Securities Info

What is a Reg D Offering?

Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements which allow some companies to offer and sell their securities without having to register the securities with the SEC. For more information about these exemptions, read below about Rules 504, 505, and 506 of Regulation D.

What is Rule 504?

Rule 504 provides an exemption for the offer and sale of up to $1 million of securities in a 12-month period. Your company may use this exemption so long as it is not a blank check company and is not subject to Exchange Act reporting requirements. Like the other Regulation D exemptions, generally you may not use public solicitation or advertising to market the securities and purchasers receive “restricted” securities, meaning that they may not sell the securities without registration or an applicable exemption.

What is Rule 505?

Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period. Under this exemption, you may sell to an unlimited number of “accredited investors” and up to 35 other persons who do not satisfy the sophistication or wealth standards associated with other exemptions. Purchasers must buy for investment only, not for resale. The issued securities are “restricted.” Consequently, you must inform investors that they may not sell for at least a year without registering the transaction. You may not use general solicitation or advertising to sell the securities.

What is Rule 506?

As we discussed earlier, Rule 506 is a “safe harbor” for the private offering exemption. If your company satisfies the following standards, you can be assured that you are within the Section 4(2) exemption:

  • You can raise an unlimited amount of capital;
  • You cannot use general solicitation or advertising to market the securities;
  • You can sell securities to an unlimited number of accredited investors (the same group we identified in the Rule 505 discussion) and up to 35 other purchasers. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated – that is, 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;
  • It is up to you to decide what information you give to accredited investors, so long as it does not violate the antifraud prohibitions. You must give non-accredited investors disclosure documents that generally are the same as those used in registered offerings. If you provide information to accredited investors, you must make this information available to the non-accredited investors as well;
  • You must be available to answer questions by prospective purchasers;
  • Financial statement requirements are the same as for Rule 505; and
  • Purchasers receive “restricted” securities. Consequently, purchasers may not freely trade the securities in the secondary market after the offering.

What is a Form D Filing?

While companies using an exemption under Regulation D do not have to register their securities and usually do not have to file reports with the SEC, they must file what’s known as a “Form D” after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s executive officers and stock promoters, but contains little other information about the company.

In February 2008, the SEC adopted amendments to Form D, requiring that electronic filing of Form D be phased in during the period September 15, 2008 to March 16, 2009. Although as amended, the electronic Form D requires much of the same information as the paper Form D, the amended Form D requires disclosure of the date of first sale in the offering. Previously, the first date of sale was not required. The Office of Small Business Policy has posted information on its web page about the filing requirements for the new Form D.

If you are thinking about investing in a Reg D company, you should access the EDGAR database to determine whether the company has filed Form D. If you need a copy of a Form D filed as a paper filing (which will include any Form D filed before September 15, 2008) that has not been scanned into IDEA, you can request a copy using our online form. If the company has not filed a Form D, this should alert you that the company might not be in compliance with the federal securities laws.

What is an Accredited Investor?

Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as “accredited investors.”

The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

  • a bank, insurance company, registered investment company, business development company, or small business investment company;
  • an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  • a charitable organization, corporation, or partnership with assets exceeding $5 million;
  • a director, executive officer, or general partner of the company selling the securities;
  • a business in which all the equity owners are accredited investors;
  • a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
  • a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or

a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

What is Rule 144?

When you acquire restricted securities or hold control securities, you must find an exemption from the SEC’s registration requirements to sell them in the marketplace.  Rule 144 allows public resale of restricted and control securities if a number of conditions are met.  This overview tells you what you need to know about selling your restricted or control securities.  It also describes how to have a restrictive legend removed.

Restricted securities are securities acquired in unregistered, private sales from the issuer or from an affiliate of the issuer.  Investors typically receive restricted securities through private placement offerings, Regulation D offerings, employee stock benefit plans, as compensation for professional services, or in exchange for providing “seed money” or start-up capital to the company.  Rule 144(a)(3) identifies what sales produce restricted securities.

When Does a Small Company Go Public?

If you decide on a registered public offering, the Securities Act requires your company to file a registration statement with the SEC before the company can offer its securities for sale. You cannot actually sell the securities covered by the registration statement until the SEC staff declares it “effective,” even though registration statements become public immediately upon filing.

Registration statements have two principal parts:

Part I is the prospectus, the legal offering or “selling” document. Your company – the “issuer” of the securities – must describe in the prospectus the important facts about its business operations, financial condition, and management. Everyone who buys the new issue, as well as anyone who is made an offer to purchase the securities, must have access to the prospectus.

Part II contains additional information that the company does not have to deliver to investors. Anyone can see this information by requesting it from one of the SEC’s public reference rooms or by looking it up on the SEC Web site.

The Basic Registration Form – Form S-1

All companies can use Form S-1 to register their securities offerings. You should not prepare a registration statement as a fill-in-the-blank form, like a tax return. It should be similar to a brochure, providing readable information. If you file this form, your company must describe each of the following in the prospectus:

  • its business;
  • its properties;
  • its competition;
  • the identity of its officers and directors and their compensation;
  • material transactions between the company and its officers and directors;
  • material legal proceedings involving the company or its officers and directors;
  • the plan for distributing the securities; and the intended use of the proceeds of the offering.

Information about how to describe these items is set out in SEC rules. Registration statements also must include financial statements audited by an independent certified public accountant.

In addition to the information expressly required by the form, your company must also provide any other information that is necessary to make your disclosure complete and not misleading. You also must clearly describe any risks prominently in the prospectus, usually at the beginning. Examples of these risk factors are:

  • lack of business operating history;
  • adverse economic conditions in a particular industry;
  • lack of a market for the securities offered; and
  • dependence upon key personnel.

What Disclosures are Necessary if a Company Goes Public?

Your company can become “public” in one of two ways – by issuing securities in an offering registered under the Securities Act or by registering the company’s outstanding securities under Exchange Act requirements. Both types of registrations trigger ongoing reporting obligations for your company. In some cases, the Exchange Act also subjects your company’s officers, directors and significant shareholders to reporting requirements. Let’s discuss these requirements individually.

[All of the Above has been Reprinted partially or substantially from]