Rule 506(b) of Regulation D is a “safe harbor” exemption under The Securities Act. Rule 506(b) provides objective standards that a company can rely on to meet the requirements of the Regulation D exemption. Companies conducting an offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors. An offering under Rule 506(b), however, is subject to the following requirements:
- No general solicitation or advertising to market the securities;
- Securities may not be sold to more than 35 non-accredited investors. All non-accredited investors must meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment;
- Purchasers in a Rule 506(b) offering receive “restricted securities;”
- Rule 506(b) offerings are subject to “bad actor” disqualification provisions; and,
- The issuer must file a notice with the SEC on Form D within 15 days after the first sale of securities in the offering.
If non-accredited investors are participating in the offering, the company conducting the offering:
- Must give any non-accredited investors disclosure documents that generally contain the same type of information in registered offerings;
- The company must make the same information available to non-accredited investors as to accredited investors;
- Must give any non-accredited investors the financial statement information Rule 506 describes; and,
- Remain available to answer questions from prospective purchasers who are non-accredited investors.
Our Rule 506(b) Offering Documents
Our SEC compliant, Rule 506(b) Offering Documents include the PPM, Investor Questionnaire, Subscription Agreement, Form D, Patriot Act Disclosures, Jurisdictional Legends and more. Our documents are available for your corporation, LLC, Hedge Fund or Real Estate Fund issuing equity, convertible or debt securities.
Do the anti-fraud provisions apply?
All securities transactions, even exempt transactions, are subject to the antifraud provisions of the federal securities laws. This means that you and your company will be responsible for false or misleading statements that you or others on your behalf make regarding your company, the securities offered, or the offering. You and your company are responsible for false or misleading statements regarding your company including misstatements about the securities offered or the offering itself. You and your company are responsible for any such oral or written statements.
The government enforces the federal securities laws through criminal, civil and administrative proceedings. Private parties also can bring actions under certain securities laws. Purchasers may also be able to return their securities and obtain a refund if all exemption conditions are not met.
What is an accredited investor?
An “accredited investor” is:
- A bank, insurance company, registered investment company, business development company, or small business investment company;
- An employee benefit plan (within the meaning of the Employee Retirement Income Security Act) if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- A tax exempt charitable organization, corporation or partnership with assets in excess of $5 million;
- A director, executive officer, or general partner of the company selling the securities;
- An enterprise in which all equity owners are accredited investors;
- An individual with a net worth of at least $1 million, not including the value of his or her primary residence;
- An individual with income exceeding $200,000 in each of the two most recent calendar years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or,
- A trust with assets of at least $5 million not formed only to acquire the securities offered, and whose purchases are directed by a person who meets the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment.
Do state law requirements apply?
The SEC regulates and enforces the federal securities laws. Each state has its own securities regulator who enforces the state’s “blue sky” laws. If a company is selling securities, it must comply with both federal and state security laws in the states where it offers and sells its securities.
If a company uses Rule 506(b), the states still have authority to investigate and bring enforcement actions for fraud, to impose state notice filing requirements and to collect state fees. The failure to file, or pay filing fees may cause state security regulators to suspend the offering or sale of securities within their jurisdiction. Companies should contact state securities regulators in the states in which they intend to offer or sell securities for further guidance on to comply with state requirements. The following table illustrates which offerings are potentially subject to state registration or qualification.
|Securities Act Exemption||Under the Securities Act, is the offering potentially subject to state registration or qualification?|
|Regulation A – Tier 1||Yes|
|Regulation A – Tier 2||No|
|Rules 147 and 147A||Yes|
Each state has its own separate registration and exemptions requirements. Even if the offering is not subject to state registration or qualification, there may still be state notice filing requirements and fees.
To locate a state securities regulator and learn more about a particular state’s securities laws, please visit the North American Securities Administrators Association (NASAA) website.
What are restricted securities?
“Restricted securities” are securities that were previously issued and held by security holders. A security holder can not freely trade restricted securities. Securities Act Rule 144(a)(3) identifies what offerings produce restricted securities. Security holders can only resell the securities by using an effective registration statement or using a valid exemption, such as Rule 144.
Rule 144, a “safe harbor,” permits the resale of restricted securities under a number of conditions including a six or a twelve month holding period. Also, Rule 144 may limit the amount of securities that an affiliate may sell at one time. Rule 144 may also restrict the manner of sale.
|Our SEC compliant documents and other services are not a substitute for the advice of legal counsel.|