Form Exemption for Securities of Small Business Investment Companies - PDF

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 Pennsylvania Securities Commission
Exemptions to the Pennsylvania Securities Act
The Pennsylvania Securities Act of 1972 (Pennsylvania Securities Act)
specifically provides that all securities sold within the Commonwealth
of Pennsylvania must be “registered” with the Pennsylvania Securities
Commission (Securities Commission), unless the security or transaction
is exempt. Registration is the process by which a company files with the
Securities Commission all disclosure materials required to provide
prospective investors with the information necessary to make an informed
investment decision.
Because the registration process may be cumbersome and expensive,
the Pennsylvania Securities Act contains a series of exemptions, which
cover situations where the nature of the securities or the character of the
transaction is such that a full registration is not necessary to protect
investors. Thus, the two basic exemptions to the registration process are:
               • Securities Exemptions, which apply to certain types
                       of securities that, by their nature, need not be
                                registered with the Securities Commission.
                                          The general rationale for these
                                                  securities exemptions is
                                                 that regulation of such
                                                 instruments is either not
                                                 necessary, or the particular
                                               securities already are subject
                                            to regulation by another
                                         government agency.

    • Transactional Exemptions, which apply in situations where the manner
      in which securities are offered and/or sold is of such character that the
      Securities Commission need not subject the issuer of the securities to
      the full registration process. However, it is important to remember
      that generally the purchaser of a security issued under a transaction
      exemption may not resell that security until it is either registered or
      qualifies for another exemption.

Securities Exemptions
The Pennsylvania Securities Act contains 11 general categories of “exempt
securities” that need not be registered with the Securities Commission before
being sold to Pennsylvania residents. The first 10 exempt securities are listed
in Section 202 of the Pennsylvania Securities Act:
      1. Securities issued by a governmental body;
      2. Securities issued or guaranteed by a bank or savings association;
      3. Commercial paper arising out of a current transaction;
      4. Securities issued or guaranteed by a Federal credit union or any
         credit union or similar association supervised under the laws of
      5. Securities (except debt securities, such as notes or bonds) of
         certain not-for-profit organizations or chambers of commerce,
         trade or professional associations;
      6. Securities listed for trading on certain exchanges;
      7. Securities issued in conjunction with an employee stock option,
         purchase, savings, pension, profit-sharing or similar plan;
      8. Securities of a registered broker-dealer issued to its officers,
         partners or employees;
      9. Membership interests in a limited liability company that renders
         professional services; and
     10. Any other security the Commission finds by regulation that
         should be exempt.

All of the above-referenced securities exemptions are “self-executing,”
meaning that the issuer of any of the listed securities need not file a form
or document with the Securities Commission to be legally entitled to rely
on the exemption.
The final category of exempt securities applies to federally-covered securities.
These securities are subject exclusively to federal Securities and Exchange
Commission (SEC) and not state (e.g., Securities Commission) jurisdiction.
Federally-covered securities include securities traded on the exchanges,
mutual funds and securities sold under Rule 506 of SEC Regulation D. Rule
506 provides an exemption from federal and state registration for sales of
unlimited amounts of securities to “accredited investors” (e.g., individuals
with net worth of at least $1 million or annual income of $200,000), and
no more than 35 non-accredited, but sophisticated investors (investors with
substantial experience investing in securities offerings). To use a Rule 506
exemption, the issuer must file SEC Form D with the SEC and the Securities
Commission within 15 days of the first sale in Pennsylvania.

Transactional Exemptions
Like the exempt securities, some transactional exemptions are self-executing,
but others require a filing with the Securities Commission before sales can
be made. The filing involves submitting to the Securities Commission the
information required by Securities Commission Form E, as well as all
disclosure materials that are to be provided to prospective investors.
Where such a filing is required to rely on a Transaction Exemption, the
issuer must wait until the Securities Commission issues a “clearance letter”
before selling securities in Pennsylvania. The consequences for selling
securities without satisfying all conditions to an exemption may include
administrative, criminal and civil penalties.
Self-Executing Transactional Exemptions
     The most common self-executing exemptions that do not require a
     filing include:
    • Secondary market/non-issuer transactions: Except in limited
      circumstances (which are discussed in the “Transactional
      Exemptions Requiring a Filing” section), the Securities
      Commission does not regulate sales made by persons other
      than the issuer of securities (e.g., the “aftermarket” or “secondary

    • Sales to institutional investors: Sales to certain institutions (e.g.,
      corporations with $10 million or more in net worth, small business
      investment companies, colleges or other educational institutions
      with $5 million or more in net worth) are exempt from registration.
    • Pre-organization sales: Pennsylvania provides a one-time
      exemption allowing newly-formed companies to sell securities
      to no more than five persons within six months of the date of
    • Small issuer exemption: Pennsylvania also provides one-time
      exemptions allowing Pennsylvania companies to sell securities to
      10 persons from the date of the formation of the business. To use
      this exemption, however, no one affiliated or associated with the
      issuer may have a history of securities law violations.

     • Isolated transaction exemption: Pennsylvania companies may
       sell securities to no more than two Pennsylvania investors in a
       12-month period without registration or filing with the Securities
       Commission. Like the small issuer exemption, companies relying
       on this exemption must not have any affiliate with a history of
       securities law violations. Those companies not located or organized
       in Pennsylvania may rely on this exemption if they are selling to
       no more than two accredited investors in Pennsylvania.
     • Sales to principals: Companies may sell unlimited amounts of
       securities to “principals,” which includes officers and directors,
       controlling shareholders, key management personnel, and the
       immediate families of the aforementioned.
     • Sales to existing shareholders: Companies with existing
       stockholders may offer those stockholders the opportunity to
       purchase more shares. The offer must be given on a pro-rata
       basis. That is, a 10 percent shareholder should be offered the
       opportunity to purchase 10 percent of the total number of new
       shares to be sold.
     • Notes secured by a mortgage: Pennsylvania law permits the sale
       of a mortgage if the entire mortgage is sold as a single unit to the
Additional self-executing exemptions include sales of securities approved by
a court of law or bankruptcy and a sale through dividend or liquidation. It is
important to note that, in relying on these exemptions, general solicitation—
including cold calling, mass media and Internet advertising—is prohibited.
Transactional Exemptions Requiring A Filing
Exemptions that require an issuer to file a form and disclosure materials with
the Securities Commission prior to selling securities in Pennsylvania include:
     1. Limited Offering Exemption
        Under Sections 203(d) and 203(e) of the Pennsylvania Securities
        Act, an issuer may offer securities to no more than 50 persons and
        may sell securities to no more than 25 persons in Pennsylvania.1
        This exemption requires an issuer, prior to selling any securities, to
        file Securities Commission Form E and all disclosure materials that

  By adoption of Regulation 204.010, the Securities Commission increased the number of offerees to
90, and the number of purchasers to 35. However, to use this related regulation, no one affiliated
(connected) with the issuer may have a history of securities law violations.

    are to be provided to prospective investors. The disclosure
    materials should be prepared in accordance with the Securities
    Commission’s Prospectus Guidelines. The Form E and the
    prospectus guidelines are available on the Securities
    Commission’s website at
    The issuer must also prepare two additional documents for
    delivery to prospective purchasers: 1) a notice of a right to
    withdraw and 2) an agreement not to resell the securities for
    12 months. The notice of a right to withdraw gives investors
    the right to withdraw their purchase of securities within two
    business days of receipt of all disclosure documents. The
    agreement not to resell prohibits investors from reselling
    their securities for one year after the initial purchase, with
    limited exceptions.
    The disclosure materials filed with the Securities Commission
    will be reviewed by Securities Commission staff, who may
    request that the issuer make certain changes to the disclosure
    materials. It is important to remember that the documents are
    not considered “filed” until the Securities Commission staff
    has completed the review, determined that all documents are
    complete and issued a clearance letter.
    Once the necessary documents have been accepted as complete
    by the Securities Commission and a clearance letter has been
    issued, the issuer may begin selling securities in Pennsylvania.
    The issuer may contract with a broker-dealer to complete the
    offering, or it may sell through the efforts of the company’s
    officers and directors. However, only registered broker-dealers
    may receive compensation (such as a commission) for selling
    securities to the public; officers, directors and employees of the
    company may not receive compensation of any kind for the sale
    of securities. Moreover, because these securities are sold under
    an exemption, rather than through a registration, no advertising
    or general solicitation may be used to sell the securities.
    Advertising and general solicitation includes cold-calling,
    mass media and Internet advertisements.

2. SEC Rule 505 Exemption
   SEC Rule 505 of Regulation D permits issuers to sell no more
   than $5 million of securities to 35 non-accredited investors and
   an unlimited number of accredited investors. The corresponding
   Pennsylvania exemption is contained in Section 203(s) of the
   Pennsylvania Securities Act. Under that section, an issuer must
   file the same materials as required under Section 203(d) above.
   The issuer is also subject to the same limitations with respect to
   sales (no advertising and no payment of commissions to anyone
   other than a licensed broker-dealer). However, to use this
   exemption, no one affiliated (connected) with the issuer may
   have a history of securities law violations.
3. Accredited Investor Exemption
   Finally, Pennsylvania has an exemption for sales of securities
   to accredited investors only. This exemption requires the same
   filings as the Rule 505 exemption. Under the Pennsylvania
   accredited investor exemption, issuers may advertise their
   securities within Pennsylvania, provided such advertisement
   clearly states that the offer is available only to accredited
   investors (e.g., individuals with $1 million in net worth or
   $200,000 in annual income).
This brochure is meant to provide a general overview of the
exemptions contained within the Pennsylvania Securities Act.
It should not be relied upon to make a securities offering. For
additional information, please contact experienced legal counsel
or the Securities Commission at 1-800-600-0007 (in Pennsylvania).

                      Commonwealth of Pennsylvania
                      Edward G. Rendell, Governor
      Robert M. Lam        Thomas A. Michlovic          Steven D. Irwin

                 Pennsylvania Securities Commission
                Eastgate Office Building, Second Floor
         1010 North Seventh Street Harrisburg, PA 17102-1410
P: 717-787-8062 Toll-Free Number for PA Residents: 1-800-600-0007

          Alternate formats of this document may be available
                  upon request by calling 717-787-1165
          TTY users via AT&T Relay Center: 1-800-654-5984

           This brochure is prepared for small business persons through
 the Entrepreneur Education Program of the Pennsylvania Securities Commission.
   Permission for reproduction with appropriate attribution may be acquired by
               contacting the Pennsylvania Securities Commission.

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