Legal Definitions - Section 4(a)(7)

Section 4(a)(7) refers to a specific provision within the U.S. Securities Act of 1933, a federal law that governs how companies offer and sell their investments (securities) to the public. Generally, companies must register their securities with the U.S. Securities and Exchange Commission (SEC) before selling them, a process that involves extensive disclosure requirements.

However, Section 4(a)(7) provides an exemption from this registration requirement for certain private resales of securities. It allows an investor who originally bought securities directly from a company in a "private placement" (meaning the securities were not offered to the general public and are therefore "restricted") to resell those restricted securities to another private buyer, without the need for a full SEC registration, provided several strict conditions are met.

The purpose of this exemption is to facilitate liquidity for investors in privately held companies while still ensuring that the buyers are sophisticated enough to understand the risks involved without the full protections of a public offering.

Key Conditions for a Section 4(a)(7) Resale:

For an investor (who is not the original company that issued the securities) to resell restricted securities under Section 4(a)(7), the following must generally be true:

• Accredited Purchasers: The buyers must be "accredited investors," meaning they meet specific financial criteria (e.g., high income or net worth) or are certain types of financial institutions, indicating they are sophisticated enough to evaluate the investment risks.
• No Public Solicitation: The seller cannot publicly advertise or broadly solicit interest in the securities. The sale must remain private and targeted.
• Information Access: If the original company that issued the securities does not publicly report its financial information (i.e., it's not a publicly traded company), the seller must ensure the prospective buyer has access to basic financial and operational information about that company.
• Seller's Clean Record: The seller must not have a history of certain serious legal or regulatory violations related to securities (often referred to as not being a "bad actor").
• Issuer's Status: The original company that issued the securities cannot be in bankruptcy, nor can it be a "blank check company" (a company with no business operations formed solely to acquire another company) or a "shell company" (a company with no significant assets or operations).
• Not Unsold Underwriter Allotment: The securities cannot be part of an unsold portion of a public offering that an underwriter was responsible for selling.
• Holding Period: The securities must have been held by the seller for at least 90 days before the resale.

Examples of Section 4(a)(7) in Action:

• Early Investor in a Private Tech Company:

  Scenario: Dr. Anya Sharma was an early angel investor in "Quantum Leap Innovations," a promising but privately held AI startup. She invested five years ago through a private placement. Now, she needs to liquidate a portion of her shares to fund a new venture, but Quantum Leap Innovations is not yet public. She identifies "Venture Capital Partners," a large institutional investor that qualifies as an accredited investor, through her professional network.

  How it illustrates Section 4(a)(7): Dr. Sharma's shares are "restricted securities" because she acquired them in a private placement. She is selling them to an "accredited investor" (Venture Capital Partners) without any public advertising ("no public solicitation"). Since Quantum Leap Innovations is a private company ("non-reporting issuer"), Dr. Sharma provides Venture Capital Partners with the company's latest financial statements and business updates ("information access"). Dr. Sharma has a clean record ("not a bad actor"), Quantum Leap Innovations is a legitimate operating company ("issuer's status"), and she has held the shares for well over 90 days ("holding period"). This transaction would likely qualify for the Section 4(a)(7) exemption.

• Employee Stock Sale from a Unicorn Startup:

  Scenario: Mark, a former senior engineer at "NovaTech," a highly valued private "unicorn" startup, received restricted stock units as part of his compensation. After exercising his options and holding the shares for two years, he wants to sell some to buy a house. He connects with Sarah, a high-net-worth individual who meets the "accredited investor" criteria, through a private wealth management firm.

  How it illustrates Section 4(a)(7): Mark's shares are "restricted securities" from NovaTech, a private company. He is selling them to Sarah, an "accredited investor," and the sale is conducted privately without any public advertising. Mark ensures Sarah receives NovaTech's financial information, as it's a private company. Mark has no history of securities violations, NovaTech is a legitimate operating business, and he has held the shares for over 90 days. This scenario fits the conditions for a Section 4(a)(7) resale.

• Investor in a Private Real Estate Fund:

  Scenario: Emily invested in "Urban Development Fund I," a private limited partnership that acquires and manages commercial real estate properties. Her investment units are restricted. After three years, she needs to free up capital for another opportunity. She finds another investor, David, who is a qualified institutional buyer (a type of accredited investor), through a specialized broker who facilitates private secondary market transactions without general solicitation.

  How it illustrates Section 4(a)(7): Emily's limited partnership units are "restricted securities" from a private placement. She is selling them to David, an "accredited investor," and the transaction is facilitated privately without public advertising. The Urban Development Fund I provides regular financial reports to its investors, which Emily can share with David. Emily has a clean record, the fund is an active real estate entity, and she has held her units for several years. This transaction would be eligible for the Section 4(a)(7) exemption.