John Worley Blog

A Lawyer’s Guide on 506 Reg D Private Placement

John Worley - Tuesday, March 21, 2017

Private placement by definition is a funding of securities which are sold directly through a public offering; this is usually directed towards a limited number of investors.  The securities act of 1933 is considered to be a broad legislation as it has managed to encompass the entire doctrine of private placement.  Under this act, private placement is required to be registered by the Securities and Exchange Commission or adhere to certain prerequisites in order to negate this requirement. These qualifications or prerequisites are known as the 506 Reg D private placements, it basically contains the certain formalities that have to be met in order for any offering to be exempted from registration. The 506 Reg D private placement has been promulgated in order to reduce the barriers of entry that small companies will face when initiating an offering, making it possible for startup companies to qualify for an exemption from the securities and exchange commission registration.  It is basically considered to be a safe harbor for small companies that do not have a substantial amount of capital at their disposal, as registration costs can prove to be quite expensive. The 506 Reg D private placement is a provision specifically designed for this purpose, as the registration costs can discourage new companies from seeking capital.

Qualifications of the 506 Reg D Private Placement 

As mentioned before the 506 Reg D Private Placement contains certain qualifications that a company has to meet in order to obtain exemption from the Securities and Exchange Commission registration. These qualifications are mentioned below and have to be expressly adhered to in order to obtain the 506 (b) exemption. 

The relevant company cannot use advertising or any type of general solicitation in order to market their securities. 
The relevant company can sell its securities to an infinite number of accredited investors and only 35 non-accredited investors.  These non-accredited investors should have sound knowledge of the prospective investment and should be able to evaluate the monetary prospects of this project as well.
Companies have the power to provide their investors with tailor made information as long as it does not conflict with the anti fraud provisions of the federal securities regulations. However each company has to provide their investors and purchasers with disclosure documents, these are similar to the documents used in registration offerings. 
The company is required to answer any questions of their potential purchasers and investors
Purchasers of securities may only be offered restricted securities, this also means that these securities cannot be sold for a year without registration. 
Companies will have to file a Form D with Federal and State authorities with 15 days after they sell their securities. 

Exemption from the advertising provision 

The first provision in 506 (b) Reg D private placements clearly states that a company can not advertise or use any type of general solicitation in order to market their securities. However even this has certain qualifications which ensures that certain companies can actually market their securities. These qualifications mentioned in 506 (c) Reg D private placement are mentioned below,

All of the investors in the offering are accredited investors. 
The relevant company has done everything in their power to adduce if the potential investors are accredited investors. This includes analyzing documents such as brokerage statements, bank statements, tax returns and  W-2s 

Accredited Investor exemption 

Accredited investors by virtue are an entity or person that has the capacity of dealing with securities that are not registered with financial authorities. The accredited creditor has to satisfy certain requirements such as asset size, professional experience and net worth. This is the term coined by the Securities and Exchange Commission for investors that are considered to be sophisticated. 

The literal meaning of the word sophisticated will not be used but rather a broad perspective will be adopted in order to adduce if the investor meets the required formalities or not. Some of the requirements in order for an investor to obtain the status of accredited are mentioned below,

Net worth should exceed $1 Million 
Income in the previous 3 years should exceed minimum levels

Process of offering in the 506 Reg D private placement

Given below is the mechanics that every company has to adhere to in order to initiate their offering process, 

1. The offering documents must be carefully prepared and monitored 
2. The company must document all sales 
3. A Form D must be filed on a timely basis with Federal and State authorities 
4. All firm records must be accurately and regularly maintained

All of the above summarizes the broad doctrine of the 506 Reg D private placement, however in order to gain substantial insight in this regulation you should contact an attorney that specializes in this field, such as John Worley, who is experienced in 506 Private Placements.

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