In my last posting, I mentioned Rules 504, 505, and 506 of Regulation D as an exemption to federal securities registration. If you meet all the requirements of Rule 504, 505, or 506, you are in a “safe harbor” and can be certain your offering qualifies as private under federal law.
All offerings under Rule 504, Rule 505 and Rule 506 have the following characteristics:
- No Advertising. With the exception of certain Rule 504 offerings, you cannot use advertising to find investors. Posting information online or using any type of viral email marketing to find capital would likely be considered advertising and could make you ineligible for the more streamlined securities compliance procedures.
- No Resale. With the exception of certain Rule 504 offerings, your investors have limited ability to resell the securities.
- Notice Filing. Within fifteen days after the first sale, you must send the SEC a completed Form D containing information about your company and the securities that were sold.
- Accredited Investors. Regulation D distinguishes between accredited investors and non-accredited investors. There are specific definitions for accredited investors but you can think of them generally as companies and individuals with lots of money. Accredited investors include individuals with incomes over $200,000 and the directors and executive officers of the company selling the securities.
The distinctions in the rules focus on the amount of money you may raise, the types of investors to whom you may sell, and the level of disclosure you must provide. Disclosure for a private offering normally takes the form of a written document referred to as an offering memorandum or a private placement memorandum.
- Regulation D, Rule 504 Lets You Raise Up to $1 Million. Rule 504 places no restrictions on the number or type of investors to whom you sell. It also has no specific requirements for the information you must disclose to investors. Nevertheless, the anti-fraud laws apply to Rule 504 transactions (as well as to all securities offerings) and require that you provide investors with all information deemed material.
- Regulation D, Rule 505 Lets You Raise Up to $5 Million. Under Rule 505, you can sell to up to 35 non-accredited investors and to an unlimited number of accredited investors. If you sell to non-accredited investors, there are specific disclosure requirements which include providing investors with audited financial statements. If you sell only to accredited investors, there are no specific disclosure requirements.
- Regulation D, Rule 506 Places No Maximum on the Amount You Raise. Rule 506 has the same investor eligibility and disclosure requirements as Rule 505. The one additional requirement is that all non-accredited investors must be financially sophisticated. Rule 506 preempts state law meaning it also serves as your exemption to state registration. In contrast, if you rely on Rule 504 or 505, you must still find an exemption under the law of each state in which you sell.
I’ll discuss exemptions to state securities registration requirements in my next posting