Under Rule 506(b):
- Only accredited investors purchase the securities although up to thirty-five (35) non-accredited investors may participate;
- The issuer takes reasonable steps to verify purchasers’ accredited investor status; and,
- Certain other conditions in Regulation D are met.
- Rule 506(b) securities are “restricted securities”;
- The issuer must file a Form D with the SEC;
- The states have authority to require notice filings and collect state fees; and
- Rule 506(b) offerings are subject to “bad actor” disqualification provisions.
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. These documents are available for your corporation, LLC, issuing equity or debt securities; we also have document sets for your Hedge Fund or Real Estate Fund.
Do the anti-fraud provisions apply?
All security transactions, even exempt transactions, are subject to the antifraud provisions of the federal securities laws. 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.
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 accredited investors hold all of the equity;
- 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|
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 previously issued securities. Restricted securities may not be freely traded. Securities Act Rule 144(a)(3) identifies what offerings produce restricted securities. After such a transaction, the 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. These conditions include a six or a twelve month holding period. If the security holder is an affiliate, Rule 144 may limit the amount of securities that the holder may sell at one time and may also restrict the manner of sale.
How can an investor resell non-restricted securities?
An investor, not affiliated with the issuer, who wishes to sell unregistered securities must either register the transaction or receive an exemption. Section 4(a)(1) of the Securities Act is a common exemption. This exemption is available to any person other than an issuer, underwriter or dealer. Several exemptions, including the exemptions under Regulation D, are only available for offers and sales by an issuer of securities to initial purchasers and are not available to any affiliate of the issuer or to any person for resale of the securities.