Private Placement from the Issuer’s Perspective- Part 2 Understanding the Regulatory System

By Vivek Krisnaswamy, for Legal Corner LLP. Vivek is a final year student of NALSAR University of Law and will be graduating in 2021. 

The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me ( if you need advice and assistance with private offerings in the US so as to get legal advice that is specific to your business needs. 

Rules under Regulation D

As we saw in the previous part of this series, transactions not involving public offerings do not require registration. This would save a company from having to a file documents – a description of the company’s properties and business and of the security to be offered for sale; information about the management of the company; and financial statements certified by independent accountants – to the SEC.

To qualify as a non-public offering, and fall under the safe harbour of section 4(a)(2), the conditions laid out in Rule 506(b), 506(c), or Rule 504, of Regulation D must be met:

Rule 506(b)

  • Must not involve any general solicitation or advertising to market the securities.
  • The company may sell to as many “accredited investors” as it chooses to and up to 35 other purchasers. “Non-accredited investors”, must be sophisticated, and have a deep understanding of and experience in financial and business matters.
  • Investors must self-verify whether or not they are accredited investors.
  • Companies, though allowed to choose what information to provide to accredited investors, must ensure to not violate any federal securities laws – free from false or misleading statements. Non-accredited investors should be provided with documents based on the guidelines in Regulation A (guidelines for registered offerings). All information provided to accredited investors must be provided to non-accredited investors as well.
  • Companies must be available to answer all questions by prospective investors.

Under rule 506(c) of Regulation D, a transaction may qualify as a non-public offering even if the issuer engages in “general solicitation” and “general advertising” if:

  • The issuer takes reasonable steps to verify that ALL potential buyers are “accredited investors.”
  • These reasonable steps could be defined as reviewing the accredited investors’ documentation – W-2s, tax returns, bank statements, etc.
  • The company/issuer can decide what information to provide to the potential investors as long as it does not violate anti-fraud provisions.

Apart from these two rules, a private offer of securities can also be made under Rule 504, which brings State Blue-Sky laws into the fold. Under this rule:

  • General solicitation and advertising are permitted depending on state blue-sky limitations.
  • Number of investors and their accredited status depend on state blue-sky laws – you may be allowed to have an unlimited number of investors and their accreditation may not be required.
  • Investors must self-verify whether or not they are accredited investors.
  • The company is not required to disclose any documents to non-accredited investors to claim the exemption, however it is suggested to provide all material information.
  • Offerings in which an issuer sells up to (not greater than) $5 Million in securities in any twelve-month period are exempted. The two other types of offerings do not limit the amount of money that can be raised.

Anti-Fraud Provisions

Regardless of whether or not your offerings fall under the safe harbor of section 4(a)(2), all securities transactions are subject to the antifraud provisions of the federal securities laws. Meaning that any company or issuer will be held accountable for “false or misleading statements” that were made regarding respective company, the securities offered, or the offering. The company and its board are responsible for any such statements, whether made by the company itself or on behalf of the company; whether they are made orally or in writing.

These laws are enforced through criminal, civil and administrative proceedings. An individual or other private party may bring actions under certain securities laws as well. Further, if it is found that all conditions of the exemptions have not been met, buyers might be able to return their securities and obtain a refund.

State Blue-Sky Laws

In 1956 the Uniform Securities Act was passed, a model law providing a framework that guides states in the crafting of their own securities legislation. It forms the foundation for 40 out of 50 state laws today, and itself is often nicknamed the Blue-Sky Law. Subsequent legislation, such as the National Securities Markets Improvement Act of 1996, pre-empts blue sky laws where they duplicate federal law.

These laws are essentially state anti-fraud regulations (almost like an extra layer of protection) that require issuers to be registered and to disclose details of their offerings. Typically, Reg. D offerings are exempt from (full) registration requirements, but the issuer will still have to file a notice, pay a filing fee and assent to service of process in that state. Issuers generally have to complete these procedures within 15 days of their first sale in the state.

These laws require issuers to register in their home state as well as any other state in which they wish to transact.

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