 Hello and welcome to this session in which we would look at exempt transactions under the Securities Act of 1933. I double underline transaction to differentiate transaction from exempt securities. Exempt securities, it means you don't have to take them through the SEC approval process, though the securities themselves don't have to go through it. Here we're going to be discussing transactions because of the nature of the transaction, you don't have to go through the SEC 1933 Act because the way the security is structured. And specifically we're going to be looking at Rule 147, Regulation D A, and obviously if you sell your own stock you don't have to go through the SEC as long as you own less than 10% of the company. Now this topic is covered on the CPA exam, therefore if you are studying for the CPA exam I strongly suggest you visit farhatlectures.com. I don't replace your CPA review course whether you are taking Becker, Roger, Gleam, Wiley or any other review course. I can be a useful addition. I can add 10 to 15 points to your CPA score by explaining the material differently, no better no less. Just let's say differently. I can be that supplement when your CPA review course does not explain something the way you would like. Maybe you want to try my explanation and what about you try for a month to find out whether it's a good system for you or not. If it's not you cancel you lost a month. The potential gain is passing the exam. I think it's a fair risk to take. And if not for anything check out my website to find out how well or not well your university doing on the CPA exam. I do have courses and resources for other topics as well. Please check out my website. Connect with me on LinkedIn if you haven't done so and you can review my LinkedIn recommendation. People that used my system to pass the exam like this recording. Please follow me on Instagram and Facebook. So I'm going to go over this list starting with rule 147 and everything that I'm going to be saying here. Maybe if I don't mention it explicitly it's considered an exempt transaction. Simply put you don't have to go through the process that the SEC wants you to do before you before you sell securities which is have a prospectus and filing statements so on and so forth. So rule 147 and rule 147 when you when you think of rule 147 think of intra state sale like you are in Pennsylvania I'm in Pennsylvania and I'm dealing everything within the state. So govern intra not inter. Inter it means between state. Here we're looking at intra. Intra it means within the state within the state itself. So the issuer first will have to be located inside the state for example Pennsylvania. The old securities are sold to residents in the state are sold to residents in Pennsylvania so the people who are financing the company are residents of the state. 80% of the proceeds are used in the state to expand the business. 80% of the assets are located in the states. 80% of the revenue is generated within the state. So notice it makes sense that you're operating in the state therefore you know because think about it the SEC is a federal regulation federal means it applies to all state. If you are operating within your state the SEC is not concerned with you because it's concerned with interstate transaction interstate commerce. So restriction of security for six months for non-residents. So simply put if a person in Pennsylvania purchased that securities they have to hold it for six months before they can sell it to a non-resident to a non-resident. Mass advertising is prohibited and we have rule 147 the issuer does not have to be a resident of the state. So somebody outside the state can sell it if they go under rule 147a but still when you buy it you have to hold the securities for six months like rule 147. So this is one transaction just make sure you know what rule 147. I think it makes sense just remember if you buy it you have to hold it for six months before you sell it to a non-resident non-resident of your state. Now regulation D when you think of regulation D think of private placement or private offering in contrast to public because remember the SEC governs the main objective of 1933 is initial public offering when you sell to the public. Well regulation D what if you don't want to sell to the public you want to sell to people that you know people that you are familiar with it's a private placement okay. So regulation D governs private placement exemptions. So what it does it provides exemptions if you if you're a small issuance a small company what you do is you go under regulation D and specifically you will follow rule 504 and 504 and 506 to be exempt there is no more these have rule 505 make sure if you saw that one cross it out of the answers okay and when it comes to regulation D they differentiate between two type of investors and you have to be familiar with them a group of investors we can call accredited investors and accredited simply put they are high net worth client and simply put as of today their net worth has to be one million and exclude excluding their home value and by the way hedge funds mutual fund banks insurance companies they're considered institutional investors and we have uncredited investors simply put they are not accredited that that's what it means and if they are not accredited it means we have to furnish them with financial information about the issuance the business annual reports and more information why because they are not accredited okay they are and like think of it they are at a disadvantage therefore we have to give them more information accredited the assumption is they know what they're doing they have lawyers accountant cfa's that they're they're gonna consult with that's the assumption here okay some general rules rules about regulation D before we go into specific if you buy the stop you have to keep it for one year there's something called the bad actors rule or the bad actors disqualification so look if someone with the issuer simply put if someone is affiliated with the issuer is considered a covered person a covered person if someone that try to defraud the sec or other investors in the past having convicted of securities fraud within the past five years then the issuer cannot use regulation they simply put then you cannot use regulation D then you have you cannot use this exemption from filing therefore you have to go through the whole process which is costly and in time consuming in this bad actor rule would apply later on will see regulation a it applies also to regulation a you have to inform the sec within 15 days of the first offering if you're going through a regulation d and again under regulation d we have two parts 504 and 506 starting with 504 under 504 you can sell securities up to five million dollars during a 12 month period it's considered a small amount to any number and type of purchaser whether that purchaser is accredited or an accredited simply put it's like open season you can buy you can sell five million dollar worth of securities to anyone okay so remember this is a private placement and they need the person that's buying need to understand it's buy as is it's it's you know buyer be aware if you if you're buying bad product it's your problem the sec is not going to it's not looking over this to me to make sure everything is complete so under those circumstances registration is not required the issuer loves it the issuer does not need to provide any specific financial information obviously as I told you you must notify the sec of the sale and there's no restriction if you buy the sale you can resell them you can do whatever you want to and obviously you can carry mass solicitation because you can target any type of accreditor so this is under rule 504 again regulation d now under rule 506 we're still working under regulation d there's no dollar limit in contrast to rule 504 remember rule 504 we said you can issue up to five million within 12 month here you have no limit you can issue as much as you want advertisement by the issuer is only you can only target accredited investors okay you can only target accredited investors now can you have unaccredited investors yes you can you can have up to 35 of unaccredited investors but those unaccredited investors must be they add a word to them sophisticated it means they have knowledge experience they understand the risk that they're getting into we don't have to worry exactly how yeah we're gonna come come to that conclusion it's not our concern but you need to know they can be they can be unaccredited but considered sophisticated they have knowledge they are comfortable with what they're doing okay however if you have one unaccredited unaccredited investor only one then you have to furnish all of the financial statements for everyone so obviously if you're gonna go under rule 506 and you're trying to avoid this you don't sell to any unaccredited investor okay and the issuer must take reasonable care not to be selling to an underwriter because these guys they try to resell that's that's not what they're trying to do you're trying to sell to investors that's that's the purpose directly to the investors regulation a another it's not really an exemption but it's simplified offering it's it's not considered an exemption simplified means they make it easier for you to raise money it permits certain issuers to to offer up to 50 million of securities in a 12 month period without filing formal registration statement and prospectus it doesn't mean you don't you don't have to file anything you're gonna have to file something but that's not not as comprehensive and and tedious as registration statements and prospectus there is no restriction on resale and general solicitation is allowed for these type of transaction it's the regulation is simply designed for small companies that wants to issue securities quick and at low cost because they're small securities they're small companies you don't want to put a lot of burden on them so they need to file something called the offering statement think of it as a registration statement but it's called the offering statement it will include disclosures to be approved by the sec and each potential buyer would receive offering circular notice different language think of a prospectus okay just different language you don't have to know what's specifically inside of it but think like what would be the prospectus equivalent of a prospectus okay assured must file financial statements for the past two complete physical year and remember the bad actors rule apply if you have someone an officer a CEO the CFO is a bad actor then forget about regulation a they will not allow you to go throw it under regulation a we have two tier or two categories tier one and tier two depending on the amount that you're raising under tier one you could raise up to 20 million dollars you could sell to anyone a credited and non-accredited investor and all what you need is reviewed financial statements not audited financial statements and you don't have to constantly report your quarterly semi-annual or annual reporting so no ongoing reporting requirements under tier two if you want to raise more than 20 but less than 15 million you will go under tier two for non-accredited investors they are limited to 10 percent of the greater of their net income or net worth so they cannot invest everything with you if it's unincredited unaccredited entities like companies they are limited to 10 percent of the revenues or their assets whichever is greater now you have to have audited financial statements notice here reviews here you have to audit financial statements and you have to have ongoing reporting requirements annual semi-annual you know press release or so on and so forth so notice under tier two you have a little bit more to do but you can raise more money and still be exempt under the securities act of 1933 at the end of this recording again i'm going to remind you if you are studying for your CPA exam i can be an alternative a support system for you not a substitute an alternative to your CPA review course i set up your my CPA review course very similar to yours so it'll be easy for you to switch back and forth stay safe good luck and study hard