Regulation D is a part of Section 4(a)(2) of the Securities Act of 1933. This important regulation, created by the Securities and Exchange Commission (“SEC”), covers private placement security issuances. Specifically, Rule 506(b) of Reg D covers private placement exceptions that allow certain types of securities to bypass the normal filing requirement before they are offered for sale to the public. Using a Regulation D exception is completely legal and eliminates significant hassle and stress associated with making sure that you have properly registered your securities with the SEC before you offer them for a public sale.
Companies that use the 506 are allowed to raise as much money as they want (or are able to) and are allowed to sell their securities to as many buyers as they wish. However, there are certain requirements with which companies must comply in order to use the 506(b) exemption. These include:
1. They must not generally solicit or advertise the securities.
2. The securities cannot be sold to more than 35 nonaccredited investors.
And if nonaccredited investors will participate in the offering the company must:
3. Give those investors a prospectus that has the same information as a registered offering (including financial statements).
4. And answer their questions.
If a company meets these requirements, it is granted safe harbor and will not have to register the securities it is offering with the SEC. This is an advantage for the company in terms of saving both time and hassle of registering the securities and potentially being denied the ability to sell the securities if the SEC determines that the criteria for sale have not been met. For purchasers of securities, the SEC’s EDGAR Database provides an easy method to determine whether a company has filed its securities with the SEC prior to the sale.
Furthermore, a 506b exception also preempts state law requirements with regard to security sales, except for required notice of filing reports and fees associated therewith. As you can see, a 506b exception is a very powerful exception to the security regulations that many security-issuers may want to consider before they sell securities. As always, if you have any questions or need help with a security sale, please feel free to reach out to the attorneys at Fourscore Business Law.
Based in the Research Triangle region of North Carolina, Fourscore Business Law serves entrepreneurs and businesses in Raleigh, Durham, Chapel Hill, Wilmington, Charlotte and throughout the Southeast. We also represent venture capital funds and other investors who invest in companies located in New York, Silicon Valley and everywhere between. The idea of delivering maximum impact in a simple and succinct manner is what we’re calling the Fourscore Principle. And that is what Fourscore Business Law is based on. Our clients operate in a broad range of industries including tech, IoT, consumer products, B2B services and more. Questions? Shoot us an email or give us a call at (919) 307-5356. Your first call is on us.