John Worley Blog

506 Reg. D Private Placement

John Worley - Wednesday, November 15, 2017

Private Placement Defined

A private placement refers to a securities offering exempt from SEC registration. Federal laws regarding securities prohibit a business from offering or selling securities, without either SEC registration, or an exemption. 506 Reg. D Private Placement can assist your business in obtaining accredited investors.

506 Reg. D Private Placement

The Securities Act of 1933 provides businesses with an exemption from federal securities registration, allowing them to solicit for private offerings. This enables business owners to raise funds for their business. As the issuer, the business owner can sell its securities to an unlimited number of “qualified investors”, and up to 35 non-accredited investors.

506 Reg. D Private Placements provide the business owner with valuable options, yet is often overlooked. In simplified terms, the original Rule 506(b) restricted potential investors to those already accredited and primarily to those they already know. Verification of investor status is not required by the business owner themselves, but they are unable to use general solicitation in order to obtain new investors. 506 Reg. D Private Placements under 506 (c) on the other hand, allow them to use general solicitation to reach new investors, but does require the verification of accredited investors. The new rule places more of a burden on the issuer, but it doesn't have to. John Worley Attorney at Law can ensure full compliance for your company's goals and security offerings.

Rule 506 (b)

The original Rule 506(b) does not place any limits on the number of accredited investors the issuer can sell securities to, but allows sale to only a few non-accredited investors. Furthermore, the issuer is not required to verify accredited investors. However, they are not allowed to publicly advertise their securities for sale. When using Rule 506 (b), issuers often sell only to the accredited buyers they already know. This limits their opportunities for selling their securities, and can slow down their goal of obtaining additional funds.

506 (c)Unlike Rule 506 (b), 506 Reg. D Private Placements under 506 (c) allows the issuer to publicly advertise their securities for sale. With general solicitation being allowed, a larger number of potential investors can be reached, increasing the potential for raising the needed capital. However, 506 Reg. D Private Placements under 506 (c) place more responsibility on the issuers part, such as verifying that each potential investor is accredited.

As with the original rule, 506 Reg. D Private Placement under 506 (c) require the issuer to provide complete disclosure in writing prior to the sale of securities.

Accredited Investor

An accredited investor can purchase securities that are not registered with the SEC. Examples of this group include individuals, banks, brokers, trusts and insurance companies that meet the requirements.

Verifying Accredited Investors

If you choose to take advantage of a 506 Reg. D Private Placement under 506 (c), it will be your responsibility to verify the status of accredited investors.

The SEC provides the following safe harbors for the issuer to verify an accredited investor:

Approved Safe Harbors

  1. Reviewing the purchaser's income, including a 1040 form, 1065, 1099 or W-2 forms for the past two years. The purchaser will also provide a written statement regarding their reasonable expectation of income qualifying them as an accredited investor for the present year.
  2. The purchaser will provide one or more of the following documents to the issuer, dated within the past three months. Furthermore, a written representation from the purchaser will provide a written representation that all liabilities have been disclosed. These documents will assist in determining the purchasers net worth.

a. Documents regarding assets, including bank statements, brokerage statements, certificates of deposit, securities holdings statements, or tax assessments and appraisal reports. All documents must be issued by third parties independent of the purchaser.

b. The purchaser is required to provide liabilities disclosure documents, and will include a consumer report, such as a credit report from a consumer reporting agency.

  1. The issuer will provide written confirmation from an SEC registered investment adviser, registered broker-dealer, a licensed attorney, or a certified public accountant that the he/she 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 with the issuer, can provide a certificate stating 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, including attorneys, accountants, and securities brokers to verify a potential investor's accredited status.

Requiring only a questionnaire, or a signed form lacking the required purchaser information indicating their accredited status, is not considered acceptable verification according to the SEC.

506 Reg. D Private Placements under 506 (c) provide an alternative to the original rule, allowing you to reach a larger audience of potential investors with general solicitation. Contact John Worley, Attorney at Law, to schedule a consultation. We can provide answers to your questions, and explain the process regarding how 506 Reg. D Private Placements can assist your business needs.

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