Section 4(2) of the Securities Act of 1933 provides exemption from registration for "transactions by an issuer not involving any public offering." There has been much uncertainty as to the precise limits of this private offering exemption. Generally, sales to persons who have access to information about the company and are able to fend for themselves (such as those directly managing the business) fall within the intended scope of the exemption. These are known as "sophisticated investors." As the number of purchasers increase and their relationship to the company and its management becomes more remote, however, it becomes more difficult for an issuer to demonstrate that the transaction does, in fact, qualify for the exemption.

To quality the offering under this exemption, it is necessary that the persons to whom your company sells the security:

• Have sufficient knowledge and experience in financial and business matters that they are capable of evaluating the risks and merits of the investment (the "sophisticated investor"), or are able to bear the economic risk of the investment;
  
  
• Have access to the type of information normally provided in a prospectus; and
  
  
• Agree not to resell or distribute the securities.

In addition, your offering may not be made by any form of public solicitation or general advertising. You should be aware that if the security is offered for sale to even one person who does not meet the necessary conditions, the entire offering may be in violation of the Securities Act. The SEC has adopted Rule 506, another "safe harbor" rule, which provides objective standards upon which business people may rely in order to be certain they meet the requirements of this exemption. Rule 506 is a part of Regulation D, which is described more fully later.