The Securities Act of 1933, as amended, is the federal law governing the issuance of securities in the United States. In general, the law requires each sale of a security to be registered with the SEC. However, the law allows the SEC to establish exemptions from registration when it determines that the public can be protected by compliance with the rules of the exemption, and without the rigorous procedure of a registration. A major exemption from registration is set forth in Regulation D issued by the SEC. Regulation D is composed of Rules 501-506. The Section references below refer to the Securities Act of 1933, as amended.
1 - Regulation D Exemptions
Rules 504 and 505 were adopted under Section 3(b) which permits the SEC to exempt from registration certain securities.
Rule 506 was adopted under Section 4(2) as an exemption from registration for transactions which are not public offerings.
2 - General Provisions
The three operative exemptions (Rules 504, 505, and 506) reference preliminary notes, as well as definitions and general conditions contained in Rules 502 and 503.
Rule 502 provides a safe-harbor from integration for offerings completed six months before or commenced six months after other offerings of securities of the same class.
Two or more offerings that might qualify separately as "exempt," may be viewed as a single non-exempt offering if they are viewed together. A five-factor test helps determine when to apply "integration." Are the sales:
Part of a single plan of financing?
Involve the same class of securities?
Occurring at or about same time?
Being made for same type of consideration?
Being made for same general purpose?
3 - New Rule 155 Integration Safe Harbors - January 2001
Rule 155(b) - An abandoned bona fide private offering (no securities sold) will not be integrated with a registered offering (30 day wait required only if private offering made to non-accredited/non-sophisticated investors).
Rule 155(c) - A withdrawn registered offering (no securities sold) will not be integrated with a private Rule 506 offering if the issuer waits 30 days after withdrawal before commencing private offering.
4 - "General Solicitation" Defined
Considered General Solicitation:
Media advertising, cold-calling, e-mail spamming.
Mass mailing C such as mailing to a list of physicians.
Holding seminars open to the public.
Open Web Site Offers.
Not Considered General Solcitation:
Issuer soliciting business contacts, relatives.
Broker contacting existing clients, or previously qualified accredited investors.
IPONET (July 26, 1996) BD pre-qualifies investors on-line/password access to later offerings.
5 - Filing/Good Faith Compliance
Rule 503 - File Form D within 15 days after first sale.
Rule 507 - Commission action for failure to file will result in future ineligibility for Reg D.
Rule 508 - Insignificant deviations will not result in loss of exemption.
But, "good faith compliance" doesn't apply to general solicitation rules, maximum dollar limits or number of purchasers.
6 - Rule 504 Parameters
Eligibility is limited to issuers which are NOT:
'34 Act reporting companies;
"Blank Check" development stage companies.
Limits on Offering:
$1,000,000 limit (Section 3(b) 12 mo. lookback to Rule 504 and 505 offerings).
No limit on number or type of purchasers.
No specific information requirements, antifraud rules apply.
Securities issued are restricted, no general solicitation allowed.
General solicitation is allowed and stock issued may be freely traded if issuer:
Registers the offering in state of sale and delivers a disclosure document;
Where no state registration requirements exist (NY), registers in another state and delivers the offering document from state of registration;
Makes offer pursuant to state exemption for sales exclusively to accredited investors (states differ on restricted status of securities).
7 - Rule 505 Parameters
Limits on Offering.
$5,000,000 limit (Section 3(b) 12 mo. lookback to Rule 504 & 505 offerings).
Up to 35 non-accredited investors, unlimited number of accredited investors.
Specified information must be given to non-accredited investors (See Rule 502).
No general solicitation/securities restricted.
Investment companies cannot use Rule 505.
Rule 262 of Regulation A disqualifies issuer from using 505 exemption if the issuer, predecessor, affiliate, or officer, director, general partner, 10% owner, promoter, underwriter, or underwriter principal has been convicted, enjoined, or subject to a Commission order within 5 or 10 years.
8 - Accredited Investor Status
Status determined at time of sale if investor comes within one of eight categories under Rule 501(a) definition, or Issuer must reasonably believe investor comes within accredited investor definition.
Any director, executive offer or general partner of the issuer.
$1 million net worth, individual or jointly with spouse, including residence and vehicles.
$200,000 individual/$300,000 joint annual income for past two years.
Bank, S&L, broker dealer, insurance company, investment company,
BDC, SBIC, certain employee benefit and ERISA plans.
Private business development company defined in Investment Advisors Act of 1940.
Non-profit org, corporation, business trust, LLC, partnership, each with total assets over $5 million, not formed solely for purpose of this investment.
Trust, $5 million assets, not formed solely for this investment, whose purchase is directed by a sophisticated person.
Entity whose equity owners are all accredited.
9 - Rule 506 Parameters
Limits on Offering.
No dollar limit.
Up to 35 non-accredited, sophisticated investors; unlimited accredited investors.
Specified information must be given to non-accredited investors.
No general solicitation/securities restricted.
Any issuer is eligible / no "bad boy" disqualifying provisions.
Securities issued under Rule 506 are "covered" securities; state registration and qualification requirements are preempted by Section 18(b)(3).
10 - Section 3(a)11 Intrastate Offering Exemption
To qualify, the issuer MUST:
Be incorporated in the state where it is offering the securities;
Carry out a significant amount of its business in that state; and
Make offers and sales only to residents of that state.
Offer or sale to even one out-of-state person may invalidate the statutory exemption.
Rule 147 is a safe-harbor provision for Section 3(a)11 exemptions.
11 - Section 4(2) Private Offering Exemption
"Transactions by an issuer not involving any public offering" C no advertising or general solicitation.
Purchasers of the securities MUST:
Have enough knowledge and experience in finance and business matters to evaluate the risks and merits of the investment, or be able to bear the investment's economic risk;
Have access to the type of information normally provided in a prospectus; and
Agree not to resell or distribute the securities to the public.
12 - Section 4(6) Accredited Investor Exemption
Statutory exemption for offers and sales to accredited investors when the total offering price is less than $5 million.
Definition of "Accredited investor" same as in Reg D.
No advertising or general solicitation.
No document delivery requirements.
13 - Regulation CE: California Limited Offering Exemption
Rule 1001 provides an exemption from registration for offers and sale of securities, in amounts up to $5 million, that satisfy the conditions of Section 25102(n) of the California Corporations Code. Securities are "restricted."
The California law exempts from CA state registration offerings made by CA companies to "qualified purchasers" whose characteristics are similar to, but not the same as, accredited investors under Reg D.
14 - Regulation A Offerings
Regulation A was adopted under Section 3(b).
Reg A offerings are exempt from registration, but share some characteristics with registered offerings:
Issuer files an offering statement with the SEC for review, but uses simpler, unaudited financials.
Up to $5 million in securities can be offered, general solicitation allowed.
Securities are not restricted.
No Exchange Act reporting obligations after offering, unless issuer has over $10 million total assets and 500 or more shareholders.