Regulation D General Overview

Issuers of private placement memorandums should be prepared to navigate new and more stringent compliance regulations in the coming years. Below is a brief overview of Regulation D, but companies should also familiarize themselves with other SEC or state-based "Blue Sky" regulations. It is recommended to seek legal counsel prior to distributing any PPM.

Regulation D is a series of six rules (Rules 501 through 506) establishing three transactional exemptions from the registration requirements of the 1933 Act. The first three rules outline definitions, conditions and notifications that apply throughout the regulation. Rules 504, 505 and 506 encompass the specific exemptions of raising money under Regulation D.

 

• Rule 501 defines the various terms used within the rules.
• Rule 502 lists the conditions, limitations and information requirements for the exemptions in Rules 504, 505 and 506.
• Rule 503 contains the SEC notification requirements.
• Rule 504 is the most beneficial to the entrepreneur as it applies to securities sales up to $1 million.
• Rule 505 applies to securities sales between $1 million to $5 million.
• Rule 506 sets forth regulations for securities offerings exceeding $5 million

Rule 504

Rule 504 provides an exemption from the registration requirements of the federal securities laws for transactions in which no more than $1,000,000 of their securities are sold in any consecutive twelve-month period. Rule 504 has no ceiling on the number of investors, permits the payment of commissions, and imposes no restrictions on the manner of offering or resale of securities. Further, there are no specific disclosure or registration requirements. Though still subject to federal anti-fraud provisions and civil liability provisions of the Exchange Act, the intent of this rule is to shift the obligation of regulating small offerings to state "Blue Sky" administrators.

Rule 505

Rule 505 applies to transactions with no more than $5,000,000 of securities sold in any consecutive twelve-month period. In addition to the unlimited number of accredited investors, sales are permitted for up to thirty-five non-accredited investors. The issuer must notify the prospective investors that they will receive "restricted" securities. Additionally, under Rule 505 the company may not use any general solicitation or advertising to sell its securities.

Rule 506

Under Rule 506, which is available to all issuers for offerings sold to an unlimited number of accredited investors and not more than thirty-five non-accredited purchasers, companies can raise an unlimited amount of money. However, unlike 504 and 505, this rule requires an issuer to make a subjective determination that at the time of investment each non-accredited purchaser meets a certain sophistication standard, either individually or in conjunction with a "Purchaser Representative", and is capable of evaluting the merits and risks involved. Like Rule 505, Rule 506 prohibits any general solicitation or general advertising.

 

While companies using a Regulation D exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file a "Form D", which is a brief notice that includes the names and addresses of the company's executive officers and stock promoters, but little else about the company.


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