Resale of Securities Basics

Statutory Framework:

  • Securities Act of 1933
    • Requires registration of offerings or an exemption therefrom
    • Imposes liability for fraud, sales in violation, etc.
  • Securities Exchange Act of 1934
    • Creates the SEC
    • Requires registration of public companies and periodic reporting
    • Regulates securities industry (intermediaries, exchanges, etc.)
    • Prohibits certain practices
    • Regulates proxy voting, insider trading, etc.
  • Colorado Securities Act, Section 11-51-101 et seq., C.R.S.

Federal and state securities laws are implicated whenever someone sells or offers securities.  Sale/sell is defined as a sale/disposition for value.  See Section 2(a)(3) Securities Act

Registration and prospectus delivery requirements be complied with in connection with any offer (to buy or sell) or sale of a security in interstate commerce or through the use of the mails.  Exceptions apply to exempt securities and offerings qualifying as exempt transactions.  See Section 5 Securities Act.  C.R.S. 11-51-301 works the same way for offers and sales in Colorado. See Section 11-51-102 (scope), C.R.S.

Step-by-Step Analysis:

  1. Is it a security?
    1. If no, federal and state securities laws do not apply
    2. If yes, is it a sale or offer?
      1. If no, registration requirements are inapplicable
      2. If yes, registration requirements apply. Do you qualify for an exemption?
        1. If no, must file registration statement with the SEC and the state
        2. If yes, exemption is either (a) Exempt Security or (b) Exempt Transaction such as a private placement. Done

Registered Offerings:

Sections 7 and 10 of the Securities Act and Section 11-51-302 through 304, C.R.S., regulate the information that must be included in a prospectus/registration statement.  The registration statement is designed to provide investors with the information necessary to make an informed investment decision.  Under federal law, the amount and type of information about the issuer that must be included is based upon the SEC’s different registration forms.  The registration process is extremely time consuming and expensive.

Exemptions from Registration:

Securities Act and the Colorado Statutes provide exemptions from their registration requirements based on (a) the nature of the security (exemption stays with the security – no need to register future resales) and (b) the nature of the transaction (exemption applies only to the specific transaction – each future resale must be registered or conducted under an exemption).

Section 4(1) of the Securities Act exempts transactions by any person other than an issuer, underwriter or dealer. These terms are broad. “Underwriter” is defined in Section 2(a)(11) of the Securities Act and includes, among other things, a person who purchased securities from an issuer or a control person of the issuer with a view to distribute the securities.  “Distribution” is not defined but understood to mean “any offer or sale to public investors.”  There are three main categories of underwriters: (1) Persons acting as agents of the issuer in a distribution; (2) Persons who previously purchased restricted securities from the issuer (with a view to distribute – hinges on “investment intent” and whether the investments have “come to rest” – analysis appears to focus on whether the reseller is in a better informational position based on relationship with the issuer than the buyer); and (3) Persons in control positions with the issuer.

There is a Rule 144 Securities Act safe harbor for the status as an “underwriter.”  A person satisfying this safe harbor is not deemed to engage in a distribution and therefore is not an underwriter. The purchaser in a Rule 144 transaction receives securities that are no longer restricted securities.  Rule 144 not available for the resale of securities initially issued by shell companies unless certain requirements apply.  Rule 144 has certain holding period, current public information, volume limitation, manner of sale limitation and form filing requirements.  Holding periods are between 6 months and 1 year.


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