John Worley Blog

506 Reg. D Private Placement

John Worley - Friday, September 15, 2017

In the United States, in order to offer and sell securities, the issuer is required to comply with the registration requirements according to the amended Securities Act of 1933, or pursuant to an exemption from the requirements. Rule 506 Reg. D Private Placement is often used as a private offering exemption. In 2013, the Securities and Exchange Commission (SEC), lifted a ban on general solicitation or advertising in certain offerings of private securities. Called the “final rule”, it allows businesses to take advantage of broader opportunities for raising money for their business. With the ability to publicly advertise their offerings. Business owners can attain their financial goals and grow their business from qualified investors. However, compliance requirements still apply.

506 Reg. D Private Placement

As any business owner knows, raising capital involves its own risks, and the desire to avoid mistakes often causes hesitation. However, 506 Reg. D Private Placement provides the issuer the opportunity to reach a greater number of potential investors, and can reduce the cost of raising capital for their business. The advantage also extends to potential investors, as it provides them with the opportunity to participate in private placements.

Rule 506 (b)

According to the “old” Rule 506(b), companies could sell securities to any number of accredited investors, and a handful of other potential purchasers. With the old rule, issuers do not have to verify potential accredited investors themselves, but they are not allowed to publicly advertise in what is known as “general solicitation”. They typically are cautious to offer securities to the buyers they already know and consider to be accredited. This limits their range of potential investors, and can slow down the process of raising capital for your business.

Rule 506 (c)

A 506 (c) Reg. D Private Placement allows public advertisement, significantly increasing your audience of potential investors for your company, and increasing the opportunity to raise capital for your business. However, there are a number of requirements involved. For example, businesses may only sell to accredited investors. Furthermore, each potential investor must be verified as an accredited investor.

The 506 (c) Reg. D Private Placement amendments do not affect the obligation of the issuer who utilizes safe-harbor to provide complete disclosure with the offering. Under safe-harbor, the disclosure is required to be issued in writing prior to the sale of securities, whether general solicitations or general advertising is used under 506 (c) Reg. D Private Placement.

Accredited vs. Non-Accredited Investors

Businesses will be required to decide whether or not to use general solicitation.  With the use of general solicitation the business will be limited to selling securities only to accredited investors. Without general solicitation, businesses can sell to as many as 35 non-accredited investors.

Verifying Accredited Investors

Under general solicitations, a reasonable effort is required to verify each potential accredited investor. The SEC provides four non-exclusive safe harbors for the issuer to verify the status of an accredited investor. Guidelines have been established by the SEC for determining whether or not an issuer has provided reasonable effort to verify an accredited investor.

Approved Safe Harbors

Acceptable safe harbors include the following:

  1. Reviewing the purchasers IRS that report income, including a filed 1040 form, 1065, 1099 or W-2 forms for the two most recent years. In addition, the purchaser will also provide a written statement regarding their reasonable expectation of reaching the income level qualifying them as an accredited investor during the current year.
  2. Review of one or more of the following documents, dated within the past three months, in addition to a written representation from the purchaser that all liabilities have been disclosed, in order to determine net worth.

a. Assets including bank statements, brokerage statements, certificates of deposit, securities holdings statements, or tax assessments and appraisal reports issued by independent third parties.

b. The purchaser will provide liabilities disclosure documents, including a consumer report. A consumer report can be a credit report from one or more of consumer reporting agencies. The purchaser will also provide a written representation that all liabilities have been disclosed to the issuer. These documents assist the issuer in a determination of the net worth of a potential purchaser.

  1. The business will provide written confirmation from an SEC registered investment adviser, registered broker-dealer, a licensed attorney, or a certified public accountant that the issuer has taken reasonable steps to verify the purchaser is an accredited investor within the most recent three months.
  2. An accredited purchaser who previously invested in a 506 Reg. D Private Placement offering prior to the effective date of Rule 506 (c) and remains an investor of the issuer, satisfies the verification requirement of 506 Reg. D Private Placement. The purchaser will provide a certificate at the time of the sale stating that they remain qualified as an accredited investor.

The SEC permits the issuer to rely on publicly available filings with government regulatory bodies, pay stubs for the past two years, or third parties, which includes attorneys, accountants, and securities brokers able to verify a person's accredited status.

According to the SEC, requiring only a questionnaire, or a signed form without purchaser information indicating their accredited status, is not considered reasonable steps for verification.

The General Solicitations allowance in 506 (c) Reg. D Private Placement enables businesses to take advantage of opportunities for your business. Contact John Worley, attorney at law, today to schedule a consultation. We will provide the information you need, and answers to your questions regarding how a 506 Reg. D Private Placement can raise money and assist your business to grow.

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