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Chapter 8. Legal and Contractual Aspects... > Legal Restrictions on Raising Privat...

Legal Restrictions on Raising Private Capital

Securities offerings are governed by the Securities Act of 1933 and rules thereunder. The relevant rules, with respect to a private offering of a startup, are those related to exemption from registration.

Legal Restrictions According to U.S. Law

According to Section 4(2) of the Securities Act of 1933, there is no need to register shares (or deliver a prospectus) in a private sale of securities. U.S. courts have laid down certain conditions for exempting private sales from registration. Generally, the following requirements have to be met for the exemption to be available: (1) the offeree receives or is given access to material information about the company; (2) the issuance of the securities is performed directly and not via means of mass distribution; (3) the number of offerees and buyers is limited; (4) the buyers will not act in practice as distributors of the shares (in other words, they will not purchase them with the aim of reselling them in the short-term).


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