Test Your Knowledge of the Issuer Exemption

Rule 3a4-1, otherwise known as the safe harbor of the issuer exemption, can be challenging to navigate. We've put together a few questions so you can test your basic knowledge of the rule. Because every offering is unique, it's important to consult a broker-dealer or legal professional for advice when selling private securities.

The issuer safe harbor (issuer exemption) applies to “Associated Persons” of securities issuers and has four requirements. The associated person may not be (i) subject to a statutory disqualification (“DQ Test”); (ii) compensated directly or indirectly based on the securities transaction (“Transaction-based Comp Test”); (iii) an associated person of a broker or dealer (“Association Test”).

 

As set forth in Rule 3a4-1(a)(4), the fourth requirement is an “Activities Test.” The Activities Test may be met in one of three Types, as further described in detail in the regulation itself. The associated person (i) must restrict the sale of securities to certain types of securities or to certain types of purchasers (“Security Type”); (ii) primary job cannot be to sell securities, cannot have been associated with a broker or dealer in the preceding 12 months, and limits participation in selling securities to only once in a 12-month period (“Job Type”); or (iii) limits selling behavior to certain specific activities (“Passive Selling Type”).

 

Think you have a good understanding of the issuer exemption? Test your knowledge by reviewing the following scenarios.

I’m a small business owner raising capital to grow my business. I’m not paying myself a commission from the sale of my securities, but do plan to give myself a bonus based on how successful the offering is. This is my only raise in the last 12 months and I plan to use an outside broker-dealer on this deal. Could I fall under the issuer exemption?

I’m raising money to build a craft brewery in my hometown. I have a Series 7 and am employed by a broker-dealer, but work in their research department. Could I fall under the issuer exemption?

I’m a real estate developer raising money for my next multi-family project. I’m not receiving a commission from the sale of securities and not associated with a broker-dealer currently. I’ve been doing three to four deals a year for the past 20 years, and this will be my second offering in the last 12 months. I have existing business and investor relationships, and want to use a portal to connect with my existing investors. I was associated with a broker-dealer until five years ago when that broker-dealer accused me of selling securities that they had not authorized. To make the matter go away, I settled with FINRA and was suspended from the industry for two years. Could I fall under the issuer exemption?

I manage a real estate fund. I am doing my first raise in more than a year and I plan on actively selling my securities. I’m thinking about contacting potential investors by phone. Until 4 months ago, I was a registered representative with a broker-dealer. Could I fall under the issuer exemption?

I’m raising money for my next oil and gas project. It’s my second raise this year and I do not plan to use a broker-dealer. I’ll just respond to any investor inquiries about the Private Placement Memorandum myself, as well as provide any new updates about the firm that have occurred since we created the PPM. Could I fall under the issuer exemption?

I plan to file the paperwork to set up a securities offering for farmland in the Midwest. It’s the third deal this year that I have worked on for my company. I am not now, nor have I ever been associated with a broker-dealer, and am not compensated in any way for my work on these offerings. I have never been accused of a securities crime, or any other crime for that matter. Since my company raises capital regularly, I complete all related paperwork, send PPMs to retail investors and otherwise provide administrative support for the offering. Could I fall under the issuer exemption?