Rules Governing the Limited Offer & Sale of Securities without Registration under the Securities Act of 1933
Overview of an Unregistered Offering (Regulation D)
Summary: In an unregistered offering, a public or private company (the “Issuer”) directly, or through an agent, solicits buyers for its equity, debt or hybrid securities from among a limited range of potential investors (the “Investors”). The Issuer may avoid registering the offering with the U.S. Securities and Exchange Commission (the “SEC”) so long as an exemption from registration applies. Exemptions are available to Issuers that offer and sell securities to sophisticated or accredited investors. The exemptions permit the Issuer to avoid registering the offering, but the anti-fraud provisions of the securities laws still apply throughout the offering. The Issuer solicits Investors on the basis of a summary of the investment – similar to a prospectus – called a “Private Placement Memorandum” or “Offering Memorandum.” The securities issued and sold in such an offering are restricted securities that may be resold by the purchaser only if an exemption for the subsequent sale is available.
In general, Section 5 of the Securities Act requires that any offer or sale of securities must be registered with the SEC unless it is exempt. In addition to the statutory exemptions in Sections 3 and 4, the SEC may promulgate regulatory exemptions utilizing its authority in Section 28 of the Securities Act (such as, for example, Rule 701). Crowdfunding rules are contained in Section 4(a)(6). An issuer may claim more than one exemption for a particular offering.
Private Placement. The “private placement” exemption, Section 4(a)(2) of the Securities Act, exempts from the registration and prospectus requirements those “transactions by an issuer not involving any public offering.” Regulation D contains multiple categories of exempt transactions. Regulation S covers safe harbors for offers and sales made outside of the United States.
Regulation D Rule 504 covers offerings up to $5 million over 12 months by non-reporting issuers. Rule 504 of Regulation D is an exemption under Securities Act §3(b), which grants the SEC exemptive authority over small issuances. Rule 506(b) exempts unlimited dollar amount offerings to 35 non-accredited and an unlimited number of “accredited investors” that are also sophisticated, as defined by the rule. Rule 506(b) of Regulation D is a safe harbor for Section 4(a)(2). Rule 506(c), implementing the provisions of the JOBS Act, permits securities Issuers to solicit sales and to advertise, but only accredited investors may purchase the securities, and the Issuer must take additional steps to confirm the Investors’ accredited status. Regulation D is a non-exclusive safe harbor, so an issuer that fails to satisfy the specific criteria of Regulation D may still rely on the broader section 4(a)(2) private placement exemption. Regulation D safe harbors under Rule 506(b) and (c), however, have the added advantage of providing a statutory blue sky exemption under the National Securities Markets Improvement Act of 1996, Public Law 104-290 of 1996, 110 Stat. 3416 and Securities Act Section 18.
Accredited investors, defined in Rule 501(1) of Regulation D, include certain types of entities, financial institutions and financial plans, in addition to investors with sophistication and significant net worth or income. Non-accredited investors who have engaged a “purchaser representative” as described in Rule 506(b) may also participate in offerings conducted under that rule.
It is common for larger issuers to rely on a Regulation D safe harbor but to limit the types of accredited investors who may participate to a small number of sophisticated institutional investors rather than allowing participation by smaller entities who qualify for accredited investor status by means of income or similar tests. These Issuers take this approach either because the securities being offered are extremely complex or simply because they value having a highly sophisticated investor base.
While most private offerings must be conducted without general solicitation or general advertising, the JOBS Act (Jumpstart Our Business Startups) amended Rule 502(c) to permit solicitation and advertising in offers made pursuant to Rule 506(c) so long as the purchasers of the securities are all accredited investors and the Issuer takes reasonable steps to verify the status of the investors.
Bad Actor Disqualifications.
The Rule 506 exemption disqualifies felons and other bad actors from participating in an offering as underwriter, placement agent, director, executive officer or 10% shareholder of the Issuer.
17 C.F.R. § 230.500
Use of Regulation D
17 C.F.R. § 230.501
Definitions and Terms Used in Regulation D
17 C.F.R. § 230.502
General Conditions to be Met
17 C.F.R. § 230.503
Filing of Notice of Sales
17 C.F.R. § 230.504
Exemption for Limited Offerings and Sales of Securities Not Exceeding $5,000,000
17 C.F.R. § 230.506
Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering
17 C.F.R. § 230.507
Disqualifying Provision Relating to Exemptions under §§ 230.504 and 230.506
17 C.F.R. § 230.508
Insignificant Deviations from a Term, Condition or Requirement of Regulation D