Regulation D was created by the Securities and Exchange Commission with the power granted to it under the Securities Act of 1933. When raising capital or receiving other sorts of investments from investors in exchange for securities, Regulation D offers guidance on the sorts of transactions that would allow the private sale of unregistered securities that would otherwise be required to be registered with the SEC. Three of the most commonly used exemptions from registration come from rules of Regulation D.
Rule 504 may be used for smaller offerings of up to Ten Million Dollars ($10M) within any 12-month period. With some exceptions, most issuers utilizing the exemption provided for by Rule 504 cannot generally solicit or generally advertise the offer or sale of the securities. Exemptions under Rule 504 also require the issuer to comply with the issuer’s and each investor’s jurisdictions’ securities laws and regulations (blue sky laws). As the number of jurisdictions rise, it can become an issue to comply with all applicable laws.
Rule 506(b) can be used to raise an unlimited amount of funds. Issuers relying on this rule’s exemption also cannot generally solicit or generally advertise the offering or sale of the subject securities. While Rule 506(b) does allow the sale of unregistered securities to up to 35 unaccredited investors, there are disclosure requirements similar to those of a full public offering of the securities, so the thoroughness of the disclosures required can be daunting for many small businesses. Issuers relying on Rule 506(b) do have the option to reasonably trust an investor’s assertion that they are an accredited investor without the need to collect additional proof of accredited investor status.
Rule 506(c) can also be used to raise an unlimited amount of funds in a private offering. Unlike Rule 506(b), issuers offering securities under Rule 506(c) are allowed to generally solicit and generally advertise their securities, but they cannot offer or sell to anyone who does not qualify as an accredited investor. Issuers relying on Rule 506(c) do have to take reasonable steps to verify each investor’s qualifications as an accredited investor, usually by examining tax returns or by certified letters from an accountant or attorney.
All three of these exemptions require the issuer to file a Form D with the SEC within 15 days of the first sale, although an issuer may file the Form D ahead of any offers or sales of its securities. Most jurisdictions, no matter if their securities laws are preempted by Rule 506(b) or 506(c), have notice requirements and fees associated with selling any securities to investors within its jurisdiction, so compliance with those required notices should also be on every issuer’s radar.
Compliance is key when it comes to Regulation D securities offerings, and O’Brien Law can assist with these sorts of offerings and filings.