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Private Placement
Memorandums
To meet the requirement of Regulation D or the requirements
of Section 4(2) of the 1933 Act (the private placement
exemption), the issuer is almost always required to make
extensive disclosures regarding the nature, character and
risk factors relating to an offering. The disclosure
document often is labeled "Offering Memorandum" or given a
similar title, which, in the normal course, is based upon
information provided to counsel to the issuer. While a
properly executed private placement is exempt from the
registration provisions (i.e. Section 5 of the 1933 Act) of
the federal securities laws, the transaction (and the
disclosures made or a lack thereof) is subject to the
anti-fraud provisions. If the offering memorandum is a
particular private placement turns out to be materially
misleading in terms of disclosures which have been made (or
which should have been made), the broker-dealer and its
principals may be deemed to have violated or aided or
abetted violations of the anti-fraud provisions of the
federal securities laws.
What is Regulation D?
Under the Securities Act of 1933, any offer to sell
securities must either be registered with the SEC or meet an
exemption know as Regulation D (or Reg D) contains three
rules providing exemptions from the registration
requirements, allowing some companies to offer and sell
their securities without having to register the securities
with the SEC. While companies using a
Reg D (17 CFR § 230.501 et
seq.) exemption do not have to register their securities and
usually do not have to file reports with the SEC, they must
file what’s known as a “Form
D” after they first sell their securities. Form D
is a brief notice that includes the names and addresses of
the company’s executive officers and stock promoters, but
contains little other information about the company.
Rule
506 of Regulation D
Rule 506 of
Regulation D is considered
a “safe harbor” for the private offering exemption of
Section 4(2) of the Securities Act.
Companies using the Rule 506 exemption can raise an
unlimited amount of money. A company can be assured it is
within the Section 4(2) exemption by satisfying the
following standards:
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The company may sell its
securities to an unlimited number of “accredited
investors” and up to 35
other purchases. Unlike Rule 505, all non-accredited
investors, either alone or with a purchaser
representative, must be sophisticated—that is, they must
have sufficient knowledge and experience in financial
and business matters to make them capable of evaluating
the merits and risks of the prospective investment;
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Companies must decide what
information to give to accredited investors, so long as
it does not violate the antifraud prohibitions of the
federal securities laws. But companies must give
non-accredited investors disclosure documents that are
generally the same as those used in registered
offerings. If a company provides information to
accredited investors, it must make this information
available to non-accredited investors as well;
While companies using the Rule 506 exemption do not have to
register their securities and usually do not have to file
reports with the SEC, they must file what is known as a “Form
D” after they first sell their securities. Form D
is a brief notice that includes the names and addresses of
the company’s owners and stock promoters, but contains
little other information about the company.
In February 2008, the SEC adopted amendments to Form D,
requiring that electronic filing of Form D be phased in
during the period September 15, 2008 to March 16, 2009.
Although as amended, the electronic Form D requires much of
the same information as the paper Form D, the amended Form D
requires disclosure of the date of first sale in the
offering. Previously, the closing date of an offering was
used as the first date of sale. The Office of Small
Business Policy has posted information on its web page about
the filing requirement for the new Form D.
SOURCE:
U.S.
Securities and Exchange Commission
Additional Compliance Considerations Under Regulation D
The SEC has pointed out the following regarding Regulation
D:
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Regulation D does not exempt
offerings from the anti-fraud and civil liability
provisions of the various federal securities laws.
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Further, Regulation D in no way
relieves issuers of their obligation to furnish to
investors whatever material information may be needed to
make any required disclosures not misleading.
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Similarly, notwithstanding exemption
from registration at the federal level, Regulation D in
no way obviates an issuer's obligation to comply with
applicable state law.
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Regulation D is interpreted as
providing "transactional" exemptions to issuers only. An
investor whose purchase was exempt from registration
cannot resell his or her interest without establishing
an independent basis of exemption.
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The three exemptions are not intended
to be mutually exclusive, that a reliance on one
exemption is not deemed to be an election to the
exclusion of any other applicable exemption.
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Finally, the exemptions of Regulation
D may not be claimed with respect to any plan or scheme
to evade the registration provisions of the act.
Existing state securities regulations at times impose
substantially more onerous limitations on issuers than
Regulation D. Issuer's counsel must be consulted regarding
the requirements of the securities law of each state in
which an offering is going to be sold.
Let's talk today. . .
1-801-369-2225
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