While Regulation A and Regulation CF have been effective tools for early stage companies to raise funds from investors across the country, secondary trading in those securities can often be a challenge, in part due to state-by-state securities regulations – often referred to as “Blue Sky” laws – that restrict which stocks brokers can discuss with their retail clients. This applies even to securities traded on new “alternative trading systems” or ATSs. To help companies meet these Blue Sky requirements and reach a potentially larger group of investors, CrowdCheck has launched TradeCheck, which includes a partnership with the Mergent Manual to allow private companies, for the first time, to rely on the “manual exemption” for Blue Sky compliance in several states.
Regulatory Requirements
Each party to the resale of securities is subject to regulation at the state and federal levels:
- Securityholders: Under federal laws, if you are not an “affiliate” of the issuer, you can rely on the exemption provided by Section 4(a)(1) of the Securities Act to resell securities. At the state level, things become more complicated, and the transaction must either be registered under the laws of the states in which the buyer and seller are located, or be made in compliance with an exemption from registration. The typical exemptions that apply are for isolated, non-issuer transactions; unsolicited sales through a broker; and the “manual exemption,” requiring that information about the company be published in a securities manual.
- Broker-dealers: If you are effecting a resale transaction in unlisted securities, you must make sure the transaction complies with the requirements of each state that has jurisdiction over the buyer and seller.
- ATSs: Transactions on your platform must comply with federal and state laws regarding secondary trades of securities.
CrowdCheck Solution
We have urged the SEC to preempt secondary trading in Regulation CF and Regulation A securities. Until that happens, though, our solution is TradeCheck. This is CrowdCheck’s assurance that the state rules relating to resales of unlisted securities are met. CrowdCheck walks the issuer through state requirements and what may be needed to comply. CrowdCheck then produces a report detailing which states transactions may be effected in, and for what time period. This service includes delivery of the issuer’s information directly to the Mergent Manual, which is made available to thousands of brokers and investors and gives companies a “manual exemption” to Blue Sky laws in a number of states. The end result will usually be clearance for all states and territories other than California, although the number of transactions permitted by an individual seller may be limited in some states. We hope to include clearance in California in the near future.
We have offered compliance services for the online capital formation world since 2012; this is just one more way we are trying to make this market more efficient.
