Federal Exemptions Available for Private Placement of Securities – Part II

In this Part II I will focus on the “small offering” exemptions, - private offering exemptions under Sections 4(6) and 3(b) of the Securities Act. Please consult securities lawyers for advice regarding which exemption is most appropriate for your company and your offering.

Section 4(6)

Section 4(6) exemption is available only to companies offering securities to the accredited investors and only for the amount not exceeding $5 million. There may be no general solicitation or advertising. The securities so issued are restricted. The issuer must file Form D with the SEC at the completion of the offering.

Section 3(b)

There are two rules (both, like Rule 506, are part of Regulation D) that may be used by the companies for small-sized private placements.

First, Rule 504, the “seed capital” exemption, allows certain companies (typically small start-ups) to sell up to $1 million worth of securities during any 12-month period. Such companies cannot be subject to reporting requirements of the Exchange Act (which generally means that they are not public) and cannot exist solely for investment purposes. In order for general solicitation and advertisement to be permitted and securities issued in the offering to be freely tradable, the offering must be either (1) registered under state law requiring public filing and delivery of a disclosure document to investors before sale (for sales in states which do not have such requirement, offers must be registered in another state which has such requirement and the disclosure document must be delivered to all purchasers prior to sale in both states) or (2) be exempted under state law permitting general solicitation and advertising so long as sales are made only to accredited investors. For all other transactions not qualifying under (1) or (2) above, general solicitation and advertising will not be permitted and the securities will be restricted.

Second, Rule 505 allows companies (other than investment companies) to sell up to $5 million worth of securities during any 12-month period. There are additional requirements:

1. There may be unlimited number of accredited investors
2. There may be only up to 35 non-accredited investors.
3. Non-accredited investors must receive a disclosure document, which is similar to the requirements of Rule 506, discussed in Part I.
4. The issuer does not have to make a determination whether or not a non-accredited investor is sophisticated, and unsophisticated investors do not need to have a purchaser representative.
5. General solicitation or advertising is prohibited.
6. “Bad boy” disqualifiers make this exemption unavailable to certain issuers.
7. Securities issued in a Rule 505 offering are restricted.
8. States can regulate Rule 505 offerings, which makes this a less popular choice as compared to Rule 506 offerings, where state regulation is preempted.

In both cases, the company must file Form D with the SEC within 15 days of the first sale of securities.

This posting will continue in Part III.