Understanding Securities Law
The business professional's guide to securities laws
 

Section 4(1) of the 1933 Selling Stock Act and SEC Rules 144 and 145 governs the answer to these questions. Section 4(1) tells you that these securities can be resold only if the resale transaction is done "by a person other than an issuer, underwriter, or dealer." The issuer is your company. A dealer is a FINRA broker/dealer. What, then, is an underwriter?

An investment banking firm which arranges with an issuer for the public sale of its securities is clearly an "underwriter" under that section. However, individual investors who are not professionals in the securities business also may be "underwriters" if they act as links in a chain of transactions through which securities move from an issuer to the public.

Just as Regulation D explained what Section 4(2) meant, SEC Rule 144 explains what the term “underwriter” means and, more importantly, explains how you and your investors can resell Restricted Securities without being deemed and underwriter.

Rule 144 distinguishes between the following:

• Unregistered Securities held by officers, directors and control persons, including but not limited to persons who own more than 10% of your issued, called Insiders or Affiliates as opposed to Unregistered Securities held by your other investors and shareholders, called Non-Insiders or Non-Affiliates.
• Unregistered Securities of an SEC Reporting Company as opposed to Non-SEC Reporting Companies.
• Unregistered Securities issued by what the SEC as “Shell Companies” as opposed to Operating Companies, which are companies with more than no or nominal non-cash assets and more than nominal operations. This is discussed in detail under the “Public Shells & Reverse Mergers” Button on this site.