When you sell equity in your company, you must either (i) register with the Securities and Exchange Commission (“SEC”) and with each state in which investors reside, or (ii) qualify for an exemption to registration.
Regulation D Offering Exemptions to Securities Registration
One of the available federal exemptions is Regulation D to the Securities Act of 1933. Regulation D provides three “safe harbors” that give companies some assurance that their capital-seeking activities are in compliance with federal securities laws. Those other Regulation D exemptions include exemptions under Rule 504, Rule 505, and Rule 506 (now Rule 506(b)). I discussed the Rule 504, Rule 505, and Rule 506(b) exemptions in a previous blog posting, “Finding an Exemption to Federal Securities Registration for the Sale of Equity in Your Company”.
New Regulation D, Rule 506(c)
As of September 23, 2013, Regulation D, Rule 506(c) offerings became permissible. This new category of offering exemption differs from traditional 506 offerings in a few ways:
Advertising Allowed. Companies offering securities under the Regulation D, Rule 506(c) exemption may use general solicitation and advertising in connection with selling equity in the company.
Accredited Investors Only. The issuing company may sell securities only to accredited investors. There are requirements to verify the accredited investor status of investors.
Bad Boy Provisions Apply. The company cannot rely on a 506 exemption if the company, its officers, directors, 20% or more shareholders have been involved in any acts on the statutory “bad acts” list. Those bad acts include securities-related or fraudulent acts resulting in criminal convictions or administrative/regulatory discipline. As of September 23, 2013, the “bad boy” provision applies to both Rule 506(b) and Rule 506(c) offerings.
Some Points to Remember
Regulation D, Rule 506(c) is an additional available exemption. All the Regulation D exemptions that existed prior to September 23, 2013 are still available and work in the same manner.
Relying on Rule 506(c) requires a Form D filing just as all the other Regulation D offerings do. As of the 506(c) launch date, the Form D remains the same except for two additions to accommodate the new 506(c) exemption:
- There is a checkbox which the company selling equity must check if it is relying on the Rule 506(c) exemption.
- The issuing company must state that it is not disqualified from relying on Rule 506 due to any “bad actor” factors.