Per the Securities Act of 1933, Issuers seeking to sell securities must either 1) be registered with the SEC, or 2) meet an exemption from registration. Issuers have available three rules under Regulation D (aka Reg D) providing exemptions from the SEC registration requirements. These rules under Reg D are known as Rules 504, 505, and 506. Each of these rules have different criteria that address the number and type of investors, and the amount that can be raised.
The type of investors allowed under each of the three rules have to do with whether or not the purchaser of the securities being offered is accredited or not. Accredited investors can be trusts, charitable organizations, or individuals. Each of these types of investors must meet minimum financial requirements thresholds to qualify as an accredited investor. For individuals, there is a minimum net worth test and and income test. Learn more at accredited investor.Per the Securities Act of 1933, Issuers seeking to sell securities must either 1) be registered with the SEC, or 2) meet an exemption from registration. Issuers have available three rules under Regulation D (aka Reg D) providing exemptions from the SEC registration requirements. These rules under Reg D are known as Rules 504, 505, and 506. Each of these rules have different criteria that address the number and type of investors, and the amount that can be raised.
While companies that raise capital under Reg D do not have to register their securities with the SEC, and usually do not have to file reports with the SEC, they do have to file a Form D. The filing of the Form D occurs after the company first sells their securities. The Form D is a notice that provides the names and addresses of the company’s executive officers and security promoters. the Form D provides very little information about the Issuer. Beginning in September of 2008, the Form D filing is accomplished electronically.
Rule 506 is considered a “safe harbor” for companies executing a private offering under the exemption of Regulation D. Companies raising capital under Rule 506 can raise an unlimited amount of money.
An Issuer can complete an issuance under Rule 506 by satisfying the following standards:
- The Issuer cannot use general solicitation or advertising to market the securities – that means no posting on internet sites, not advertisements in newspapers;
- The Issuer may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchases. However, unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
- Issuers must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws, meaning no lies of commission or of omission. Issuers must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well. In other words, make all required information available to all prospective investors, regardless of whether they are accredited or non-accredited ;
- The Issuer must be available to answer questions by prospective purchasers;
- Financial statement requirements are the same as for Rule 505; and
- Purchasers receive ”restricted” securities, meaning that the securities cannot be sold for at least a year without registering them.
Issuers raising money under Rule 506 do not have to register their securities with the SEC, and usually do not have to file ongoing reports with the SEC. Issuers do, however, have to file a Form D after they first sell their securities. This Form D is filed electronically and provides a notice that includes the names and addressed of the company’s owners and offering promoters. This form contains very little information regarding the company.
Under Regulation D, Rule 505 allows some companies that seek to offer their securities for sale to have those securities exempted from federal securities laws registration requirements. To qualify for the exemption provided under Rule 505, a company:
- Can only offer and sell up to $5 million of its securities in any 12-month period;
- May sell to an unlimited number of “accredited investors” and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions;
- Must inform purchasers that they receive ”restricted” securities, meaning that the securities cannot be sold for six months or longer without registering them; and
- Cannot use general solicitation or advertising to sell the securities.
Under Rule 505, Issuers can decide what information to provide to their prospective investors which are accredited investors. The caveat is that the information provided (or omitted) does not violate the antifraud prohibitions of the federal securities laws. That is, do not commit any lies of commission or lies of omission. Put yourself in the shoes of your prospective investors and ask yourself what information you would want to receive to make a totally informed decision about your investment opportunity.
Issuers must provide non-accredited investors the same information that is generally equivalent to that information used in registered offering. Additionally, if an Issuer provide information to an accredited investor, the same information must be made available to non-accredited investors as well. In other words, provide the same information to all of the prospective investors, regardless of the status as accredited or non-accredited investors. Finally, the Issuer must be available to answer any questions posed by prospective investors.
Rule 505 also has some specific financial statement requirements applicable to this type of offering:
- Financial statements need to be certified by an independent public accountant;
- If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company’s balance sheet (to be dated within 120 days of the start of the offering) must be audited; and
- Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under the federal income tax laws.
companies issuing securities under Rule 505 do not have to register their securities, nor they usually have to provide any reporting to the SEC. Companies do, however, have do an electronic filing of Form D, which provides a notice that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company.