Request for Question Clarification by
pafalafa-ga
on
29 May 2005 16:32 PDT
Scotty,
There are only two references to Regulation D in the document you
linked to, and neither of them (that I could see) make mention of any
in-depth explanations.
However, the SEC website does have such an explanation available just
the same, which you can see here:
http://www.sec.gov/info/smallbus/qasbsec.htm
The relevant section is extracted below...if this is what you need,
let me know, and I will post it as an answer to your question.
pafalafa-ga
===============
Q&A: Small Business and the SEC
D. Regulation D
Regulation D establishes three exemptions from Securities Act
registration. Let's address each one separately.
Rule 504
Rule 504 provides an exemption for the offer and sale of up to
$1,000,000 of securities in a 12-month period. Your company may use
this exemption so long as it is not a blank check company and is not
subject to Exchange Act reporting requirements. Like the other
Regulation D exemptions, in general you may not use public
solicitation or advertising to market the securities and purchasers
receive "restricted" securities, meaning that they may not sell the
securities without registration or an applicable exemption. However,
you can use this exemption for a public offering of your securities
and investors will receive freely tradable securities under the
following circumstances:
You register the offering exclusively in one or more states that
require a publicly filed registration statement and delivery of a
substantive disclosure document to investors;
You register and sell in a state that requires registration and
disclosure delivery and also sell in a state without those
requirements, so long as you deliver the disclosure documents mandated
by the state in which you registered to all purchasers; or,
You sell exclusively according to state law exemptions that permit
general solicitation and advertising, so long as you sell only to
"accredited investors," a term we describe in more detail below in
connection with Rule 505 and Rule 506 offerings.
Even if you make a private sale where there are no specific disclosure
delivery requirements, you should take care to provide sufficient
information to investors to avoid violating the antifraud provisions
of the securities laws. This means that any information you provide to
investors must be free from false or misleading statements. Similarly,
you should not exclude any information if the omission makes what you
do provide investors false or misleading.
Rule 505
Rule 505 provides an exemption for offers and sales of securities
totaling up to $5 million in any 12-month period. Under this
exemption, you may sell to an unlimited number of "accredited
investors" and up to 35 other persons who do not need to satisfy the
sophistication or wealth standards associated with other exemptions.
Purchasers must buy for investment only, and not for resale. The
issued securities are "restricted." Consequently, you must inform
investors that they may not sell for at least a year without
registering the transaction. You may not use general solicitation or
advertising to sell the securities.
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 charitable organization, corporation or partnership with assets
exceeding $5 million;
a director, executive officer, or general partner of the company
selling the securities;
a business in which all the equity owners are accredited investors;
a natural person with a net worth of at least $1 million;
a natural person with income exceeding $200,000 in each of the two
most recent 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 to acquire the
securities offered, and whose purchases are directed by a
sophisticated person.
It is up to you to decide what information you give to accredited
investors, so long as it does not violate the antifraud prohibitions.
But you must give non-accredited investors disclosure documents that
generally are the same as those used in registered offerings. If you
provide information to accredited investors, you must make this
information available to the non-accredited investors as well. You
must also be available to answer questions by prospective purchasers.
Here are some specifics about the financial statement requirements
applicable to this type of offering:
Financial statements need to be certified by an independent public accountant;
If a company other than a limited partnership cannot obtain audited
financial statements without unreasonable effort or expense, only the
company's balance sheet, to be dated within 120 days of the start of
the offering, must be audited; and
Limited partnerships unable to obtain required financial statements
without unreasonable effort or expense may furnish audited financial
statements prepared under the federal income tax laws.
Rule 506
As we discussed earlier, Rule 506 is a "safe harbor" for the private
offering exemption. If your company satisfies the following standards,
you can be assured that you are within the Section 4(2) exemption:
You can raise an unlimited amount of capital;
You cannot use general solicitation or advertising to market the securities;
You can sell securities to an unlimited number of accredited investors
(the same group we identified in the Rule 505 discussion) and up to 35
other purchasers. 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;
It is up to you to decide what information you give to accredited
investors, so long as it does not violate the antifraud prohibitions.
But you must give non-accredited investors disclosure documents that
generally are the same as those used in registered offerings. If you
provide information to accredited investors, you must make this
information available to the non-accredited investors as well;
You must be available to answer questions by prospective purchasers;
Financial statement requirements are the same as for Rule 505; and
Purchasers receive "restricted" securities. Consequently, purchasers
may not freely trade the securities in the secondary market after the
offering.
E. Accredited Investor Exemption - Section 4(6)
Section 4(6) of the Securities Act exempts from registration offers
and sales of securities to accredited investors when the total
offering price is less than $5 million.
The definition of accredited investors is the same as that used in
Regulation D. Like the exemptions in Rule 505 and 506, this exemption
does not permit any form of advertising or public solicitation. There
are no document delivery requirements. Of course, all transactions are
subject to the antifraud provisions of the securities laws.
F. California Limited Offering Exemption - Rule 1001
SEC Rule 1001 provides an exemption from the registration requirements
of the Securities Act for offers and sales of securities, in amounts
of up to $5 million, that satisfy the conditions of §25102(n) of the
California Corporations Code. This California law exempts from
California state law registration offerings made by California
companies to "qualified purchasers" whose characteristics are similar
to, but not the same as, accredited investors under Regulation D. This
exemption allows some methods of general solicitation prior to sales.
G. Exemption for Sales of Securities through Employee Benefit Plans - Rule 701
The SEC's Rule 701 exempts sales of securities if made to compensate
employees. This exemption is available only to companies that are not
subject to Exchange Act reporting requirements. You can sell at least
$1,000,000 of securities under this exemption, no matter how small
your company is. You can sell even more if you satisfy certain
formulas based on your company's assets or on the number of its
outstanding securities. If you sell more than $5 million in securities
in a 12-month period, you need to provide limited disclosure documents
to your employees. Employees receive "restricted securities" in these
transactions and may not freely offer or sell them to the public.
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