3.8.7 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. Regulation D has provisions excluding bad actors, which are issuers who have disqualified themselves through various types of misconduct.
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, with exceptions as indicated below. Issuers of private placements must electronically file a Form D within 15 days of first use.
Regulation D offers three types of opportunities for issuers.
• Rule 504 is for offerings under $10 million and includes no restrictions on who can purchase the security. The SEC exempts Rule 504 offerings from certain requirements if they are governed by sufficiently strict blue sky laws. Such Rule 504 offerings may be publicly advertised, and their securities are not designated as restricted securities (see below).
• 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