Chapter 7.1 Flashcards
Regulation D offering - Private Placement Rules
SEC Rules 504-506 exempt certain transaction from the registration requirements of federal securities laws, provided the offering meets the requirements contained in these rules.
Regulation D offerings are subject to anti-fraud or civil liability provisions of federal securities laws.
SEC Rule 504
- Provides an exemption for an aggregate offering of $5,000,000 or less in any 12-month period
- There are no specific disclosure requirements to investors in a Rule 504 offering and there is no requirement concerning an investor’s qualification to purchase the issue
- The exemption under Rule 504 generally does not allow companies to solicit or advertise their securities to the public
- There is no limit to the number of investors, provide the aggregate offering does not exceed $5,000,000.
- If the offering is conducted exclusively in states where it is registered, and a disclosure document is delivered under applicable state law, then the securities purchased can be sold without restriction by investors. If this is not true, then the securities purchased by investors would be restricted securities and limited in the manner in which they could be resold.
Categories of accredited investors
- Institutional investors(banks, insurance companies, etc.)
- Private business development companies
- Tax exempt organizations
- Directors, executive officers, and general partners of the issuer
- Individuals with $1,000,000 of net worth or $1,000,000 of net worth for the investor and the investor’s spouse(excluding the value of the personal residence)
- An individual who has an income in excess of $200,000 in each of the last two years and who reasonably expects an income in excess of $200,000 in the current year
- Any trust with total assets in excess of $5,000,000, not formed for the purpose of purchasing the securities offered
- Any entities made up of accredited investors
**In all offerings under Rules 504 and 506, Form D must be filed with the SEC
SEC Rule 506(b) offering - Traditional private placement
- Issuers can continue to conduct “quiet” private placements without using general solicitation/advertising, but non-accredited investors may participate if they are provided with disclosure information about the issuer of the securities, usually in a Private Placement Memorandum
- SEC Rule 506 provides an exemption for an offering without regard to a dollar limit if the issue is sold to no more than 35 sophisticated investors plus an unlimited number of accredited investors
- The company cannot use general solicitation or advertising to market the securities
- All non-accredited investors, must be sophisticated - 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. A purchaser representative might be an accountant or an attorney, etc. who would assist the unsophisticated investor in determining whether or not to invest in the offering. Commissions may be paid to RR’s in a Rule 506 offering.
- The securities received by an investor in Rule 506 offering are restricted securities
- If the securities are purchased by sophisticated non-accredited investors, certain information must be furnished to the non-accredited investors. No specific information must be given to accredited investors if only accredited investors are purchasing the issue. If both accredited and non-accredited investors are purchasing the issue, both must be given the same required information.
**The direct sale of an entire new issue to an institutional investor would be considered to be a “private placement”
Rule 506(c) offering
Issuers may now use general solicitation/advertising, but all purchasers must be accredited investors and the issuer must reasonably believe that they are accredited investors by taking “reasonable steps to verify” that the investors are accredited investors. Required disclosure will be driven by market demands
What must a firm do when they sell a security in a “Private Placement”?
The firm must file a copy of the offering document with FINRA within 15 calendar days of the date of the first sale. If the sale occurred without an Offering Document, the firm must notify FINRA of that fact.
