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If a company decides on a registered public offering, the Securities Act requires a company to file a registration statement with the SEC before the company can offer its securities for sale. It cannot actually sell the securities covered by the registration statement until the SEC staff declares it "effective," even though registration statements become public immediately upon filing.

Registration statements have two principal parts:

Part I	Is the prospectus, the legal offering or "selling" document? A company - the "issuer" of the securities - must describe in the prospectus the important facts about its business operations, financial condition, and management. Everyone who buys the new issue, as well as anyone who is made an offer to purchase the securities, must have access to the prospectus.
Part II	Contains additional information that the company does not have to deliver to investors. Anyone can see this information by requesting it from one of the SEC's public reference rooms or by looking it up on the SEC Web site.

All companies can use Form S-1 to register their securities offerings. A company should not prepare a registration statement as a fill-in-the-blank form, like a tax return. It should be similar to a brochure, providing readable information.

1.1.1 Filing Information

If it files the S-1 form, a company must describe and include each of the following in the prospectus:

1. The reason for business
2. The properties
3. The competition
4. The identity of its officers and directors and their compensation
5. Material transactions between the company and its officers and directors
6. Material legal proceedings involving the company or its officers and directors
7. The plan for distributing the securities
8. The intended use of the proceeds of the offering
9. Financial statements audited by an independent certified public accountant. Form S-1 requires the issuer to provide audited financial statements, prepared according to detailed SEC regulations, for three fiscal years

1.1.2 Risk Factors

In addition to the information expressly required by the form, a company must also provide any other information that is necessary to make its disclosure complete and not misleading. It also must clearly describe any risks prominently in the prospectus, usually at the beginning.

Examples of these risk factors are:

1. Lack of business operating history
2. Adverse economic conditions in a particular industry
3. Lack of a market for the securities offered
4. Dependence upon key personnel

Information about how to describe these items is set out in SEC rules.

1.1.3 Staff Review of Registration Statements

SEC staff examines registration statements for compliance with disclosure requirements. If a filing appears incomplete or inaccurate, the staff usually informs the company by letter. The company may file correcting or clarifying amendments. Once the company has satisfied the disclosure requirements, the staff declares the registration statement effective. The company may then begin to sell its securities. The SEC can refuse or suspend the effectiveness of any registration statement if it concludes that the document is misleading, inaccurate, or incomplete.

If a company qualifies as a "small business issuer," it can choose to file its registration statement using one of the simplified small business forms.

A small business issuer is a United States or Canadian issuer:

1. That had less than $25 million in revenues in its last fiscal year
2. Whose outstanding publicly-held stock is worth no more than $25 million

1.2.1 Form SB-1 - To Raise $10 Million or Less

Small business issuers offering up to $10 million worth of securities in any 12-month period may use Form SB1. This form allows a company to provide information in a question and answer format, similar to that used in Regulation A offerings, a type of exempt offering. Unlike Regulation A filings, Form SB-1 requires audited financial statements.

1.2.2 Form SB-2 - To Raise Capital in Any Amount

If a company is a "small business issuer," it may register an unlimited dollar amount of securities using Form SB-2, and may use this form again and again so long as it satisfies the "small business issuer" definition.

One advantage of Form SB-2 is that all its disclosure requirements are in Regulation S-B, a set of rules written in simple, non-legalistic terminology.

Form SB-2 also permits the company to provide audited financial statements, prepared according to generally accepted accounting principles, for two fiscal years. In contrast, Form S-1 requires the issuer to provide audited financial statements, prepared according to more detailed SEC regulations, for three fiscal years; and include less extensive narrative disclosure than Form S-1 requires, particularly in the description of your business, and executive compensation.

A company can become "public" in one of two ways - by issuing securities in an offering registered under the Securities Act or by registering the company's outstanding securities under Exchange Act requirements. Both types of registration trigger ongoing reporting obligations for a company. In some cases, the Exchange Act also subjects a company's officers, directors and significant shareholders to reporting requirements. These requirements are discussed individually.

1.3.1 Reporting obligations because of Securities Act registration

Once the staff declares a company's Securities Act registration statement effective, the Exchange Act requires it to file reports with the SEC. The obligation to file reports continues at least through the end of the fiscal year in which the registration statement becomes effective. After that, a company is required to continue reporting unless it satisfies the following "thresholds," in which case its filing obligations are suspended:

1. The company has fewer than 300 shareholders of the class of securities
2. The company has fewer than 500 shareholders of the class of securities offered and less than $10 million in total assets for each of its last three fiscal years

If a company is subject to the reporting requirements, it must file information with the SEC about:

1. Its operations
2. Its officers, directors, and certain shareholders, including salary, various fringe benefits, and transactions between the company and management
3. The financial condition of the business, including financial statements audited by an independent certified public accountant
4. Its competitive position and material terms of contracts or lease agreements

All of this information becomes publicly available when a company files its reports with the SEC. As is true with Securities Act filings, small business issuers may choose to use small business alternative forms and Regulation S-B for registration and reporting under the Exchange Act.

1.3.2 Reporting Obligations because of Exchange Act registration

Even if a company has not registered a securities offering, it must file an Exchange Act registration statement if:

1. It has more than $10 million total assets and a class of equity securities, like common stock, with 500 or more shareholders
2. It lists its securities on an exchange or on Nasdaq.

If a class of a company's securities is registered under the Exchange Act, the company, as well as its shareholders and management, are subject to various reporting requirements, explained below.

1.3.3 Ongoing Exchange Act periodic reporting

If a company registers a class of securities under the Exchange Act, it must file the same annual, periodic, and current reports that are required as a result of Securities Act registration, as explained above. This obligation continues for as long as the company exceeds the reporting thresholds previously outlined. If a company's securities are traded on an exchange or on Nasdaq, the company must continue filing these reports as long as the securities trade on those markets, even if the company falls below the thresholds.

A company with Exchange Act registered securities must comply with the SEC's proxy rules whenever it seeks a shareholder vote on corporate matters. These rules require the company to provide a proxy statement to its shareholders, together with a proxy card when soliciting proxies. Proxy statements discuss management and executive compensation, along with descriptions of the matters up for a vote. If the company is not soliciting proxies but will take a vote on a matter, it must provide to its shareholders an information statement that is similar to a proxy statement. The proxy rules also require a company to send an annual report to shareholders if there will be an election of directors. These reports contain much of the same information found in the Exchange Act annual reports that a company must file with the SEC, including audited financial statements. The proxy rules also govern when a company must provide shareholder lists to investors and when it must include a shareholder proposal in the proxy statement.

If a company has registered a class of its equity securities under the Exchange Act, persons who acquire more than five percent of the outstanding shares of that class must file beneficial owner reports until their holdings drop below five percent. These filings contain background information about the beneficial owners as well as their investment intentions, providing investors and the company with information about accumulations of securities that may potentially change or influence company management and policies.

A public company with Exchange Act registered securities that faces a takeover attempt, or third party tender offer, should be aware that the SEC's tender offer rules will apply to the transaction. The same is true if the company makes a tender offer for its own Exchange Act registered securities. The filings required by these rules provide information to the public about the person making the tender offer. The company that is the subject of the takeover must file with the SEC its responses to the tender offer. The rules also set time limits for the tender offer and provide other protections to shareholders.

Section 16 of the Exchange Act applies to a company's directors and officers, as well as shareholders who own more than 10% of a class of a company's equity securities registered under the Exchange Act. It requires these persons to report their transactions involving the company's equity securities to the SEC. Section 16 also establishes mechanisms for a company to recover "short swing" profits, those profits an insider realizes from a purchase and sale of a company security within a six-month period. In addition, Section 16 prohibits short selling by these persons of any class of the company's securities, whether or not that class is registered under the Exchange Act.

Are There Legal Ways To Offer and Sell Securities Without Registering With the SEC?

Yes! A company's securities offering may qualify for one of several exemptions from the registration requirements. The most common ones are explained below. It must be remembered, however, that all securities transactions, even exempt transactions, are subject to the antifraud provisions of the federal securities laws. This means that directors and officers and the company will be responsible for false or misleading statements, whether oral or written. The government enforces the federal securities laws through criminal, civil and administrative proceedings. Some enforcement proceedings are brought through private law suits. Also, if all conditions of the exemptions are not met, purchasers may be able to obtain refunds of their purchase price. In addition, offerings that are exempt from provisions of the federal securities laws may still be subject to the notice and filing obligations of various state laws. Make sure to check with the appropriate state securities administrator before proceeding with an offering.

Section 3(a)(11) of the Securities Act is generally known as the "intrastate offering exemption." This exemption facilitates the financing of local business operations. To qualify for the intrastate offering exemption, a company must:

1. Be incorporated in the state where it is offering the securities
2. Carry out a significant amount of its business in that state
3. Make offers and sales only to residents of that state.

There is no fixed limit on the size of the offering or the number of purchasers. A company must determine the residence of each purchaser. If any of the securities are offered or sold to even one out-of-state person, the exemption may be lost. Without the exemption, the company could be in violation of the Securities Act registration requirements. If a purchaser resells any of the securities to a person who resides outside the state within a short period of time after the company's offering is complete (the usual test is nine months), the entire transaction, including the original sales, might violate the Securities Act. Since secondary markets for these securities rarely develop, companies often must sell securities in these offerings at a discount.

It will be difficult for a company to rely on the intrastate exemption unless it knows the purchasers and the sale is directly negotiated with them. If a company holds some of its assets outside the state, or derives a substantial portion of its revenues outside the state where it proposes to offer its securities, it will probably have a difficult time qualifying for the exemption.

A company may follow Rule 147, a "safe harbor" rule, to ensure that it meets the requirements for this exemption. It is possible, however, that transactions not meeting all requirements of Rule 147 may still qualify for the exemption.

Section 4(2) of the Securities Act exempts from registration "transactions by an issuer not involving any public offering." To qualify for this exemption, the purchasers of the securities must:

1. Have enough knowledge and experience in finance and business matters to evaluate the risks and merits of the investment (the "sophisticated investor"), or be able to bear the investment's economic risk
2. Have access to the type of information normally provided in a prospectus
3. Agree not to resell or distribute the securities to the public

In addition, a company may not use any form of public solicitation or general advertising in connection with the offering.

The precise limits of this private offering exemption are uncertain. As the number of purchasers increases and their relationship to the company and its management becomes more remote, it is more difficult to show that the transaction qualifies for the exemption. It should be known that if a company offers securities to even one person who does not meet the necessary conditions, the entire offering may be in violation of the Securities Act.

Section 3(b) of the Securities Act authorizes the SEC to exempt from registration small securities offerings. By this authority, the exchange created Regulation A, an exemption for public offerings not exceeding $5 million in any 12-month period. If a company chooses to rely on this exemption, it must file an offering statement, consisting of a notification, offering circular, and exhibits, with the SEC for review.

Regulation A offerings share many characteristics with registered offerings. For example, a company must provide purchasers with an offering circular that is similar in content to a prospectus. Like registered offerings, the securities can be offered publicly and are not "restricted," meaning they are freely tradable in the secondary market after the offering.

The principal advantages of Regulation A offerings, as opposed to full registration, are:

1. The financial statements are simpler and don't need to be audited
2. There are no Exchange Act reporting obligations after the offering unless the company has more than $10 million in total assets and more than 500 shareholders

Companies may choose among three formats to prepare the offering circular, one of which is a simplified question-and-answer document; and may "test the waters" to determine if there is adequate interest in its securities before going through the expense of filing with the SEC.

All types of companies which do not report under the Exchange Act may use Regulation A, except "blank check" companies, those with an unspecified business, and investment companies registered or required to be registered under the Investment Company Act of 1940. In most cases, shareholders may use Regulation A to resell up to $1.5 million of securities.

If a company "tests the waters," it can use general solicitation and advertising prior to filing an offering statement with the SEC, giving it the advantage of determining whether there is enough market interest in its securities before incurring the full range of legal, accounting, and other costs associated with filing an offering statement. It may not, however, solicit or accept money until the SEC staff completes its review of the filed offering statement and prescribed offering materials are delivered to investors.

Regulation D establishes three exemptions from Securities Act registration. Let's address each one separately.

Rule 504 provides an exemption for the offer and sale of up to $1,000,000 of securities in a 12-month period. A company may use this exemption so long as it is not a blank check company and is not subject to Exchange Act reporting requirements. Like the other Regulation D exemptions, in general, a company may not use public solicitation or advertising to market the securities and purchasers receive "restricted" securities, meaning that they may not sell the securities without registration or an applicable exemption. However, a company can use this exemption for a public offering of its securities and investors will receive freely tradable securities under the following circumstances:

1. The company registers the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors
2. The company registers and sells in a state that requires registration and disclosure delivery and also sells in a state without those requirements, so long as it delivers the disclosure documents mandated by the state in which it registered to all purchasers
3. The company sells exclusively according to state law exemptions that permit general solicitation and advertising, so long as it sells only to "accredited investors”.

Even if a company makes a private sale where there are no specific disclosure delivery requirements, it should take care to provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. This means that any information it provides to investors must be free from false or misleading statements. Similarly, it should not exclude any information if the omission makes what the company does provide investors false or misleading.

Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period. Under this exemption, a company may sell to an unlimited number of "accredited investors" and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions. Purchasers must buy for investment only, and not for resale. The issued securities are "restricted." Consequently, the company must inform investors that they may not sell for at least a year without registering the transaction. The company may not use general solicitation or advertising to sell the securities.

Rule 506 is a "safe harbor" for the private offering exemption. If a company satisfies the following standards, it can be assured that it are within the Section 4(2) exemption:

1. The company can raise an unlimited amount of capital
2. The company cannot use general solicitation or advertising to market the securities
3. The company can sell securities to an unlimited number of accredited investors (the same group identified in the Rule 505 discussion) and up to 35 other purchasers. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated - that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment
4. It is up to the company to decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions. But it must give non-accredited investors disclosure documents that generally are the same as those used in registered offerings. If the company provide information to accredited investors, it must make this information available to the non-accredited investors as well
5. The company must be available to answer questions by prospective purchasers
6. Financial statement requirements are the same as for Rule 505

Purchasers receive "restricted" securities. Consequently, purchasers may not freely trade the securities in the secondary market after the offering.

Section 4(6) of the Securities Act exempts from registration offers and sales of securities to accredited investors when the total offering price is less than $5 million.

The definition of accredited investors is the same as that used in Regulation D. Like the exemptions in Rule 505 and 506, this exemption does not permit any form of advertising or public solicitation. There are no document delivery requirements. Of course, all transactions are subject to the antifraud provisions of the securities laws.

2.8.1 An accredited investor is:

1. A bank, insurance company, registered investment company, business development company, or small business investment company
2. An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million
3. A charitable organization, corporation or partnership with assets exceeding $5 million
4. A director, executive officer, or general partner of the company selling the securities
5. A business in which all the equity owners are accredited investors
6. A natural person with a net worth of at least $1 million
7. A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year
8. A trust with assets of at least $5 million, not formed to acquire the securities offered, and whose purchases are directed by a sophisticated person.

2.8.2 Information to Accredited Investors

It is up to the company to decide what information it gives to accredited investors, so long as it does not violate the antifraud prohibitions. But a company must give non-accredited investors disclosure documents that generally are the same as those used in registered offerings. If it provides information to accredited investors, the company must make this information available to the non-accredited investors as well. It must also be available to answer questions by prospective purchasers.

Here are some specifics about the financial statement requirements applicable to this type of offering:

1. Financial statements need to be certified by an independent public accountant
2. If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company's balance sheet, to be dated within 120 days of the start of the offering, must be audited
3. Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under the federal income tax laws.

SEC Rule 1001 provides an exemption from the registration requirements of the Securities Act for offers and sales of securities, in amounts of up to $5 million, that satisfy the conditions of §25102(n) of the California Corporations Code. This California law exempts from California state law registration offerings made by California companies to "qualified purchasers" whose characteristics are similar to, but not the same as, accredited investors under Regulation D. This exemption allows some methods of general solicitation prior to sales.

The SEC's Rule 701 exempts sales of securities if made to compensate employees. This exemption is available only to companies that are not subject to Exchange Act reporting requirements. A company can sell at least $1,000,000 of securities under this exemption, no matter how small the company is. It can sell even more if it satisfies certain formulas based on the company's assets or on the number of its outstanding securities. If a company sells more than $5 million in securities in a 12-month period, it needs to provide limited disclosure documents to its employees. Employees receive "restricted securities" in these transactions and may not freely offer or sell them to the public.