As Seen In

Section 4(a)(2) vs Reg D – Comparing Syndication Structures

By: Tilden Moschetti, Esq.

Section 4(a)(2) of the Securities Act of 1933 and Regulation D (Reg D) are both exemptions from the registration requirements for securities offerings. However, they have some key differences.

Overall, Section 4(a)(2) is a broad exemption that allows companies to raise capital from a limited number of sophisticated investors without registering the offering with the SEC, while Reg D provides more specific exemptions that allow companies to put together syndications or funds to raise an unlimited amount of capital from both accredited and non-accredited investors. It’s important to consult with securities attorneys and financial advisors to understand the specific requirements and limitations of each exemption before making a decision.

Section 4(a)(2) of the Securities Act of 1933

What is Section 4(a)(2)?

Section 4(a)(2) of the Securities Act of 1933 is a statutory exemption from the registration requirements for securities offerings. This exemption is commonly known as the “private placement” exemption and it is intended to allow companies to raise capital from a limited number of sophisticated investors, who are able to fend for themselves.

This exemption does not have any specific requirements or limitations on the use of general solicitation and advertising, and it does not have any specific requirements for filing reports with the SEC. It also does not have any specific requirements for the form of securities or the use of proceeds. The issuer must prove that the investors are able to fend for themselves and that the securities were not offered or sold through general solicitation or advertising.

It’s important to note that this exemption does not require the issuer to register the offering with the SEC, but it does not eliminate the issuer’s liability under the federal securities laws, and the issuer still has to comply with any other applicable laws or regulations.

What is a “sophisticated investor”?

In the context of Section 4(a)(2) of the Securities Act of 1933, a “sophisticated investor” is an individual or entity that has the knowledge and experience to evaluate the risks and potential returns of a securities investment. The SEC does not have a specific definition of a “sophisticated investor” for Section 4(a)(2), but it’s generally considered to be someone who has the financial means and investment experience to properly evaluate the risks of a private placement.

Sophisticated investors are expected to have access to the information and resources necessary to evaluate an investment opportunity, including the ability to conduct their own research, access to professional advice, and an understanding of the nature and risks of the investment. These investors are considered to be able to fend for themselves and make an informed investment decision, that’s why companies are allowed to raise capital from them without registering the offering with the SEC.

Some factors that may be considered in determining whether an investor is sophisticated include:

  • Their net worth or income
  • Their investment experience
  • Their level of financial sophistication
  • Their ability to bear the economic risk of the investment.

It’s important to note that the evaluation of whether an investor is sophisticated or not is made on a case-by-case basis.

Comparison of Section 4(a)(2) and Reg D

Differences between Section 4(a)(2) and Reg D in terms of the types of investors that can participate

Section 4(a)(2) of the Securities Act of 1933 and Regulation D are both exemptions from the registration requirements for securities offerings, but there are some key differences in terms of the types of investors that can participate:

  1. Section 4(a)(2) is intended to allow companies to raise capital from a limited number of sophisticated investors who are able to fend for themselves. These investors are expected to have the knowledge, experience, and resources to evaluate the risks and potential returns of a securities investment.
  2. Reg D provides several exemptions, including Rule 506b and Rule 506c, which are intended to allow companies to raise an unlimited amount of capital from an unlimited number of accredited investors, as well as up to 35 non-accredited investors.
  3. Accredited investors are individuals or entities that meet certain financial thresholds, such as having a net worth of at least $1 million (excluding the value of their primary residence) or having an income of at least $200,000 for the past two years.
  4. Under Rule 506b of Reg D, companies can raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited investors who meet certain financial sophistication standards.
  5. Under Rule 506c of Reg D, companies can raise an unlimited amount of capital from an unlimited number of accredited investors and may make use of general solicitation and advertising, but they must take reasonable steps to verify that the investors are indeed accredited investors.

Overall, Section 4(a)(2) is intended to allow companies to raise capital from a limited number of sophisticated investors who are able to fend for themselves, while Reg D allows companies to raise an unlimited amount of capital from an unlimited number of accredited investors and a limited number of non-accredited investors who meet certain financial standards.

Differences between Section 4(a)(2) and Reg D in terms of the amount of money that can be raised

Section 4(a)(2) of the Securities Act of 1933 and Regulation D (Reg D) have some key differences in terms of the amount of money that can be raised:

  1. Section 4(a)(2) is intended to allow companies to raise capital from a limited number of sophisticated investors without the need for SEC registration. There is no specific limit on the amount of money that can be raised under this exemption, but it is intended for private placements and small offerings.
  2. Reg D provides several exemptions, including Rule 506(b) and Rule 506(c), which are intended to allow companies to raise an unlimited amount of capital from an unlimited number of accredited investors and a limited number of non-accredited investors.
  3. Both Section 4(a)(2) and Reg D offerings can have concurrent Regulation S offerings made at the same time as part of expanding the investor-base to world-wide.

Basically, Section 4(a)(2) allows companies to raise capital without limitation of amount, but it’s intended for private placements and small offerings, while Reg D allows companies to raise an unlimited amount of capital from an unlimited number of accredited investors and a limited number of non-accredited investors under certain conditions.

Differences between Section 4(a)(2) and Reg D in terms of the level of disclosure and reporting required

Section 4(a)(2) of the Securities Act of 1933 and Regulation D have different levels of disclosure and reporting required:

  1. Section 4(a)(2) does not have any specific requirements for disclosure or reporting.
  2. Reg D provides several exemptions, including Rule 506b and Rule 506c, which are intended to allow companies to raise an unlimited amount of capital from an unlimited number of accredited investors and a limited number of non-accredited investors.
  3. Under Rule 506b of Reg D, companies must file a Form D with the SEC after the offering is completed, and they are also required to provide disclosure to investors (almost always a private placement memorandum), but the level of disclosure required is less extensive than that required in a registered offering.
  4. Under Rule 506c of Reg D, companies must file a Form D with the SEC after the offering is completed and are also required to take reasonable steps to verify that the investors are indeed accredited investors.

Overall, Section 4(a)(2) does not have any specific requirements for disclosure or reporting, while Reg D requires companies to file a Form D with the SEC after the offering is completed and provide some level of disclosure to investors, but it is less extensive than that required in a registered offering.

Advantages of Section 4(a)(2) compared to Reg D

Some of the advantages of Section 4(a)(2) compared to Reg D include:

  1. Flexibility: Section 4(a)(2) allows companies to raise capital from a limited number of sophisticated investors without the need for SEC registration, providing flexibility in terms of the terms of the offering, the types of securities offered, and the use of proceeds.
  2. Speed: As there are no specific requirements for disclosure or reporting under Section 4(a)(2), the process of raising capital can be completed relatively quickly, which can be beneficial for companies looking to raise capital quickly or with limited resources.
  3. Cost-effective: Section 4(a)(2) can be a cost-effective way to raise capital as it eliminates the need for the time-consuming and costly process of registering the offering with the SEC.
  4. Less Restrictive: Section 4(a)(2) does not have any specific restrictions on the use of general solicitation and advertising, and it does not have any specific requirements for the form of securities or the use of proceeds.
  5. No Limitation on the number of investors: Section 4(a)(2) does not have any specific limitations on the number of investors that can participate in the offering, unlike Reg D’s limitations on the number of non-accredited investors.

Advantages of Reg D compared to Section 4(a)(2)

Some of the advantages of Reg D compared to Section 4(a)(2) include:

  1. Unlimited capital raising: Reg D allows companies to raise an unlimited amount of capital from an unlimited number of accredited investors and a limited number of non-accredited investors, which can be beneficial for companies looking to raise a significant amount of capital.
  2. Accredited Investor Definition: Reg D provides a clear definition of an accredited investor, which can help companies to identify and verify these investors more easily.
  3. Ability to use general solicitation: Under Reg D, companies can use general solicitation and advertising to reach a larger pool of potential investors, which can be beneficial for companies looking to raise capital from a wider audience.
  4. Continuous offering: Reg D allows for continuous offering, which can be beneficial for companies that need to raise capital on a regular basis.

Conclusion

It’s important to note that the specific requirements and limitations of each exemption may vary and it’s recommended to consult with a syndication attorney to understand the specific requirements and limitations of each exemption before making a decision.

Make informed decisions about your syndication.

Contact our syndication and private placement memorandum law firm today!