Private Placements: Regulation D
Probably the most common method of issuing securities without going through the rigorous SEC registration process is through a private placement. A private placement is an offering of securities to a small group of selected investors. Private placements are subject to the provisions of the Securities Act of 1933, but if the offering meets certain conditions stated within the Act, the offering may be exempted from traditional registration requirements. For this reason, an exempt private placement is considered an exempt transaction.
Most private placements are issued under the set of rules stated in Regulation D of the Act. Under Regulation D, companies can offer securities to a limited group of individuals or institutions that meet certain requirements. Regulation D is open to both U.S. and foreign issuers and can be used for both equity and debt securities. To protect the public from private placement investments that have not gone through the traditional, rigorous SEC review, no public advertising is permitted for most Regulation D offerings (except Rule 506(c) offerings). Filers of private placements must electronically file a Form D within 15 days of first use.
Regulation D offers three types of opportunities for issuers, under Rules 504, 506(b), and 506(c), respectively. An issuer that chooses to conduct its offering under Rule 506 must choose either 506(b) or 506(c) and stick to this decision throughout the offering.
- • Rule 504 is for equity offerings under $5 million and includes no restrictions on who can purchase the security. Also, there is a provision to exclude “bad actors” from participating.
- • Rule 506(b) has no dollar cap and restricts non-accredited investors to 35. The non-accredited investors must all be sophisticated or be represented by a purchaser representative who is sophisticated. Sophisticated means the investor has demonstrated that she is experienced and knowledgeabl