Reg D Rules: Rule 506, 501, 504, and beyond

What is Reg D?

Before we dive right in to rules, lets set the stage with a definition of Reg D. Regulation D contains a set of rules that allow an entrepreneur or a company to sell securities without registering with the SEC. It’s intended to help small companies that otherwise couldn’t bear the costs of a standard SEC registration gain access to the capital market. Thanks to this regulation, introduced in 1982, and companies can raise capital selling equities and debt securities.

What is Regulation D? Reg D defines essential terms, conditions that need to be met, and potential exemptions for certain offerings. Companies that meet all requirements don’t have to register their offering of securities, but they do need to file Form D with the SEC. This needs to be done no later than 15 days after the first securities are sold. Preparation of the documents and Form D are typically done with a syndication attorney.

 

Rule 501 of SEC Reg D – Accredited Investors and Beyond

Rule 501 of Reg D is one of the most important since it defines numerous elements necessary for a Reg D offering. Most notably, it describes who can purchase your offering and under what conditions. The essential definitions of Rule 501 are:

• Accredited investors
• Aggregate offering price
• Business combination
• Calculation of number of purchasers
• Purchaser representative

This rule describes all the terms mentioned above crucial for taking advantage of Reg D in detail. It also sets the criteria that need to be met and discusses potential exceptions for each definition. Other terms defined in Rule 501 are:

• Executive officer
• Final order
• Issuer
• Purchaser representative
• Spousal equivalent

What are Rule 504 Securities of SEC Reg D?

Rule 504 of Reg D provides an exemption from registering securities with the SEC for particular companies that sell up to $10,000,000 of securities over 12 months.

Companies can take advantage of this rule as long as they aren’t blank-check companies and don’t have to file reports under the Securities Exchange Act of 1934. Rule 504 doesn’t allow companies to solicit or advertise their securities unless they meet one of the following conditions:

• The company registers the offering in at least one state’s blue sky laws that require publicly filed registration statements and issues extensive disclosure paperwork to the investors.
• The company registers (and sells) the offering in a state that requires publicly filled registration and in a state with no such requirements. In this case, the company needs to deliver the required disclosure paperwork to all purchasers (including those in the state without such requirements).
• The company sells in compliance with a state’s law exemptions that allow solicitation and advertising. In this case, the company needs to sell only to accredited investors.
• A company must give a private placement memorandum (PPM) to potential investors.

What is Rule 506(b) of SEC Reg D?

Rule 506(b) of Reg D describes a particular exemption from registering securities with the SEC. Companies that take advantage of this rule can raise unlimited amounts of money. Rule 506(b) is often called a “safe harbor” under Section 4(2) of the Securities Act of 1933.

This rule prescribes that:

• A company can’t solicit or advertise securities on the market (unless it complies with Rule 506(c)).
• A company can sell securities to an unlimited number of accredited investors and up to 35 other purchasers.
• A company can decide what information to give to accredited investors but must not violate anti-fraud prohibitions.
• A company must give a private placement memorandum (PPM) to potential investors.
• A company must answer the potential purchasers’ questions.
• Purchasers get “restricted” securities they can’t sell without registering for at least six months or one year.

What is Rule 506(c) of SEC Reg D?

Until the JOBS Act of 2012, Rule 506(c) of Reg D didn’t exist. This new rule enables issuers to solicit and advertise their offerings and remain in compliance with the exemption requirements so long as they meet certain criteria:

• All investors in the offering need to be accredited investors.
• The company needs to verify and confirm the investors are accredited. This often includes checking W-2 Forms, tax returns, bank statements, etc.
• A company should give a private placement memorandum (PPM) to potential investors.

Companies that comply with these criteria also don’t have to register their securities with the SEC, but they need to file Form D after selling their first securities.

Purchasers of securities under this rule receive “restricted” securities. This means they can’t sell them without registering for at least six months or a year.