The Regulation D Exemption l Rule 506 l Going Public Lawyers
To offer and sell securities in the United States, an issuer must comply with the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), or must offer and sell the securities pursuant to an exemption from the registration statement requirements. A commonly used private offering exemption is Rule 506 of Regulation D. Rule 506 is a non-exclusive “safe harbor” for the statutory exemption provided by Section 4(2) of the Securities Act. The Rule 506 exemption is often used by issuers who engage in go public direct transactions and conduct underwritten and direct public offerings.
The legal and compliance costs of Rule 506 offerings are less than those of offerings registered with the Securities and Exchange Commission (“SEC”) because only a notice filing on Form D is required to be filed with the SEC.
Issuers conducting direct public offerings often file a registration statement with the SEC to register the resale of the securities sold in Rule 506 offerings. Registration of the resale of the securities sold in Rule 506 offerings enables the issuer to qualify for the assignment of a ticker symbol from FINRA assuming the issuer obtained at least twenty five purchasers. Filing a resale registration statement also prevents many of the problems reverse merger issuers encounter in obtaining approval from Depository Trust Company (“DTC”) for electronic trading.
Unlike Rule 504, both SEC reporting and non-reporting issuers can offer and sell securities in reliance upon 506 offerings. The basic Rule 506 requirements are:
Dollar Amount That May Be Sold
Rule 506 does not limit the amount of capital an issuer can raise.
Number of Shares Permitted
Rule 506 does not limit the number of shares that an issuer may offer or sell.
Manner of Offering
Rule 506 requires that the offering be private. An issuer cannot use general solicitation or advertising to market the securities offered and must have a pre-existing relationship to any investor solicited.
Maximum Number of Investors
Although Rule 506 does not limit the number of accredited investors that an issuer may sell its securities to, it does limit the number of offers and sales to non-accredited investors. Issuers may offer and sell securities to as many as 35 non-accredited investors in a Rule 506 offering and they must reasonably believe that the non-accredited purchaser, either alone or with their purchaser representative, is a sophisticated investor with sufficient knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the issuer’s securities.
The Information Requirements
Regardless of the type of information provided, the anti-fraud provisions apply to any information furnished to investors.
Opportunity to Ask Questions
An issuer must give each purchaser, at a reasonable time prior to purchase, the opportunity to ask questions and receive answers concerning the terms and conditions of the offering, and the issuer must obtain any information that is necessary to verify the accuracy of the information furnished to the investor if the issuer possesses or can acquire such information without unreasonable effort or expense.
Issuers are not required to furnish any specific information to accredited investors. An accredited investor is any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000. Except for certain narrow exceptions, for purposes of calculating net worth under this paragraph:
(i) The person’s primary residence shall not be included as an asset;
(ii) Indebtedness that is secured by the person’s primary residence, up to the estimated fair market value of the primary residence at the time of the sale of securities, shall not be included as a liability (except that if the amount of such outstanding indebtedness at the time of the sale of securities exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence, the amount of such excess shall be included as a liability); and
(iii)Indebtedness that is secured by the person’s primary residence that is in excess of the estimated fair market value of the primary residence at the time of the sale of securities shall be included as a liability.
Non-Accredited Investors of Non-Reporting Issuers
If an issuer is not required to file periodic reports under the Securities Exchange Act of 1934 then it must furnish non-accredited investors with the same kind information as required by a Regulation A offering statement.
Non-Accredited Investors of Reporting Issuers
If an issuer is required to file periodic reports under the Securities Exchange Act of 1934 then it must furnish non-accredited investors with the same kind information as required by a registration statement to be filed under the Securities Act.
Financial Statement Information
Offerings up to $2,000,000
The financial statements which include:
(i) balance sheets as of the end of each of the two most recent fiscal years (or as of a date within 135 days if the issuer has existed for less than one year), however, only the balance sheet, dated within 120 days of the start date of the offering, must be audited;
(ii) statements of income, cash flow and changes in stockholders’ equity for each of the two years preceding the date of the most recent audited balance sheet (or such shorter period as the issuer has been in business); and
(iii) interim financial statements as of the end of the issuer’s most recent fiscal quarter.
Offerings up to $7,500,000
The same financial statements required to be furnished in offerings up to $2,000,000, but the financial statements must be audited.
Offerings over $7,500,000
The issuer must provide the financial statements required to be filed in a registration statement.
Form D Filing
An issuer must file a notice of sale on Form D with the Securities and Exchange Commission no later than 15 days after the first sale of securities in the offering.
Rule 506 will continue to be a viable exemption for issuers who go public direct and undertake underwritten and direct public offerings. Because only a notice filing on Form D is required, the legal and compliance costs are minimal in comparison to the costs of other offerings.
For more information about the requirements of Form D please visit our blog post at:
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information about going public and the rules and regulations affecting the use of Rule 144, Form 8K, crowdfunding, FINRA Rule 6490, Rule 506private placement offerings and memorandums, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration statements on Form S-1 , IPO’s, OTC Pink Sheet listings, Form 10 OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, direct public offerings and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or [email protected]. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855