased restrictions in recent years, making the process of private transfers far less complicated than it once was.
Under the federal securities laws, a company may not offer or sell securities unless the offering has been registered with the Securities and Exchange Commission (SEC) or an exemption from registration applies. A securities offering that is exempt from registration with the SEC is often referred to as an unregistered offering or private placement offering.
Private placements differ from traditional securities offerings in several key ways. Most notably, they have restrictions on their transfer, and you will need to comply with an exemption from registration to resell. When you acquired the restricted securities, you likely received a certificate stamped with a “restrictive” legend. The legend indicates that the securities may not be resold in the marketplace unless they are registered with the SEC or are exempt from the registration requirements.
The good news is that over the last several decades, the federal government (Congress and the SEC) have eased the previously rigid restrictions on such transfers so that these types of private transactions between friends, neighbors, business associates or family members are no longer subject to regulations that used to call for waiting years to achieve required holding periods or obtaining complex legal opinions reciting facts supporting exemptions allowing private transactions before a stated holding period ran.
The federal government determined that encouraging capital formation by young companies was important for our economy, so it eased holding period and transfer requirements over the past several decades. An earlier long-standing two year holding period was reduced to one year twenty plus years ago and is now down to six months under Rule 144 under the Securities Act of 1933.
Today, with liberalized rules and shortened holding periods, privately transferring unregistered securities is far more easily accomplished. The liberalizations have virtually eliminated the need for the average investor to seek a no-action letter from the SEC — a letter that states that under the facts presented, the SEC would take no enforcement action against the proposed securities transfer.
Private transactions are now more readily seen by regulators as exempt under Section 4(a)(1) of the Securities Act or under the SEC’s shortened Rule 144 holding periods.
Section 4(a)(2) of the Securities Act of 1933 authorizes private placements by exempting from registration “transactions by an issuer not involving any public offering.” Meanwhile, Section 4(a)(1) exempts from registration “transactions by any person other than an issuer, underwriter, or dealer.”
Accordingly, investors who hold private placements can sell their securities in a private sale without registration if they are not considered an “underwriter.” Under section 2(a)(11), a person may qualify as an “underwriter” if he acquires securities with a view to “distribution” or is participating in a “distribution,” which generally means an offering that is not a private offering. Because it is based on a combination of Sections 4(a)(1) and 4(a)(2), the resale exemption is often referred to as “Section 4(1-1/2).”
In 2015, the FAST Act created a new exemption for certain resales of securities. While the newly-created Section 4(a)(7) of the Securities Act is largely intended to codify Section 4(1-1/2), it contains its own specific requirements. They include:
Rule 144 authorizes the public resale of restricted securities provided that a number of conditions are met. If you are not (and have not been for at least three months) an affiliate of the company issuing the securities and have held the restricted securities for at least one year, you can sell the securities without satisfying the conditions of Rule 144. An affiliate is a person, such as an executive officer, a director or large shareholder, in a relationship of control with the issuer.
If the issuer of the securities is subject to the Exchange Act reporting requirements and you have held the securities for at least six months but less than one year, you may sell the securities as long as the current public information condition is satisfied. It mandates that there is adequate current information about the issuing company publicly available before the sale can be made. For reporting companies, this generally means that the companies have complied with the periodic reporting requirements of the Securities Exchange Act of 1934. For non-reporting companies, this means that certain company information, including information regarding the nature of its business, the identity of its officers and directors, and its financial statements, is publicly available.
Even if you can satisfy all the conditions of Rule 144, you must still have the legend removed from the certificate. Transfer agents can remove a restrictive legend; however, they will typically only do so if the issuer consents—usually in the form of an attorney’s opinion letter to the transfer agent. So, although transfer agents may still require a legal opinion letter to affect a private transaction, these letters have become far less difficult to obtain and require far less of an attorney’s fact review time.
Finally, state regulators remain relevant, depending upon where you reside. Virtually all states have isolated transaction exemptions applicable to the typical investor in a private transaction. As a result, the entire process of privately transferring your unregistered securities investments is now a “piece of cake.”
If you have any questions or if you would like to discuss the matter further, please contact me, Dan Brecher, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
The Trump Administration’s new tariffs are having an oversized impact on small businesses, which already tend to operate on razor thin margins. Many businesses have been forced to raise prices, find new suppliers, lay off staff, and delay growth plans. For businesses facing even more dire financial circumstances, there are additional tariff response options, including […]
Author: Brian D. Spector
Business partnerships, much like marriages, function exceptionally well when partners are aligned but can become challenging when disagreements arise. Partnership disputes often stem from conflicts over business strategy, financial management, and unclear role definitions among partners. Understanding Business Partnership Conflicts Partnership conflicts place significant stress on businesses, making proactive measures essential. Partnerships should establish detailed […]
Author: Christopher D. Warren
*** The original article was featured on Bloomberg Tax, April 28, 2025 — As a tax attorney who spends much of my time helping people and companies who have large, unresolved issues with the IRS or one or more state tax departments, it often occurs to me that the best service that I can provide […]
Author: Scott H. Novak
On January 28, 2025, the Trump Administration terminated Gwynne Wilcox from her position as a Member of the National Labor Relations Board (NLRB or the Board). Gwynne Wilcox, a union side lawyer for Levy Ratner, was confirmed to the Board for an original term in 2021 and confirmed again for a successive five-year term expiring […]
Author: Matthew F. Mimnaugh
Breach of contract disputes are the most common type of business litigation. Therefore, nearly all New York and New Jersey businesses will likely have to deal with a contract dispute at least once. Understanding when to file a breach of contract lawsuit and how long you have to sue for breach of contract is essential […]
Author: Brittany P. Tarabour
Closing your business can be a difficult and challenging task. For corporations, the process includes formal approval of the dissolution, winding up operations, resolving tax liabilities, and filing all required paperwork. Whether you need to understand how to dissolve a corporation in New York or New Jersey, it’s imperative to take all of the proper […]
Author: Christopher D. Warren
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!