What Does Rule 506 of Regulation D Require? 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. With a Regulation D offering 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.
The requirements of the Rule 506 exemption are as follows:
AMOUNTS RAISED IN THE OFFERING
An issuer may raise an unlimited amount of capital.
METHOD OF OFFERING
The Issuer cannot use general solicitation or advertising to market the securities offered.
An issuer may sell its securities to an unlimited number of accredited investors and up to 35 non-accredited investors that the issuer reasonably believes to be, either alone or with their purchaser representative to have sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of an investment in the issuer’s securities.
An issuer is not required to furnish any specific information to accredited investors. Not that the anti-fraud provisions of the federal securities laws still apply to Rule 506 offerings.
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 the same kind information as required by a Regulation A offering statement and any other information furnished to accredited investors.
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;
♦ either: (i) its most recent annual report, definitive proxy statement, and, if requested in writing, Form 10-K; or (ii) the information contained its Form 10-K, registration statement on Form S-1 or S-11, or Form 10, depending on which was the most recently required filing;
♦ the information contained in any Exchange Act filings required since the distribution or filing of the information specified in the immediately previous section, a brief description of the securities offered, the use of the proceeds, and any material changes not otherwise disclosed in the documents furnished; and
♦ any other information furnished to accredited investors.
Offerings up to $2,000,000.
For offerings up to $2,000,000, the issuer must provide the following financial information to non-accredited investors:
♦ 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;
♦ 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
♦ interim financial statements as of the end of the issuer’s most recent fiscal quarter.
Offerings up to $7,500,000.
For offerings up to $7,500,000, the issuer must provide non-accredited investors with audited financial statements. If an issuer cannot obtain audited financial statements without unreasonable effort or expense, then only the balance sheet, dated within 120 days of the start of the offering, must be audited.
Offerings over $7,5000,000.
For offerings over $7,500,000 the issuer must provide the financial statements required to be filed in a registration statement under the Securities Act.
OPPORTUNITIES FOR QUESTIONS
An issuer making a Rule 506 offering must provide the opportunity for each investor, at a reasonable time prior to purchase, to ask questions and receive answers concerning the offering and to obtain any additional information which the issuer possesses or can acquire without unreasonable effort or expense that is necessary for the investor to verify the accuracy of information furnished.
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 and must file amendments to the Form D under certain circumstances.
For more information about Rule 506 and 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 advice on any specific matter, nor does this message create an attorney-client relationship. 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