Limited Offerings and Private Placements · § 2:11 Rule 147 and Rule 147A Intrastate Offerings § 2:12 Crowdfunding Exempt Offerings ... • Effective January 20, 2017, the SEC amended

Chapter 2

Limited Offerings andPrivate Placements

Harry S. Pangas

Partner, Eversheds Sutherland (US) LLP, Washington, DC

Sara Sabour

Associate, Eversheds Sutherland (US) LLP, Washington, DC

[Chapter 2 is current as of August 28, 2017.]

§ 2:1 Overview§ 2:2 Securities Act of 1933 and State Blue Sky Laws§ 2:3 Securities Act Exemptions for Limited Offerings and Private

Placements§ 2:3.1 Section 3(b) of the Securities Act—Limited Offerings§ 2:3.2 Section 4(a)(2) of the Securities Act—Private Placements

§ 2:4 Regulation A in Detail§ 2:5 Regulation A+ in Detail§ 2:6 Regulation E in Detail§ 2:7 Regulation D in Detail

§ 2:7.1 Rule 504 Offerings§ 2:7.2 Rule 505 Offerings§ 2:7.3 Rule 506 Offerings§ 2:7.4 No General Advertising or Solicitation in Certain Regulation D

Offerings§ 2:7.5 Counting Investors§ 2:7.6 Accredited Investors§ 2:7.7 Disclosure Obligations

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§ 2:7.8 “Bad Actor” Disqualification Provisions§ 2:7.9 Form D§ 2:7.10 Recent Amendments to Form D§ 2:7.11 Substantial Compliance§ 2:7.12 Limitations on Resale§ 2:7.13 Integration§ 2:7.14 Integration of Exempt Offerings and the Regulation D

Safe Harbor§ 2:7.15 Integration of Exempt Offering and Subsequent Public

Offering—“Gun Jumping”§ 2:7.16 Securities Offerings Available Under Regulation D

§ 2:8 Proposed Revisions to Regulation D§ 2:9 Interaction of Regulation S with Regulation D§ 2:10 Rule 144A Transactions§ 2:11 Rule 147 and Rule 147A Intrastate Offerings§ 2:12 Crowdfunding Exempt Offerings§ 2:13 State Blue Sky RequirementsAppendix 2A Limited Offering and Private Placement Quick

Reference Chart

§ 2:1 Overview

A company or other issuer may from time to time raise capital frominvestors. These capital raising transactions may take the form of largescale public securities offerings or may involve a small handful ofinvestors. Whether an offering involves a public distribution of securitiesor a small private offering, federal and state securities laws will apply andan offering must be carefully structured to ensure compliance. Offeringsthat do not comply with federal and state securities laws subject theissuer and its control persons to civil liability and potential regulatorypenalties, including criminal penalties in extreme cases.

§ 2:2 Securities Act of 1933 and State Blue Sky Laws

The offer and sale of securities, including the securities of investmentvehicles such as venture capital, private equity and hedge funds, areregulated by the Securities Act of 1933, as amended (the “SecuritiesAct”), and by the securities laws of the states in which an offering or saleoccurs. These state securities laws are often referred to as state “bluesky” laws. In general, to make an offering of securities, the securitiesmust be registered or exempt from registration under the Securities Actand the laws of each state in which such securities are offered for sale.This chapter focuses on two types of exempt transactions, limitedofferings and private placements.

§ 2:1 FINANCIAL PRODUCT FUNDAMENTALS

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Certain exemptions from section 5 of the Securities Act1 permit anissuer to offer securities to certain investors subject to limitedconditions, while avoiding the registration and prospectus deliveryrequirements of a public offering. Such exemptions from registrationcan be found in section 3 (which relates to exempt securities) andsection 4 (which relates to exempt transactions) of the Securities Actand in rules promulgated by the Securities and Exchange Commission(SEC). State blue sky laws have a similar structure to the Securities Actand require offerings to be registered unless an exemption fromregistration is available. Offerings exempt under the Securities Act arenot necessarily exempt under state securities laws and, as a result, eachstate’s securities laws must be analyzed to ensure a good exemptionexists. Through amendments to the Securities Act in 1996, certainofferings exempt from registration under the Securities Act now enjoy afifty-state exemption through a limited preemption of state blue skylaws.2

The general purpose of registration is to provide full and fairdisclosure of information so that investors may make informedinvestment decisions and so that the SEC may review such disclosurethrough the registration process to ensure that the interests of theinvesting public are protected. Since exempt transactions are offeredto a limited class of investors and often are substantially limited tosophisticated investors, the investors do not need the same kind ofdisclosure and SEC (or state) review as that required in a registeredoffering broadly distributed to the general investing public. Althoughregistration has its advantages, such as allowing broad publicdistribution of securities, a certain prestige factor, liquidity ofsecurities purchased, and a lack of limitations on the number ornature of purchasers or the amount of securities which may be offered,registration may not always be desirable. As discussed in the previouschapter, registration can be expensive and time-consuming and may

1. Section 5 of the Securities Act provides that it is unlawful to sell or offer forsale any security unless a registration statement has been filed with anddeclared effective by the Securities and Exchange Commission or unlessthe transaction is exempt from the registration requirements of theSecurities Act.

2. In October 1996, Congress passed a bill entitled “The National SecuritiesMarkets Improvement Act of 1996” (NSMIA). NSMIA amended section18 of the Securities Act to preempt state securities registration require-ments with respect to a newly defined category of securities—the “coveredsecurity.” Notwithstanding the federal preemption of “covered securities,”states may, and generally do, require notice filings, consisting of filing feesand copies of documents filed with the SEC to be filed with them, except asto securities traded on a national securities exchange. For a more detaileddiscussion of NSMIA, see infra section 2:13.

§ 2:2Limited Offerings and Private Placements

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subject the issuer to ongoing regulatory filings and oversight underthe federal securities laws.3

§ 2:3 Securities Act Exemptions for Limited Offerings andPrivate Placements

§ 2:3.1 Section 3(b) of the Securities Act—LimitedOfferings

Section 3 of the Securities Act exempts certain securities from theregistration provisions. Section 3(b) gives the SEC the authority toexempt securities when registration is not necessary due to the smallamount involved or the limited character of the public offering. Pur-suant to the rulemaking authority granted in section 3(b), the SECadopted Regulation A, Rule 504 under Regulation D, and Regulation E.Rule 504 under Regulation D and Regulation E provide exemptionsfor offerings of up to $5 million, and Regulation A provides exemptionsfor offerings of up to $20 million and $50 million, depending on theRegulation A tier that the issuer elects to follow.4 Registration of suchofferings is not considered to be necessary because of the small dollaramounts involved.

Here is certain recent congressional and SEC regulatory activityrelating to section 3(b) of the Securities Act, which is helpful backgroundinformation to know when dealing with these exemptions:

• On April 5, 2012, President Obama signed the Jumpstart OurBusiness Startups Act (the “JOBS Act”) into law. The JOBS Actis intended to make it easier and less burdensome for companiesto raise capital through securities offerings, including exemptand private offerings. Among other things, the JOBSAct amended section 3(b) of the Securities Act to create aRegulation A–like exemption from the registration require-ments under the Securities Act that permits an aggregateoffering of up to $50 million in any twelve-month period,subject to compliance with certain other conditions. Thisexemption is commonly known as “Regulation A+.”

3. In general, most non-investment company issuers will be subject toongoing reporting and regulatory requirements under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), and mostinvestment company issuers will be subject to ongoing reporting andregulatory requirements under the Investment Company Act of 1940, asamended (the “Investment Company Act”), following a public offering.

4. Although section 3 is entitled “Exempted Securities,” Regulation A,Rule 504 of Regulation D, and Regulation E promulgated under section 3(b)provide for exempt transactions.


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• On March 25, 2015, the SEC adopted final rules, which becameeffective on June 19, 2015, to implement the Regulation A+exemption. For a detailed discussion of Regulation A+ rules,see section 2:5 below.

• Effective January 20, 2017, the SEC amended Rule 504 underRegulation D by increasing the aggregate amount of securitiesthat may be offered and sold in any twelve-month period from$1 million to $5 million, and by disqualifying certain bad actorsfrom relying on Rule 504. For a detailed discussion of Rule 504,including these recent amendments, see section 2:7 below. Inlight of these amendments, the SEC also repealed Rule 505under Regulation D, effective May 22, 2017.

§ 2:3.2 Section 4(a)(2) of the Securities Act—PrivatePlacements

Section 4 of the Securities Act exempts certain transactions fromthe registration requirements of the Securities Act. Section 4(a)(2) ofthe Securities Act (formerly section 4(2) of the Securities Act)5 exemptsfrom registration “transactions by an issuer not involving any publicoffering.” Because “public offering” is not defined in the Securities Actand because Congress provided little guidance regarding what wasintended by the term, case law and SEC releases have established themeaning of the term “public offering.”

A securities offering need not be offered to the general public inorder to be considered a “public offering.” In the Ralston Purina case,6

the leading case on this issue, the U.S. Supreme Court found RalstonPurina’s offering of securities to “key employees” to be a publicoffering. Based on the overall purpose of registration and the policybehind exempting transactions when there is no practical need forregistration, the Court stated that a determination as to whetheran offering is public should turn on whether the offerees need theprotection of the Securities Act. Because Ralston Purina offered itssecurities to non-management employees, including “employees withthe duties of artist, bakeshop foreman, chow loading foreman, clericalassistant, copywriter, electrician, stock clerk, mill office clerk, ordercredit trainee, production trainee, stenographer, and veterinarian,”who did not have access to the kind of information that wouldbe disclosed in a registration statement, the Court held that suchemployees needed the protection of the Securities Act. On the otherhand, if Ralston Purina had offered securities only to executive officers

5. The JOBS Act created new section 4(b) of the Securities Act and movedformer section 4(2) to section 4(a)(2).

6. SEC v. Ralston Purina Co., 346 U.S. 119 (1953).

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who have access to the kind of information that would be disclosed ina registration statement, the offering would have been exempt undersection 4(a)(2) of the Securities Act because such offerees would havethe ability to protect themselves, given their access to information.

In 1962, the SEC issued a release regarding the availability of thesection 4(a)(2) exemption (“Release No. 33-4552”).7 The SEC statedthat the determination as to whether an offering is a “public offering”is a question of fact and requires a consideration of all surroundingcircumstances, including the relationship between the offerees and theissuer, and the nature, scope, size, type, and manner of the offering.The SEC also stressed that the identity of the offerees as well as theidentity of the actual purchasers must be considered.

Based on Ralston Purina, Release No. 33-4552 and subsequent caselaw, the Federal Regulation of Securities Committee of the AmericanBar Association (the “ABA Committee”) issued a position paperattempting to synthesize the most significant factors in determiningwhether the section 4(a)(2) exemption is available.8 The ABA Com-mittee concluded that the following four factors are the most significantin making such a determination: (1) offeree qualification; (2) availabilityof information; (3) manner of offering; and (4) absence of redistribution.

An offeree may be “qualified” on any one of several bases, including:(1) sophistication, or the ability to understand the risk of the invest-ment, (2) the ability to assume the risk of the investment, that is,the offeree’s wealth, and (3) a qualifying relationship to the issuer, suchas a family relationship, friendship, an employment relationship, or apre-existing business relationship. Special care must be taken to ensurethat all offerees are qualified because, if an offer is made to a nonqualifiedinvestor, the exemption may be unavailable for the entire offering. Anofferee should also have some basic information about the issuer, orshould have access to such information, prior to purchasing securities.9

Basic information regarding the issuer may include the issuer ’s financialcondition, results of operations, and a description of the issuer ’s

7. Securities Act Release No. 33-4552 (Nov. 6, 1962).8. Section 4(2) and Statutory Law, A Position Paper of the Federal Regulation

of Securities Committee, Section of Corporation, Banking and BusinessLaw of the American Bar Association, 31 BUS. LAW. 485 (1975).

9. Importantly, the anti-fraud provisions of the federal securities laws, suchas section 10(b) of the Exchange Act and Rule 10b-5 thereunder, apply toall purchases and sales of securities, including those issued in connectionwith exempt securities offerings. As a result, issuers typically prepare andprovide a disclosure document regarding the issuer, the issuer ’s businessand financial condition, and the terms of the securities offering topotential investors in connection with exempt securities offerings. For amore detailed discussion of the anti-fraud provision of the federal secu-rities laws and related disclosure obligations of issues, see infra section2:7.7.

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business, property, and management. The manner of a private offeringshould be direct communications with potential offerees. A privateoffering should not be conducted via general advertising and massmedia, or else offerees who are not qualified may be solicited. Finally,purchasers of securities in a private offering should not resell theirsecurities immediately, as this would have the effect of transformingthe offering into a public offering.

Accordingly, a proper private placement under section 4(a)(2) includesdirect offerings of securities to sophisticated and/or wealthy investorswho either possess general information concerning the issuer or receivesome general information before making a purchase. Such investorswould also agree not to resell their securities to other investors for acertain period of time so as to avoid a redistribution of the securities and,thus, a public offering.

Under the SEC ’s rulemaking authority, it has adopted Rule 506(b)under Regulation D providing a nonexclusive safe harbor exemptionfrom registration pursuant to section 4(a)(2), which means that if therequirements of the rule are not completely satisfied, the issuer couldrely on the section 4(a)(2) statutory exemption.10 Rule 506(b) permitsan issuer to sell an unlimited dollar amount of securities, providedcertain requirements, similar to those discussed in connection withthe section 4(a)(2) exemption, are satisfied. This makes the safe harbormore attractive than section 4(a)(2), since the issuer can ensure that anexemption exists and no limits exist on the amount of funds that can beraised. Rule 506(b) tells an issuer, among other things, who it can sellsecurities to, how it can sell such securities, and what information mustbe provided to prospective investors. The issuer generally does not havethe same level of certainty when relying on section 4(a)(2).

In addition, issuers may now find it more attractive to rely onRule 506(c) as compared to relying on section 4(a)(2) and/or Rule506(b), given that this JOBS Act–created exemption permits generalsolicitation and advertising in connection with Rule 506(c) offerings solong as the securities are only sold to “accredited investors” (as defined

10. Rule 504 of Regulation D is not a safe harbor, because section 3(b) does notprovide for a statutory self-executing exemption. Accordingly, if the require-ments of Rule 504 are not satisfied, the issuer may not rely on section 3(b).Likewise, Rule 506(c) is a stand-alone exemption created by the JOBS Actthat does not depend on, or obtain its authority from, a statutory exemption(e.g., section 4(a)(2)). Accordingly, if the requirements of Rule 506(c) are notsatisfied, the issuer would not likely be able to rely on another statutoryexemption or rule in connection therewith given the nature of Rule 506(c)offerings (i.e., they permit general solicitation and advertising so long as thesecurities are only sold to “accredited investors” (as defined in Rule 502 ofRegulation D) and the issuer takes reasonable steps to verify the “accreditedinvestor” status of investors). For a detailed discussion of new Rule 506(c),see infra sections 2:7.3 and 2:7.4.


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below) and the issuer takes reasonable steps to verify the “accreditedinvestor” status of investors.11

§ 2:4 Regulation A in Detail

As discussed above, section 3(b) of the Securities Act authorizes theSEC to exempt from registration small securities offerings. By thisauthority, the SEC created Regulation A, an exemption for publicofferings by U.S. and Canadian companies not exceeding $20 millionin any twelve-month period. Regulation A may not be relied upon byan issuer that is (i) subject to the reporting requirements of section 13or 15(d) of the Exchange Act (that is, it is required to file Form 10-Ks,Form 10-Qs and Form 8-Ks with the SEC); (ii) an investment companyregistered or required to be registered under the Investment CompanyAct;12 (iii) a development stage company that either has no specific

11. For more information on this new exemption, see infra sections 2:7.3and 2:7.4.

12. In general, a company that is engaged primarily in the business ofinvesting in the securities of other companies, such as venture capital,private equity and hedge funds, must register with the SEC under, andbecome subject to the provisions of, the Investment Company Act, unlesssuch company falls within an exclusion from the definition of “investmentcompany” under the Investment Company Act. Typically, venture capital,private equity and hedge funds structure themselves to ensure the avail-ability of an exclusion from the definition of “investment company” underthe Investment Company Act to avoid being required to register, andbecoming subject to regulation, under the Investment Company Act. Twoimportant exclusions from the definition of “investment company” underthe Investment Company Act are (i) if the fund has less than 100 security-holders and is not making and does not presently propose to make a publicoffering of its securities (this exclusion is referred to as the “section 3(c)(1)exclusion”) and (ii) if the fund’s securities are exclusively owned by personswho are “qualified purchasers” and the fund is not making and does notpresently propose to make a public offering of its securities (this exclusionis referred to as the “section 3(c)(7) exclusion”). As a result, if a fund fallswithin an exclusion from the definition of an “investment company”under the Investment Company Act, it will not be excluded per se fromrelying on Regulation A. However, a venture capital, private equity orhedge fund that is relying on the section 3(c)(1) exclusion or section 3(c)(7)exclusion from the definition of an “investment company” under theInvestment Company Act will not be able to conduct a limited publicoffering under Regulation A because the section 3(c)(1) and section 3(c)(7)exclusions require that the fund not make and presently propose to make apublic offering of its securities. In contrast, a venture capital, private equityor hedge fund that is relying on the section 3(c)(1) exclusion or section3(c)(7) exclusion from the definition of an “investment company” underthe Investment Company Act will be able to conduct a Rule 506(c) offering(which permits general solicitation and general advertising in certaincircumstances) without the concern of running afoul of the requirementthat it not make and presently propose to make a public offering of its


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business plan or purpose or has indicated that its business is to engagein a merger or acquisition with an unidentified company or compa-nies; or (iv) issuing fractional undivided interests in oil or gas rights,or a similar interest in other mineral rights. In addition, Regulation Amay not be relied upon in connection with an offering that involvescertain “felons” and “bad actors.”13 If an issuer chooses to rely onRegulation A, it will be required to file an offering statement, consist-ing of a notification, offering circular, and exhibits, with the SEC forreview.

As a practical matter, Regulation A offerings are more akin toregistered offerings than exempt offerings. For example, an issuermust provide purchasers with an offering circular that is similar incontent to a prospectus contained in a registration statement. Likeregistered offerings, the securities can be offered publicly and are not“restricted,” meaning they are freely tradeable after the offering. Theprincipal advantages of Regulation A offerings, as opposed tofull registration, are simpler financial statements requirements,including no need for audited financial statements; no Exchange Actreporting obligations after the offering unless the issuer has more than$10 million in total assets and 2,000 or more shareholders or 500 ormore shareholders who are not accredited investors; and the possibil-ity for the issuers to “test the waters” to determine if there is adequateinterest in their securities before going through the expense of filingwith the SEC.

If an issuer “tests the waters,” it can use general solicitation andadvertising prior to filing an offering statement with the SEC, giving itthe advantage of determining whether there is enough market interestin its securities before it incurs the full range of legal, accounting, andother costs associated with filing an offering statement. However,issuers may not solicit or accept money or other consideration untilthe SEC staff completes its review of the filed offering statement andthe issuer delivers the prescribed offering materials to investors.

§ 2:5 Regulation A+ in Detail

Regulation A+ offerings consist of offerings of up to $50 million ina twelve-month period. The Regulation A+ exemption is available toany company organized in and with its principal place of business inthe United States or Canada. The exemption is not available to public

securities because the JOBS Act specifically provides that “[o]ffers and salesexempt under [Rule 506(c)] shall not be deemed public offerings under theFederal securities laws as a result of general advertising or generalsolicitation.”

13. See Regulation A Rule 262.


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companies already reporting under the Exchange Act, investment com-panies, business development companies, blank check companies,companies subject to “bad boy” disqualification, or to issuers of frac-tional undivided interests in oil or gas rights. Offerings under thisexemption may consist only of equity securities, debt securities, anddebt securities convertible or exchangeable into equity interests,including any guarantees of such securities.

The Regulation A+ exemption requires a company to file an offeringstatement electronically with the SEC and allows for the confidentialnon-public review of the draft offering statement by the SEC prior tofiling. The offering statement is required to include two years of auditedfinancial statements and information similar to that found in a regis-tration statement for an initial public offering registered under theSecurities Act (for example, Management Discussion and Analysis(MD&A), risk factors, compensation information for the three mosthighly paid officers, and related-party transaction disclosures).

Similar to Regulation A, a company pursuing a Regulation A+ offer-ing is able to “test the waters” with potential investors before and afterthe filing of the offering statement with the SEC. The company isrequired to file any solicitation materials used in connection with “testthe waters” activity as an exhibit to its offering statement. The Regula-tion A+ rules limit the amount of securities that a potential investormay invest in a Regulation A+ offering of securities that are not listedon a registered national securities exchange upon qualification of theRegulation A + offering to 10% of the greater of the investor ’s annualincome or net worth, in the case of natural person investors, or revenueor net assets, in the case of non-natural person investors. This limita-tion does not apply if the investor is an accredited investor (as definedin Rule 501 of Regulation D under the Securities Act).

As is the case with Regulation A, the process for filing, review, andqualification of Regulation A+ offering statements are substantiallythe same as the process for filing, review, and effectiveness of registra-tion statements under the Securities Act. The exemption subjectsissuers that offer securities pursuant to Regulation A+ to additionalrequirements, including an ongoing reporting regime that requiresthem to electronically file with the SEC:

• Annual reports on Form 1-K, which are required for the fiscalyear in which the offering statement became qualified and forevery fiscal year thereafter. The annual report essentially updatesthe information contained in the company ’s offering statement,including two years of annual audited financial statements. Theannual report must be filed within 120 days of the company ’sfiscal year end.


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• Semi-annual reports on Form 1-SA, which cover the first halfof each fiscal year of the company and consist primarily ofunaudited financial statements and MD&A. The semi-annualreport must be filed within ninety days of the end of the secondquarter.

• Current reports on Form 1-U, which are required to be filed uponthe occurrence of certain specified events, and must be filedwithin four business days of the event. Form 1-U reportableevents include bankruptcy; material modification to the rightsof security holders; changes in accountant; non-reliance on pre-vious financial statements; changes in control; departure of thechief executive officer, chief financial officer, or principal account-ing officer; and unregistered sales of 5% or more of outstandingequity securities. In addition, any “fundamental change” to thenature of the company ’s business triggers Form 1-U reporting.The fundamental change reporting event would be triggered by“major and substantial changes in the issuer ’s business or planof operations, or changes reasonably expected to result in suchchanges, such as significant acquisitions or dispositions, or theentry into, or termination of, a material definitive agreement thathas or will result in major and substantial changes to the natureof an issuer ’s business or plan of operations.”

Importantly, however, the following reporting and complianceobligations that would not apply to Regulation A+ companies (andtheir directors, officers and stockholders) are:

• the proxy and information statement rules;

• section 16 reporting by directors, executive officers, and 10%stockholders (that is, Forms 3, 4, and 5);

• Schedule 13D/Schedule 13G filings by 5% or greaterstockholders;

• audit committee independence requirements;

• internal control over financial reporting requirements;

• director and officer loan prohibitions;

• chief executive officer and chief financial officer certifications;

• conflict minerals and resource extraction disclosures requiredby the Dodd-Frank Wall Street Reform and Consumer Protec-tion Act (the “Dodd-Frank Act”); and

• pay ratio disclosure required by the Dodd-Frank Act.

Securities sold under Regulation A+ would have the status of pub-licly offered securities and, therefore, the purchasers of these securities


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would be able to freely resell them in the secondary market after theoffering. Notably, blue sky laws would be preempted for both the offerand sale of securities in Regulation A+ offerings.

§ 2:6 Regulation E in Detail

Regulation E shares many similarities with Regulation A. In thisregard, Regulation E provides an exemption from registration underthe Securities Act for small offerings (that is, not exceeding $5 millionin any twelve-month period) in accordance with section 3(b) of theSecurities Act. However, Regulation E may only be relied upon by twotypes of investment companies: small business investment companiesregistered under the Investment Company Act and closed-endinvestment companies that have elected to be regulated as businessdevelopment companies under the Investment Company Act. Regula-tion E permits the issuer to publicly offer the securities, and thesecurities sold are not “restricted,” meaning that the purchasersof such securities are free to resell them in the secondary market afterthe offering.

Regulation E requires the filing with the SEC of a notification andan offering circular containing information on the business andinvestment policies of the issuer, its management, and its financialcondition. The prohibitions on offers and sales under Regulation Esomewhat mimic those contained in section 5 of the Securities Actwith respect to registered offerings. In this regard, the permissibilityof offers depends upon whether they are oral or written and thepermissibility of the consummation of a sale depends upon thedelivery of an offering circular.

The financial statements in the Regulation E offering circularshould be prepared in accordance with generally accepted accountingprinciples. If the issuer has filed or is required to file financial state-ments for the issuer ’s latest fiscal year with the SEC, the statementsshould be audited. Statements filed for the period or periods precedingthe latest year do not have to be audited.

§ 2:7 Regulation D in Detail

Regulation D provides three possible exemptions from registration:Rule 504, Rule 506(b), and Rule 506(c). As noted above, the statutorybasis for Rule 504 is section 3(b) of the Securities Act, the authority forRule 506(b) is section 4(a)(2), and the authority for Rule 506(c) is theJOBS Act. Effective January 20, 2017, in connection with amendmentsto Rule 504, the SEC repealed Rule 505 of Regulation D.


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§ 2:7.1 Rule 504 Offerings

Effective January 20, 2017, the SEC amended Rule 504 by increas-ing the aggregate amount of securities that may be offered and sold inany twelve-month period from $1 million to $5 million, and bydisqualifying certain “bad actors” from participating in Rule 504offerings, as discussed below. Rule 504 cannot be used by an issuerthat is: (i) subject to the reporting requirements of section 13 or 15(d)of the Exchange Act (that is, it is required to file Form 10-Ks, Form10-Qs and Form 8-Ks with the SEC); (ii) an investment company;14 or(iii) a development stage company that either has no specific businessplan or purpose or has indicated that its business is to engage in amerger or acquisition with an unidentified company or companies.There are no specific disclosure requirements or limitations on thenumber and nature of purchasers for Rule 504 offerings. However, thegeneral anti-fraud provisions of the federal securities laws and Rule502(a), the integration provision, both of which are discussed below,apply to Rule 504 offerings.15

Rule 504 was amended in 1999 to curb its use in questionablemicrocap public offerings.16 These amendments now limit the circum-stances under which an issuer can use general solicitation and issuefreely tradable securities to transactions (1) registered under state bluesky laws requiring public filing and delivery of disclosure documentsto investors before sale or (2) exempted under state blue sky laws per-mitting general solicitation and advertising so long as sales are madesolely to “accredited investors.”17 As a result, general advertising and

14. See id. If a fund falls within an exclusion from the definition of an“investment company” under the Investment Company Act, it will notbe excluded per se from relying on Rule 504.

15. See supra note 9.16. Securities Act Release No. 33-7644 (Feb. 25, 1999).17. However, a venture capital, private equity or hedge fund that is relying on

the section 3(c)(1) exclusion or section 3(c)(7) exclusion from the definitionof an “investment company” under the Investment Company Act will notbe able to conduct a limited public offering under Rule 504 because thesection 3(c)(1) exclusion and section 3(c)(7) exclusion require that the fundnot make and presently propose to make a public offering of its securities.In contrast, a venture capital, private equity, or hedge fund that is relyingon the section 3(c)(1) exclusion or section 3(c)(7) exclusion from thedefinition of an “investment company” under the Investment CompanyAct will be able to conduct a Rule 506(c) offering (which permits generalsolicitation and general advertising in certain circumstances) without theconcern of running afoul of the requirement that it not make and presentlypropose to make a public offering of its securities because the JOBS Actspecifically provides that “[o]ffers and sales exempt under [Rule 506(c)]shall not be deemed public offerings under the Federal securities laws asa result of general advertising or general solicitation.”


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solicitation will not be permissible and the securities acquired will be“restricted,” meaning that they may not be freely resold after theoffering, unless the conditions specified above are satisfied. Prior tothe 1999 amendments to Rule 504, the exemption allowed privatecompanies to sell securities to an unlimited number of persons withoutregard to the investor ’s sophistication or experience and without spec-ified disclosure obligations. General solicitation and advertising werepermitted, and the securities acquired could be resold freely by non-affiliates of the issuer, who were not otherwise acting as underwriters.


As discussed above, as a result of the amendments to Rule 504, theSEC repealed Rule 505 of Regulation D, which permitted offerings ofup to $5 million annually that were required to be sold solely to accred-ited investors or no more than thirty-five non-accredited investors.


Rule 506 tends to be the workhorse of the limited offering andprivate placement exemptions for many issuers, including investmentvehicles such as venture capital, private equity, and hedge funds. Asdiscussed above, there is no aggregate dollar amount limitation onRule 506 offerings, allowing the offering of securities in significantdollar amounts. Some issuers, notably large venture capital, privateequity, or hedge funds, may raise over a billion dollars under a singleRule 506 offering, and offerings raising hundreds of millions are rela-tively commonplace.

As a result of changes made to Rule 506 by the JOBS Act and SECaction relating thereto,18 Rule 506 is now composed of a safe harborunder section 4(a)(2) (that is, Rule 506(b)) and a stand-alone exemp-tion (that is, Rule 506(c)). Specifically, Rule 506(b) is the rule underRule 506 that provides conditions that an issuer may rely on to meetthe requirements of the section 4(a)(2) exemption. These conditionsrequire that an issuer must not use general solicitation to marketthe securities as well as impose additional financial sophisticationrequirements on purchasers of an issuer ’s securities that do not qualifyas “accredited investors.” Under Rule 506(c), issuers can offer securi-ties through means of general solicitation and general advertising,provided that: (i) all purchasers in the offering are “accredited inves-tors,” (ii) the issuer takes reasonable steps to verify their “accreditedinvestor” status, and (iii) certain other conditions in Regulation D aresatisfied.

18. See Securities Act Release No. 33-9415 (July 10, 2013).


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Both Rule 506(b) and Rule 506(c) limit the ability of the purchaserto freely trade the securities in the secondary market after the offering(that is, because Rule 506(b) and Rule 506(c) securities are deemed tobe “restricted” securities).

§ 2:7.4 No General Advertising or Solicitation in CertainRegulation D Offerings

Regulation D prevents an issuer offering securities in reliance uponRule 506(b) under Regulation D from engaging in “general advertisingor solicitation.”19 The restriction applies to the issuer and any personacting on behalf of the issuer, such as a general partner, manager, orbroker-dealer. Prohibited activities include: (1) any advertisement,article, notice, or other communication published in any newspaper,magazine, or similar media or broadcast over television or radio; and(2) any seminar or meeting whose attendees have been invited by anygeneral advertising or solicitation.20 This precludes most impersonalmarketing activities, including newspaper, magazine, radio, or televi-sion advertisements; press interviews; or other mass marketing andcold mailings to mailing lists of specific interest groups. The SEC hasaddressed much of the uncertainty in this area in a number of no-action letters and other releases. Traditionally, the SEC ’s view hasbeen that all prospective investors should be people with whom theissuer, its directors, officers, or full-time employees have a pre-existingrelationship. However, recent trends in this area have been to liberalizethe activities that can be engaged in without violating the ban on gen-eral advertising and solicitation. In several no-action letters, the SECstaff has concluded that substantive relationships may be establishedby obtaining sufficient information on purchaser suitability ques-tionnaires to evaluate potential investors’ sophistication and finan-cial circumstances.21 As a result, prospective investors in a Rule 506(b)offering should be people with whom the issuer has a pre-existingrelationship or people who provide the issuer with sufficient informa-tion regarding their financial and business experience such that theissuer is able to evaluate their suitability for investing in the issuer ’ssecurities. The SEC has also permitted “pre-clearance” of sophisticatedinvestors for private offerings in general (that is, not for a particularoffering) by broker-dealers and by sponsors of websites, including sitescontaining hedge funds and private investment partnerships offered

19. Rule 502(c).20. Id.21. See, e.g., H.B. Shaine & Co., SEC No-Action Letter (May 1, l987);

E.F. Hutton and Co., SEC No-Action Letter (Dec. 3, 1985).


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under Rule 506(b) of Regulation D.22 Although the SEC had indicatedthat this pre-clearance requirement may have been problematic forthird parties that were not registered broker-dealers or affiliated withregistered broker-dealers,23 the JOBS Act created an exemption frombroker-dealer registration for certain persons in connection with theissuance of securities in compliance with Rule 506 offerings.24 Anunrestricted website posting of offering materials will generally beproblematic under Rule 506(b)’s ban on general advertising orsolicitation.25

Offerings under Rule 504 may be conducted publicly if they areregistered in a state, and disclosure documents are delivered toinvestors, or if the offers are limited to accredited investors and gen-eral advertising or solicitation is permitted under state blue sky laws.Rule 506(c) permits general solicitation and general advertising so longas the securities are only sold to “accredited investors” and the issuertakes reasonable steps to verify the “accredited investor” status ofinvestors. The determination of the reasonableness of the steps takento verify an “accredited investor” is an objective assessment by anissuer. An issuer is required to consider the facts and circumstancesof each purchaser and the transaction. Nevertheless, Rule 506(c)provides a non-exclusive list of methods that issuers may use tosatisfy the verification requirement for individual investors. Theverification methods consist of:

• verification based on income, by reviewing copies of anyInternal Revenue Service form that reports income, such asForm W-2, Form 1099, Schedule K-1 of Form 1065, and a filedForm 1040;

• verification on net worth, by reviewing specific types of doc-umentation dated within the prior three months, such as bankstatements, brokerage statements, certificates of deposit, taxassessments and a credit report from at least one of the nation-wide consumer reporting agencies; and obtaining a writtenrepresentation from the investor;

• a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a certifiedpublic accountant stating that such person or entity has taken

22. See, e.g., id. and Lamp Technologies, Inc., SEC No-Action Letter (May 29,1997).

23. See Securities Act Release No. 33-7856 (May 4, 2000). In this release, theSEC indicated that some third-party sponsors of websites may be requiredto register as broker-dealers.

24. See Securities Act § 4(b).25. Securities Act Release No. 33-7856.


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reasonable steps to verify that the purchaser is an accreditedinvestor within the last three months and has determined thatsuch purchaser is an accredited investor; and

• in regard to an investor who purchased securities in an issuer ’sRule 506(b) offering as an accredited investor beforeSeptember 23, 2013, and remains an investor of the issuer, awritten certification by such investor at the time of sale that heor she qualifies as an accredited investor.

Importantly, the elimination of the prohibition on general solici-tation and general advertising in connection with Rule 506(c)offerings applies to funds relying on sections 3(c)(1) and 3(c)(7) ofthe Investment Company Act, and permits them to use broad-basedadvertising. Although these funds are still restricted under the Invest-ment Company Act from making a “public offering,” the JOBS Actspecifically provides that general solicitation and general advertisingunder Rule 506(c) will not constitute a public offering for purposesof the federal securities, including the Investment Company Act.

The JOBS Act also created an exemption from broker-dealerregistration for certain persons in connection with the issuance ofsecurities in compliance with Rule 506(b) or Rule 506(c).26 In thisregard, persons that (a) maintain a platform or mechanism thatpermits the offer, sale, purchase, or negotiation of or with respect tosecurities, or permits general solicitations, general advertisements, orsimilar or related activities by issuers of such securities, whetheronline, in person, or through any other means; (b) co-invest in suchsecurities; or (c) provide ancillary services with respect to suchsecurities, will not be required to register as broker-dealers. However,compensation may not be paid, and such persons may not be inpossession of customer funds or securities, in connection with thepurchase or sale of the securities.

§ 2:7.5 Counting Investors

Rule 506(b) limits the number of “purchasers” to an unlimitednumber of accredited investors, and up to thirty-five non-accreditedinvestors in any offering.27 The non-accredited investors must haveknowledge and experience in financial and business matters such that

26. The broker-dealer exemption is contained in Securities Act § 4(b).27. Counting investors is one important way in which section 4(a)(2) differs

from Rule 506(b) of Regulation D. For section 4(a)(2) purposes, bothofferors and purchasers are taken into account, whereas, for Rule 506(b)of Regulation D purposes, only actual purchasers, not offerors, are con-sidered so long as the issuer does not violate the ban on general advertisingor solicitation.


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they are capable of evaluating the merits and risks of an investmentin the issuer ’s securities, or the issuer must reasonably believe imme-diately prior to making any sale that such purchasers come withinthis description.28

This requirement may be met either by the purchaser alone or witha purchaser representative. A purchaser representative, as defined byRule 501(h), is a person who has knowledge and experience in finan-cial and business matters such that he or she is capable of evaluatingthe merits and risks of the prospective investment. The purchaserrepresentative is obligated to act in the interest of the purchaser.A purchaser representative is generally an attorney or an accountant.A purchaser representative, however, may not be an affiliate, director,officer, or other employee of the issuer, or a 10% beneficial ownerof the issuer, unless: (1) the purchaser is related to the purchaserrepresentative by blood, marriage, or adoption, nor more remote thana first cousin; (2) the purchaser is a trust or estate in which the pur-chaser representative and any persons related to him collectively havea 50% beneficial interest, or of which the purchaser representativeserves as trustee, executor, or in any similar capacity; or (3) the pur-chaser is a corporation or other organization of which the purchaserrepresentative and any persons related to him collectively are 50%beneficial owners. The purchaser must acknowledge the purchaserrepresentative as such in writing. The purchaser representative mustdisclose to the purchaser in writing prior to the sale of securities anymaterial relationship between the purchaser representative or hisaffiliates and the issuer that exists, that has been mutually contem-plated, or that existed during the previous two years, and any com-pensation to be received as a result of such relationship.29

In addition, Rule 501(e) establishes certain other rules for countingpurchasers who are non-accredited investors. Rule 501(e) providesthat a purchaser who is a relative, spouse, or relative of the spouseof a purchaser who has the same principal residence as the purchaseris not counted when calculating the number of purchasers who are

28. The issuer will obtain certain relevant information from prospectiveinvestors by means of a purchaser suitability questionnaire and/or sub-scription agreement to ensure that non-accredited investors have therequisite knowledge and experience in financial and business matters.For example, the questionnaire may ask questions regarding the investor ’seducation, occupation, securities holdings, and whether the investor haspurchased securities in private offerings in the past. In addition, the issuerwill likely require the investor to represent and warrant that he or she hasknowledge and experience in financial and business matters such that heor she is capable of evaluating the merits and risks of an investment in theissuer ’s securities.

29. Regulation D Rule 501(h).


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non-accredited investors. A trust or estate in which a non-accreditedinvestor purchaser and any of his relatives collectively own morethan a 50% beneficial interest is not counted as a non-accreditedinvestor purchaser, nor is a corporation or other entity of which anon-accredited investor purchaser and any of his relatives collectivelybeneficially own more than 50% of the equity. Moreover, a corpora-tion, partnership, or other entity is counted as one non-accreditedinvestor purchaser, unless the entity was organized for the specificpurpose of acquiring the securities offered and all equity owners of theentity are not accredited investors. In such case, each equity ownerwould be counted as a non-accredited investor purchaser, subject tothe provisions for counting non-accredited investor purchasersdescribed above. A noncontributory employee benefit plan under theEmployee Retirement Income Security Act of 1976, as amended(ERISA), is counted as one non-accredited investor purchaser providedthat the trustee makes all investment decisions for such a plan.30

Importantly, clients of an investment adviser or customers of abroker or dealer are considered the “purchasers” under RegulationD regardless of the amount of discretion given to the investmentadviser or broker or dealer to act on behalf of the client or customer.31

As a result, issuers will be required to look-through to such clientsand customers for purposes of counting non-accredited investors in aRule 506(b) securities offering.

§ 2:7.6 Accredited Investors

“Accredited investors” are institutions and companies that invest insecurities offerings, as well as individuals with significant income orhigh net worth. Such investors are deemed to have the knowledge andexperience in business matters to evaluate the merits and risks ofan investment in the securities and to bear the economic risk of aninvestment in the securities. Although investors with significantincome or high net worth may have no knowledge or experience inbusiness matters and may be unable to evaluate investment opportu-nities, they are deemed to be sophisticated by virtue of their wealthand do not have to satisfy any independent financial sophisticationstandards. An accredited investor as defined in Rule 501(a) is aninvestor who meets at least one of the following standards at thetime of the sale:

30. These counting rules may differ from the counting of beneficial ownersin private investment vehicles relying upon the section 3(c)(1) exclusionfrom registration under the Investment Company Act. Section 3(c)(1) isdiscussed in greater detail in infra chapter 11.

31. See Note to Rule 501(e) of Regulation D.


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(a) any national or state bank or any savings and loan associationor other similar institution, whether acting in its individual orfiduciary capacity;

(b) any registered broker or dealer;

(c) any insurance company;

(d) any investment company registered or regulated under theInvestment Company Act, such as a mutual fund, or abusiness development company, respectively;

(e) any small business investment company licensed by the U.S.Small Business Administration;

(f) any plan established and maintained by a state, its politicalsubdivisions, or any agency or instrumentality thereof, for thebenefits of its employees, if such plan has total assets in excessof $5 million;

(g) any employee benefit plan within the meaning of ERISA, if theinvestment decision is made by a plan fiduciary that is either abank, savings and loan association, insurance company, orregistered investment adviser, or if the plan has total assetsin excess of $5 million or, if a self-directed plan, withinvestment decisions made solely by persons that areaccredited investors;

(h) any private business development company;

(i) any organization described in section 501(c)(3) of the InternalRevenue Code of 1986, as amended (the “Code”), corporation,Massachusetts or similar business trust, or partnership, notformed for the specific purpose of acquiring the securitiesoffered, with total assets in excess of $5 million;

(j) any director, executive officer, or general partner of the issueror of the general partner of the issuer;

(k) any natural person whose individual net worth, or joint networth with that person’s spouse, at the time of purchaseexceeds $1 million (the “Net Worth Test”);

(l) any natural person who had an individual income in excessof $200,000 in each of the two most recent years or jointincome with that person’s spouse in excess of $300,000in each of those years and has a reasonable expectationof reaching the same income level in the current year(the “Income Test”);


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(m) any trust with total assets in excess of $5 million not formedfor the specific purpose of acquiring the securities offered,whose purchase is directed by a person who has knowledgeand experience in financial and business matters such that heis capable of evaluating the merits and risks of the prospectiveinvestment; or

(n) any entity in which all of the equity owners are accreditedinvestors.

On July 21, 2010, President Obama signed the Dodd-Frank Actinto law. The Dodd-Frank Act is the result of an effort to transformthe supervision of banks and other financial institutions in response tothe financial crisis that began in 2007. In addition to significantlyimpacting the operations of entities in the financial services industry,the legislation affects securities offerings conducted by any entityunder Rule 506 of Regulation D. In particular, section 413 of theDodd-Frank Act revised the “accredited investor” definition for naturalpersons to specifically exclude the value of a person’s primary resi-dence as an asset from the Net Worth Test.32

The Dodd-Frank Act requires the SEC to review and modify the“accredited investor” definition every four years. Thus, althoughthe Dodd-Frank Act does not directly modify the Income Test orincrease the dollar threshold for the Net Worth Test, the SEC maydo so as part of its subsequent review process.

§ 2:7.7 Disclosure Obligations

Although offerings pursuant to Regulation D are exempt from theregistration requirements of the Securities Act, such offerings are notexempt from the anti-fraud provisions of the federal securities laws.In particular, section 10(b) of the Exchange Act, and Rule 10b-5promulgated thereunder, apply to the purchase and sale of anysecurities, regardless of the exemption from registration. Rule 10b-5prohibits misstatements or omissions of material information inconnection with the purchase and sale of securities. Information is

32. On December 21, 2011, the SEC amended its rules to codify this change tothe Net Worth Test. In addition, the amended rules provide that indebted-ness secured by a person’s primary residence, up to the fair market value ofthe residence, will not be treated as a liability, except that if the amount ofsuch indebtedness outstanding at the time of the sale of securities exceedsthe amount outstanding sixty days before such time (other than as a resultof the acquisition of the primary residence), the amount of such excessshall be included as a liability. Finally, indebtedness secured by a person’sprimary residence in excess of the property ’s fair market value is treatedas a liability under the amended rules.


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material if there is a substantial likelihood that a reasonable investorwould consider it important in making a decision to buy or sell asecurity. The U.S. Supreme Court explained this test as requiring asubstantial likelihood that the disclosure of omitted facts would havebeen viewed by a reasonable investor as having significantly alteredthe “total mix” of information made available.33 In other words, theissuer should disclose all of the facts regarding the company and thesecurities offered that would be important to potential investors whendeciding whether to purchase the issuer ’s securities. Such disclosure istypically accomplished by means of an offering memorandum.

In addition to the general Rule 10b-5 requirements, specificdisclosure requirements apply to offerings made to non-accreditedinvestors under Rule 506(b). Rule 502(b)(2) requires that such inves-tors receive certain nonfinancial statement information and financialstatement information from the issuer. Regulation D also requires theissuer to provide audited financial statements. An issuer must also becareful to comply with the specific date requirements in Rule 502(b)(2)for financial statements in offerings involving non-accreditedinvestors.

Rule 502(b)(2) also requires that the issuer make available to suchnon-accredited investors the opportunity to ask questions and receiveanswers concerning the terms and conditions of the offering and toobtain additional information necessary to verify the accuracy of theinformation provided in the offering memorandum, to the extent theissuer possesses such information or can acquire it without unrea-sonable effort or expense. The issuer must also advise such purchasersof the limitations on resale. Both of these requirements may besatisfied by including the appropriate disclosure in the offeringmemorandum.

Rule 504 offerings and offerings made solely to accredited investorsunder Rule 506(b) or 506(c) are not subject to any specific disclosurerequirements or the requirement to obtain audited financial state-ments. However, the Rule 10b-5 requirements, as discussed above,apply to such offerings. Offering memoranda for offerings made onlyto accredited investors generally contain significant disclosure to theextent necessary to satisfy an issuer ’s general disclosure obligationsand to adequately describe the offering such that prospective investorswill be interested in investing. As discussed, such offering memor-anda generally include information on resale restrictions, as well asoffer to answer questions or provide additional information.

33. See Basic Inc. v. Levinson, 485 U.S. 224, 232 (1988); TSC Indus., Inc. v.Northway, Inc., 426 U.S. 438, 449 (1976).


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§ 2:7.8 “Bad Actor” Disqualification Provisions

Effective January 20, 2017, Rule 504 now contains provisions thatmake the exemption unavailable for any securities offering in whichcertain “felons” and “bad actors” are involved. As a result of a mandatecontained in section 926 of the Dodd-Frank Act, the SEC adoptedrules that disqualify an offering or sale of securities made in relianceupon Rule 506 if it involves certain “felons” and “bad actors.” Specif-ically, an issuer cannot rely on Rule 504, Rule 506(b), or Rule 506(c) ifthe issuer or any other person covered by the rules had a “disqualify-ing event.” The disqualification rule covers the issuer, including itspredecessors and affiliated issuers, as well as:

• directors and certain officers, general partners, and managingmembers of the issuer;

• 20% beneficial owners of the issuer;

• promoters;

• investment managers and principals of pooled investmentfunds; and

• persons compensated for soliciting investors as well as thegeneral partners, directors, officers, and managing members ofany compensated solicitor.

Under the rules, a “disqualifying event” includes:

• Criminal convictions in connection with the purchase or sale ofa security, making of a false filing with the SEC, or arising outof the conduct of certain types of financial intermediaries.The criminal conviction must have occurred within ten yearsof the proposed sale of securities (or five years in the case of theissuer and its predecessors and affiliated issuers).

• Court injunctions and restraining orders in connection withthe purchase or sale of a security, making of a false filing withthe SEC, or arising out of the conduct of certain types offinancial intermediaries. The injunction or restraining ordermust have occurred within five years of the proposed sale ofsecurities.

• Final orders from the Commodity Futures Trading Commis-sion; federal banking agencies; the National Credit UnionAdministration; or state regulators of securities, insurance,banking, savings associations, or credit unions that:

° bar the issuer from associating with a regulated entity;engaging in the business of securities, insurance or banking;or engaging in savings association or credit union activities;or


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° are based on fraudulent, manipulative, or deceptive conductand are issued within ten years of the proposed sale ofsecurities.

• Certain SEC disciplinary orders relating to brokers, dealers,municipal securities dealers, investment companies, and invest-ment advisers and their associated persons.

• SEC cease-and-desist orders related to violations of certain anti-fraud provisions and registration requirements of the federalsecurities laws.

• SEC stop orders and orders suspending the Regulation Aexemption issued within five years of the proposed sale ofsecurities.

• Suspension or expulsion from membership in a self-regulatoryorganization (SRO) or from association with an SRO member.

• U.S. Postal Service false representation orders issued withinfive years before the proposed sale of securities.

The rules provide an exception from disqualification when theissuer can show it did not know and, in the exercise of reasonablecare, could not have known that a covered person with a disqualify-ing event participated in the offering.

Importantly, the disqualification applies only for disqualifyingevents that occur after September 23, 2013, but matters that existedbefore such date and would otherwise be disqualifying are subject to amandatory disclosure requirement to investors.

§ 2:7.9 Form DForm D serves as the official notice of an offering of securities made

without registration under the Securities Act in reliance on anexemption provided by Regulation D. Rule 503 requires each issuerthat sells its securities in reliance on an exemption under RegulationD to file Form D with the SEC. The filing of Form D, however, is not acondition to establishing an exemption under Regulation D. This doesnot mean that filing Form D is optional. Rather, the failure to fileForm D in a timely manner will not affect the availability of anexemption under Regulation D.34

Form D must be filed with the SEC no later than fifteen days afterthe first sale of securities. In some cases, there may be uncertainty asto when the first sale of a security occurs. The SEC staff has clarifiedwhen the first sale occurs in certain situations. For instance, forpurposes of a minimum-maximum offering, where subscriptions are

34. See Rule 508 of Regulation D.


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held in escrow pending receipt of the minimum subscription amount,the SEC staff has stated that the first sale occurs when the firstsubscription agreement is received and the first subscription isdeposited into escrow.35 When Regulation D is used in connectionwith a stock option plan, the SEC staff has said that the Form Dshould be filed not later than fifteen days after the first option exercise.In order to avoid questions concerning when the first “sale” ofsecurities in an offering under Regulation D takes place, an issuermay file its Form D as soon as the offering commences even though nosales have yet been made. Because Rule 506 allows an unlimitedamount of securities to be sold, it is customary for private investmentvehicles engaged in a continuous offering to indicate a relatively highoffering amount on the Form D.

§ 2:7.10 Recent Amendments to Form DOn February 12, 2008, the SEC adopted a final rule adopting

revisions to Form D.36 The final rule mandates electronic filing ofForm D and revises it to simplify and restructure the form as well asupdate and revise its information requirements. The new rules alsoclarify when amendments to Form D are required.

The substantive amendments to Form D require that issuers selecttheir industry and revenue range from dropdown menus, in place ofthe current requirement to provide a description of their business.Issuers are also no longer required to identify owners of 10% or more ofa class of its securities as “related persons” and Form D no longerenables the issuer to check a box to indicate a claim to the UniformLimited Offering Exemption (ULOE), the state equivalent to Regula-tion D, from state securities law requirements. However, issuers stillare required to identify the exemption they are claiming for theoffering, now with increased specificity.

New Form D also requires the issuer to report the date of first salein the offering and whether the offering is expected to last more thanone year. It replaces: (i) the requirement to disclose information on awide variety of expenses with a requirement to report only expensespaid for sales commissions and finders’ fees; (ii) the requirement todisclose the use of proceeds with a requirement to report use ofproceeds only to the extent used to make payments to executiveofficers, directors and promoters; and (iii) the current federal and statesignature requirements with a combined signature requirement. NewForm D also permits free writing in “clarification” fields to the extentnecessary to clarify certain information provided.

35. See Interpretive Release on Regulation D, SEC Release No. 33-6455(Mar. 3, 1983).

36. Securities Act Release No. 33-8891 (Feb. 6, 2008).


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In the future, amendments may be adopted to allow for “one-stopfiling” of Form D with the SEC and the states designated by the issuerin a single electronic transaction. This change is expected to reducethe costs and burdens of preparing and filing Form D with the SEC andstate securities regulators; however, it has not yet been implementedand may not be implemented for some time.

The prior rules regarding Form D were unclear with respect to whena previously filed Form D was required to be amended. The new rulesclarify that an amendment is required in only three situations:

• to correct a material error or mistake of fact in a prior filing;

• to reflect a material change in the offering; or

• one year after the initial filing, and once a year thereafter, if theoffering is still continuing.

The new rules also provide that certain changes (such as a change inthe amount of securities sold in the offering or a change in the totalnumber of investors, or in the number of non-accredited investors, aslong as the change does not increase the number of non-accreditedinvestors to more than thirty-five) in the offering are not deemed“material” changes requiring an amendment.

Also, in connection with the adoption of Rule 506(c), the SECamended Form D to require an issuer to specify whether it is relyingon Rule 506(b) or Rule 506(c) in connection with the Rule 506 offering.The SEC has stated that an issuer may not check both the Rule 506(b)and Rule 506(c) boxes at the same time for the same offering.

Finally, as a result of the adoption of the “bad actor” provisionsrelating to Rule 506 offerings discussed above, the certification to thesignature block of the Form D has been expanded so that issuersclaiming a Rule 506 exemption will be required to confirm that theoffering is not disqualified from reliance on the Rule 506 exemption.

§ 2:7.11 Substantial ComplianceRule 508, or the “innocent and immaterial” defense, provides that

minor failures to comply with certain technical requirements ofRegulation D will not result in the loss of the exemption. If an issuermakes a good faith and reasonable attempt to comply with all applic-able requirements of Regulation D, the issuer ’s failure to comply willnot result in the loss of the exemption for an offer or sale to aparticular investor, provided that the failure to comply did not pertainto a requirement directly intended to protect that particular investorand was insignificant as compared to the offering as a whole.

Certain requirements are deemed significant with respect to theoffering as a whole. Under Rule 508, the prohibition against general


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advertising or solicitation and the limitation on the number of pur-chasers are deemed significant. In addition, for purposes of Rule 504,Rule 508 deems the $5 million aggregate offering price to be significant.

A failure to comply with Regulation D is actionable by the SEC. Inaddition, an individual investor may sue the issuer for rescission ifthe issuer violates a requirement intended to protect that particularinvestor, such as the failure to provide a non-accredited investor withan offering memorandum. However, other investors in the offeringwould not be able to sue for rescission, unless the failure to complywas significant to the offering as a whole. In the previous example,the failure to provide one non-accredited investor with an offeringmemorandum would not be significant to the offering as a whole.

§ 2:7.12 Limitations on ResaleSecurities acquired in a Regulation D offering under Rule 506 are

“restricted” securities. In other words, such securities may not be resoldwithout registration or an exemption from registration. Offeringsconducted under Rule 504 result in the purchaser acquiring restrictedsecurities unless the offering is registered in a state and disclosuredocuments are delivered to investors, or the offering is limited toaccredited investors and general advertising or solicitation is permittedunder state blue sky laws. To ensure that investors who buy the issuer ’ssecurities do not resell the securities without registration or an exemp-tion therefrom and, thus, adversely affect the issuer ’s Regulation Dexemption, the issuer must take reasonable care to make sure that suchinvestors are not “underwriters” under section 2(a)(11) of the SecuritiesAct. Accordingly, the issuer must take reasonable care to ensure thatsuch investors are not purchasing the securities with a view to the dis-tribution or resale thereof.

Rule 502(d) provides a nonexclusive safe harbor by which an issuermay establish reasonable care. The issuer must make a reasonableinquiry to determine whether the investor is purchasing the securitiesfor himself. This can be accomplished by obtaining a representationfrom the investor that the securities are being purchased for himselfand not with a view to the distribution or resale thereof. The issueralso discloses in the offering memorandum that the securities havenot been registered and, thus, may not be resold without registrationor an exemption from registration. In addition, the issuer may place arestrictive legend on the stock certificate or other instrument thatevidences the securities, stating that the securities have not beenregistered and setting forth the restrictions on resale. The restrictivelegend puts a potential future buyer on notice as to the restrictedstatus of the securities.


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§ 2:7.13 IntegrationThe integration provisions of Regulation D and the Securities Act,

in general, come into effect when an issuer is conducting two or moreofferings of securities during the same general time period. If two ormore offerings are “integrated” or deemed to be a single offering, theissuer may no longer have a valid exemption from registration.Accordingly, issuers must take care to avoid integration. Integrationtypically arises in one of two scenarios—either the issuer is conduct-ing two or more exempt offerings at or about the same time, or theissuer conducts an exempt offering followed by a public offering.Regulation D contains a safe harbor for Regulation D offerings madeat least six months after completion of another offering.

§ 2:7.14 Integration of Exempt Offerings and theRegulation D Safe Harbor

Integration is an especially important concept for purposes of theRegulation D exemptions when one or more of an issuer ’s offeringexemptions involve an aggregate offering price limitation or involve alimitation on the number of purchasers. Rule 502(a) generally providesthat all sales that are part of the same Regulation D offering must meetthe requirements of Regulation D. Hence, if two offerings are integratedand deemed to be a single offering, to be exempt under Regulation D,the offering as a whole must satisfy the requirements for a particularRegulation D exemption. This means that offering price or purchaserrequirements that had not been contemplated prior to commencingthe offerings may apply. This is one of the principal reasons that it ispreferable to rely on Rule 506 and to limit the offering to accreditedinvestors only. There is no limit on aggregate offering price and theoffering can be made to a virtually unlimited number of accreditedinvestors.

The safe harbor, which is also found in Rule 502(a), states thatoffers and sales made more than six months before the commence-ment of a Regulation D offering or more than six months aftercompletion of a Regulation D offering will not be integrated with theRegulation D offering, provided that, during those six-month periods,there are no offers or sales of securities by or for the issuer that are of asame or similar class as those offered or sold under Regulation D. Thisdoes not necessarily mean that if an offering is conducted within sixmonths of a Regulation D offering the two offerings will be integrated.Rather, the Note to Rule 502(a) states that if the safe harbor is notavailable to the offerings, the integration determination depends onthe particular facts or circumstances of the offerings. In particular,the following factors should be considered in determining whether


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offerings should be integrated: (1) whether the sales are part of a singleplan of financing; (2) whether the sales involve issuance of the sameclass of securities; (3) whether the sales have been made at or about thesame time; (4) whether the same type of consideration is received; and(5) whether the sales are made for the same general purpose.37

The SEC has provided little guidance regarding how to apply thisfacts and circumstances test, and it is unclear how each factor shouldbe weighed when applying the test.

§ 2:7.15 Integration of Exempt Offering and SubsequentPublic Offering—“Gun Jumping”

When an issuer conducts an exempt offering at or around the sametime as a public offering, there is the possibility that the securitiesoffering will be viewed as a single offering for integration purposes.Thus, the exempt offering would be integrated with the public offer-ing, and the exempt offering would lack a valid exemption. Rule 152under the Securities Act provides a safe harbor for such offerings.38

Pursuant to Rule 152, the exempt offering will not be integrated withthe public offering so long as the issuer completes its exempt offeringprior to the filing of the registration statement.39 For integrationpurposes, the exempt offering will be deemed complete once theinvestors have executed binding subscription agreements.40 As withthe Rule 502(a) safe harbor, described above, if the Rule 152 safe harboris unavailable to the issuer, the offerings will be subject to the samefacts and circumstances analysis described in Release No. 33-4552.

In addition, Rule 155 under the Securities Act provides two safeharbors from integration, one for undertaking a registered publicoffering after abandoning an exempt offering, and the other for under-taking an exempt offering after abandoning a registered publicoffering.41

The SEC also issued significant, new interpretive advice regardingthe ability to conduct an exempt offering after the filing of a registra-tion statement in connection with a public offering.42

37. These factors are the same factors set forth in Release No. 33-4552 withrespect to the section 4(a)(2) private offering exemption.

38. Importantly, Rule 152 under the Securities Act provides protection for privateofferings under section 4(a)(2) and Rule 506 of Regulation D, but not for thesection 3(b) exemptions, including Rule 504 of Regulation D.

39. See Verticom, Inc., SEC No-Action Letter (Feb. 12, 1986).40. See Black Box, Inc., SEC No-Action Letter (June 26, 1990).41. Similar to Rule 152 under the Securities Act, Rule 155 under the Securities

Act only provides protection for private offerings under section 4(a)(2) andRule 506 of Regulation D, but not for the section 3(b) exemptions,including Rule 504 of Regulation D.

42. Securities Act Release No. 33-8828 (Aug. 7, 2007).


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Specifically, the SEC stated that, while there are many situations inwhich the filing of a registration statement could serve as a generalsolicitation or general advertising for a concurrent private offering, thefiling of a registration statement does not, per se, eliminate a com-pany ’s ability to conduct a concurrent private offering, whether it iscommenced before or after the filing of the registration statement.Prior to the issuance of such interpretive advice, the SEC had generallytaken the position that the mere filing of a registration statement fora specific offering, even without any marketing activity, constitutedgeneral solicitation of the security being registered and, as a result, theexemption for a private offering under section 4(a)(2) or Rule 506(b)of the same security undertaken after the filing of the registrationstatement would not be available as a result of the general solicitationif the private offering were integrated with the registered offering.

§ 2:7.16 Securities Offerings Available UnderRegulation D

As discussed above, private and public companies can use Regula-tion D for purposes of offering securities. In addition, Regulation D canbe used by different kinds of entities to offer different kinds of securities.For example, corporations, partnerships, and limited liability companiescan all use Regulation D, and these entities can offer and sell, amongothers, common stock, preferred stock, warrants and other equitysecurities, and notes, debentures and other debt securities.

Regulation D can also be used by an issuer for securities to be issuedin a business combination, such as a merger or share exchange.Regulation D, however, is not available for sales of securities by anaffiliate of the issuer, such as a director, officer, or 10% or morebeneficial shareholder, nor may it be used for resales of the issuer ’ssecurities.

§ 2:8 Proposed Revisions to Regulation D

As discussed above, the SEC adopted new Rule 506(c) to permitgeneral solicitation and general advertising. In connection with itsadoption of new Rule 506(c), the SEC has proposed a number ofchanges to Regulation D and Form D. Specifically, the proposedamendments would require the issuer to file an Advance Form D atleast fifteen calendar days before commencing general solicitation fora Rule 506(c) offering. The Advance Form D would cover informationabout the issuer, related parties, the exemption being claimed for theoffering, and similar details.

After filing the Advance Form D, the issuer would be required tofile an amendment containing the remaining information required


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by Form D within fifteen calendar days after the date of first sale ofsecurities in the offering, as is currently required.

In order to catalogue the number of offerings made underRules 506(b) and 506(c), as well as the total capital raised undersuch offerings, the SEC has proposed to require the filing of a Form D“closing amendment” upon the completion of the offering. Thisclosing amendment would be made within thirty calendar daysafter the termination of any Rule 506 offering, unless an issuerhas already provided the required information and “checked thebox for a closing filing in a previous Form D filing.”

Rule 507 currently only disqualifies an issuer from using Regula-tion D if the issuer has been enjoined by a court for violating the filingrequirements in Rule 503. The SEC has proposed an amendment toRegulation D that would further disqualify an issuer, automatically,from using Rule 506(b) or Rule 506(c) in any new offering for one yearif the issuer, or its predecessor or affiliate, failed to comply with FormD filing requirements in a Rule 506 offering within the past five years.The one-year disqualification would not commence until after thefiling of all required Form D filings.

The SEC has also proposed revisions to Form D that are intendedto enhance the SEC’s (and investors’) ability to evaluate the use ofRule 506(c) by requiring information in Form D on the types ofinvestors that participate in Rule 506(c) offerings, the issuer ’s plansto engage in general solicitation, and the methods used to satisfythe “accredited investor” verification requirement in Rule 506(c).

Proposed new items of Form D would require issuers to provideadditional information with respect to Rule 506 offerings, including,if the issuer used a broker-dealer and the types of general solicitationmaterials used or to be used in Rule 506(c) offerings.

As a result of an issuers’ ability to solicit generally in Rule 506(c)offerings, the SEC has also proposed requirements for issuers to betterinform potential investors as to whether they are qualified to partici-pate in these offerings, the type of offerings being conducted andcertain potential risks associated with such offerings.

Hedge funds, venture capital funds, and private equity funds wouldbe required to include a legend on any written general solicitationmaterials noting that the securities offered are not subject to theInvestment Company Act protections offered to mutual fund inves-tors. Further, because of the emphasis that investors place on fundperformance when selecting investments, the proposed rules wouldrequire any private fund written general solicitation materials thatinclude performance data to include additional cautionary legends.

If the proposed rules are adopted, a temporary rule (which wouldexpire two years after its effective date) would require issuers conduct-ing an offering in reliance on Rule 506(c) to submit electronically to


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the SEC any written general solicitation materials used in suchoffering no later than the date the materials are used in the offering.

The SEC is also proposing to apply the guidance in Rule 156, whichsets forth interpretive guidance on the type of information mutualfunds include in their sales materials, to the sales materials of privatefunds.

Some of these proposed amendments would also apply to Rule 504offerings.

The comment period for this proposed rule expired on September 23,2013, and the SEC has not taken any further action on the proposedrule.

§ 2:9 Interaction of Regulation S with Regulation D

In 1990, the SEC adopted Regulation S under the Securities Act toclarify the extraterritorial application of the registration provisions ofthe Securities Act.43 Rule 901 of Regulation S generally provides thatoffers and sales that occur outside the United States are not “offers” or“sales” under section 5 of the Securities Act. In order for a transactionto occur outside the United States for purposes of Regulation S and,thus, to avoid registration under the Securities Act, both the offer andthe sale of securities must occur outside the United States. Indetermining whether the offer and sale have occurred outside theUnited States, a facts and circumstances test is applied. The concept ofthe securities coming to rest outside of the United States is generallydeterminative as to whether the offer and sale occurred outside theUnited States.

Regulation S specifically provides for two safe harbors which deemcertain offers and sales to be outside the United States and, thus, notsubject to the section 5 registration requirements—the issuer safe harborand the resale safe harbor. Both safe harbors are subject to two generalconditions. The offer or sale must be made in an “offshore transaction,”and no “directed selling efforts” may be made in the United States.

An offer or sale of securities is made in an “offshore transaction” if(1) the offer is not made to a person in the United States, and (2) either(a) at the time the buy order is originated, the buyer is outside theUnited States, or the seller and any person acting on its behalfreasonably believe that the buyer is outside the United States, or(b)(i) if relying on the issuer safe harbor, the transaction is executed in,on or through a physical trading floor of an established foreignsecurities exchange that is located outside the United States, or (ii) if

43. Securities Act Release No. 33-6863 (Apr. 24, 1990). Regulation S isdiscussed in detail in infra chapter 3.


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relying on the resale safe harbor, the transaction is executed in, on orthrough the facilities of a designated offshore securities market, andneither the seller nor any person acting on its behalf believes that thetransaction has been pre-arranged with a buyer in the United States.

“Directed selling efforts” include activities undertaken for thepurpose of, or that could reasonably be expected to have the effect of,conditioning the market in the United States. Such activities includeplacing an advertisement in a publication with a general circulation inthe United States referring to the Regulation S offering, with theexception of tombstone advertisements and advertisements requiredto be published under U.S. or foreign law, and certain distributions ofbroker-dealer ’s quotations.

Regulation S and Regulation D interact when an issuer simultaneouslyconducts a foreign public offering and a domestic Regulation D offer-ing. Although the issuer would be conducting two offerings during thesame time period, the Note to Rule 502(a) under Regulation D providesthat a transaction which is exempt pursuant to Regulation D will not beintegrated with a simultaneous offering being made outside the UnitedStates in compliance with Regulation S.44

Also, in light of the provision permitting general solicitation andgeneral advertising in connection with Rule 506(c) offerings, the SEChas provided interpretive guidance to permit reliance on Regulation Sand Rule 506(c) in connection with a simultaneous foreign and domes-tic offering.45

§ 2:10 Rule 144A Transactions

Rule 144A under the Securities Act provides a non-exclusive safeharbor resale exemption for offers and sales of eligible restrictedsecurities to qualified institutional buyers (QIBs) by persons otherthan the issuers of such securities. This rule permits securitiesacquired in a private placement exemption to be resold to QIBswithout the person making the resale being considered an “under-writer” and therefore without destroying an issuer ’s section 4(a)(2)

44. As noted in infra chapter 12, a private investment vehicle may make aprivate offering in the United States pursuant to Regulation D, coincidentwith a public offering of the fund’s securities abroad in compliance withRegulation S, provided that upon completion of the offering there are nomore than 100 persons resident in the United States who are beneficialowners of the fund’s securities or the fund relies upon section 3(c)(7) of theInvestment Company Act. See Goodwin, Procter & Hoar LLP, SEC No-Action Letter (Feb. 28, 1997); Touche Remnant & Co., Stein, Roe &Farnham, SEC No-Action Letter (Aug. 27, 1984).

45. This interpretive guidance also applies to Rule 144A offerings that involvethe use of general solicitation or advertising.


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or Rule 506(b) exemption, whether or not the purchasers of thesesecurities purchased them with a view to reselling such securities. Ina typical Rule 144A transaction, an issuer first sells restricted secu-rities to a broker-dealer (often referred to as an “initial purchaser”) in aprivate placement exempt from registration under section 4(a)(2) orRule 506(b) of the Securities Act. The initial purchaser then imme-diately reoffers and resells the securities to QIBs using the exemptionprovided by Rule 144A.

In order for the Rule 144A resale exemption to be available, thesecurities must be offered or sold only to QIBs or to an offeree orpurchaser that the seller and any person acting on behalf of the sellerreasonably believes is a QIB. This can be established through certainreasonably current publicly available financial information withrespect to the purchaser or through an officer ’s certification of thepurchaser.

Under Rule 144A(a)(l), QIBs include any of the following entities,acting for their own account or the accounts of other QIBs, which inthe aggregate own and invest on a discretionary basis at least$100 million in securities46 of issuers that are not affiliated with theQIB:

(a) any insurance company;

(b) any registered investment company47 or any business devel-opment company;

(c) any small business investment company;

(d) state or local employee benefit plans;

(e) title I ERISA employee benefit plans;

(f) any trust fund comprised of plans set forth under (d) and (e),above (other than IRAs);

(g) any 501(c)(3) organization, corporation (other than banking orcertain financial institution organizations), partnership, orMassachusetts or similar business trust;

(h) any investment adviser registered under the Investment Ad-visers Act of 1940, as amended;

46. Certain securities and other instruments are excluded for these purposes,including U.S. government securities, bank instruments, repurchaseagreements and swaps. See Rule 144A(a)(2).

47. An investment company will meet the $100 million test if it is part of afamily of investment companies which own in the aggregate at least$100 million in unaffiliated securities. See Rule 144(a)(l)(iv).


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(i) any bank, savings and loan association, or foreign bank or sav-ings and loan association or equivalent institution, provided theentity has an audited net worth of at least $25 million; or

(j) any entity all of the equity owners of which are QIBs acting fortheir own account or the accounts of other QIBs.

In addition, any registered securities dealer is a QIB if (i) the dealer isacting for its own account or the account of other QIBs and owns andinvests on a discretionary basis at least $10 million in unaffiliatedsecurities (excluding unsold allotments in public offerings), or (ii) isacting as a riskless principal on behalf of a QIB.

In addition to reselling to QIBs, in order to use Rule 144A, the selleror person acting on its behalf must take reasonable steps to ensure thatthe purchaser is aware that the seller may rely upon the Rule 144Aexemption. Only certain securities may be resold under Rule 144A.The securities must not, when issued, be of the same class as exchangelisted or inter-dealer quotation system quoted securities48 or securitiesof any registered open-end investment company, unit investmenttrust or face amount certificate company.

Also, Rule 144A requires that certain information regarding theissuer of the security be available to a purchaser to meet the require-ments of the exemption if the issuer is not a reporting company underthe Exchange Act. The holder of the security and any prospectiveholder must have the right to obtain from the issuer, upon request, thefollowing reasonably current information: (i) a very brief statement ofthe nature of the issuer ’s business and the products and services itoffers; (ii) the issuer ’s most recent balance sheet and profit and lossand retained earnings statements (which shall be audited to the extentpracticable); and (iii) similar financial statements for such part of thetwo preceding fiscal years as the issuer has been in operation.49

General solicitation and advertising is permitted in connectionwith Rule 144A offerings so long as the ultimate sales of the securitiesare made only to purchasers that are, or which the seller reasonablybelieves are, QIBs.

§ 2:11 Rule 147 and Rule 147A Intrastate Offerings

On October 26, 2016, the SEC adopted final rules to enhance howissuers can raise money to fund their businesses through intrastateofferings, which became effective on April 20, 2017. The final rules

48. Special rules apply to convertible and exchangeable securities and war-rants. See Rule 144A(a)(3)(i).

49. Rule 144A(d)(4)(i).


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amended Rule 147 under the Securities Act, which provides a safe harborfor compliance with the section 3(a)(11) exemption from registration forintrastate securities offerings. The SEC also adopted a new intrastateoffering exemption under the Securities Act, designated as Rule 147A,which, unlike amended Rule 147, has no restrictions on offers andallows offers to be accessible to out-of-state residents (so long as salesare made only to in-state residents) and issuers that are incorporatedor organized outside of the state in which the intrastate offering isconducted (provided that the issuers satisfy the “principal place ofbusiness” and “doing business” tests discussed below).

To conduct offerings pursuant to Rule 147 and Rule 147A, issuersmust meet certain requirements, which are broadly summarized inTable 2-1 below.

Table 2-1

Issuer Requirements for Conducting Rule 147and Rule 147A Offerings

Rule 147(safe harborundersection3(a)(11))

Rule147A

Issuer is organized in-state þ

Officers, partners, or managers of the issuerprimarily direct, control and coordinate theissuer’s activities (“principal place of business”)in-state

þ þ

Issuer satisfies at least one of the “doing business”requirements (as discussed below)

þ þ

Offers are limited to in-state residents or personswho the issuer reasonably believes are in-stateresidents

þ

Sales are limited to in-state residents or personswho the issuer reasonably believes are in-stateresidents

þ þ

Issuer obtains a written representation fromeach purchaser as to residency

þ þ

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“In-state” refers to the state or territory in which the issuer is aresident and, in the case of a legal entity, the state or territory in whichthe issuer is doing business at the time of sale of the security. As notedabove, in order to be considered “doing business” in-state, issuersconducting a Rule 147 or Rule 147A offering must satisfy at least oneof the following requirements:

• the issuer derived at least 80% of its consolidated gross reve-nues from the operation of a business or of real property locatedin-state or from the rendering of services in-state;

• the issuer had at least 80% of its consolidated assets located in-state, which is measured at the time of its most recent semi-annual fiscal period prior to the first offer of securities pursuantto such exemption;

• the issuer intends to use and uses at least 80% of the netproceeds from the offering towards the operation of a businessor of real property in-state, the purchase of real property locatedin-state, or the rendering of services in-state; or

• a majority of the issuer ’s employees are based in-state.

For a period of six months from the date of the sale by the issuer of asecurity pursuant to Rule 147 or Rule 147A, any resale of such securitymay be made only to persons resident within the state in which theissuer was resident at the time of sale of the security by the issuer.Issuers must also disclose these limitations on resale to offerees andpurchasers, and include a restrictive legend on the stock certificates orother instrument as described above.

Offers or sales conducted pursuant to Rule 147 or Rule 147A willnot be integrated with:

• prior offers or sales of securities; or

• subsequent offers or sales of securities that are:

○ registered under the Securities Act, except as provided inRule 147(h) or Rule 147A(h);

○ exempt from registration under Regulation A;

○ exempt from registration under Rule 701;

○ made pursuant to an employee benefit plan;

○ exempt from registration under Regulation S;

○ exempt from registration under Regulation Crowdfunding; or

○ made more than six months after completion of the Rule147 or Rule 147A offering.


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§ 2:12 Crowdfunding Exempt Offerings

The JOBS Act also added a transactional exemption to section 4(a)(6)of the Securities Act for “crowdfunding,” which allows issuers to raise upto $1 million without having to comply with section 5 of the SecuritiesAct. Crowdfunding generally involves raising funds for a commoncause or venture through the use of social media to obtain small con-tributions from many individuals. In 2015, the SEC adopted new rules(which are set forth in Regulation Crowdfunding) and forms to permitcompanies to offer and sell securities through crowdfunding in relianceon the exemption under section 4(a)(6) of the Securities Act.

The crowdfunding transaction must be conducted through a brokeror funding portal that complies with certain requirements. To use thecrowdfunding exemption, an issuer must have issued less than$1,070,000 of its securities during the twelve-month period prior tothe transaction. The crowdfunding exemption is only available to non-SEC reporting issuers that are organized in the United States and arenot investment companies or exempted investment companies (forexample, section 3(c)(1) and section 3(c)(7) funds) under the Invest-ment Company Act. The exemption limits the amount of money thatindividuals can invest across all companies for the twelve-monthperiod prior to the crowdfunding transaction. Investors with an annualincome or net worth below $107,000 are limited to investing thegreater of $2,200 or 5% of the investor ’s annual income or net worthin the issuer ’s securities. Investors with annual income or net worth of$100,000 are limited to investing up to 10% of that investor ’s annualincome or net worth in the issuer ’s securities, up to a $107,000 maxi-mum. Issuers that participate in crowdfunding are required to file withthe SEC and disclose to potential investors:

(1) the issuer ’s name, legal status, physical address, and website;

(2) the names of the directors, officers, and shareholders withmore than 20% ownership interest;

(3) a description of the issuer and the issuer ’s anticipated busi-ness plan;

(4) a description of the issuer ’s financial condition;

(5) the intended purpose for the proceeds;

(6) the target amount of the offering and the deadline to reach thatamount;

(7) the price or method of calculating the price of the securities tothe public;

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(8) a description of the ownership and capital structure of theissuer; and

(9) any other information that the SEC may require by rule toprotect investors.

With the exception of notices to direct investors to the broker orfunding portal for the crowdfunding offering, issuers are prohibitedfrom advertising any terms of an offering to investors. Issuers that relyon the crowdfunding exemption will be required to file their financialstatements and disclosures about the results of operations with theSEC and provide them to investors on an annual basis. Crowdfundingtransactions must be completed through a broker or funding portalthat is registered with the SEC and an applicable self-regulatoryorganization. As long as a funding portal remains subject to SECauthority, is a member of a national securities association, and meetsthe requirements that the SEC prescribes, the funding portal need notregister as a broker-dealer. However, a funding portal must be amember of a registered national securities association and is stillsubject to SEC examination, enforcement, rulemakings, and any otherrequirements the SEC deems appropriate.

As an intermediary, a broker or funding portal must disclose toinvestors the risks of the investment as well as any investor educationmaterials that the SEC may require. This intermediary must ensurethat the investor reviews the investor-education information andunderstands the risks, illiquidity, extent of possible loss, and natureof the company in which the investor is purchasing securities. Theintermediary must also take measures to reduce the risk of fraud withthe transaction by completing a background check on the officers,directors, and any shareholders with more than a 20% ownershipinterest. The intermediary must deliver any information received fromthe issuer to the SEC not later than twenty-one days prior to the firstday on which securities will be sold. The intermediary must alsoensure that the aggregate amount of capital raised is equal to or greaterthan the target offering amount; that investors are allowed tocancel their commitments to invest; that individual investors donot exceed their respective maximum allowed investments with allissuers; and that the privacy of any investor information collected isprotected. Intermediaries are prohibited from compensating promo-ters, finders, or lead generators, and must prohibit any director, officer,or partner of the intermediary from having a financial interest in theissuer.

Investors that purchase securities offered pursuant to the crowd-funding exemption must have a private right of action against theissuer for rescission based on material misstatements or omissions in


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connection therewith. For liability purposes, directors, partners, prin-cipal executive officers, principal financial and accounting officers, andany person who offers or sells the security in the offering is consideredan issuer. An investor that purchases securities pursuant to thecrowdfunding exemption may only resell those securities to the issuer,an accredited investor, as part of an SEC registered offering, to a familymember, or in connection with death or divorce for one year after thepurchase date of securities issued pursuant to the crowdfundingexemption. While the JOBS Act preempts state securities laws con-cerning registration, documentation, and offering requirements forsecurities issued pursuant to the crowdfunding exemption, it does notlimit or impact states’ enforcement actions concerning fraud, deceit,or unlawful conduct of an issuer, funding portal, or any other person orentity using the exemption.

§ 2:13 State Blue Sky Requirements

Securities must be registered or exempt from the registration pro-visions in each state where the securities are offered. Accordingly, thesecurities, or “blue sky” laws must be analyzed in each state in whichsecurities are offered to ensure that an appropriate exemption fromregistration exists. Typical exemptions include: (1) a numerical exemp-tion, based on a small number of offers or sales in a state; (2) the ULOE;(3) an “accredited investors” exemption if the offering is limited to suchinvestors; or (4) a Rule 506 exemption (as a result of amendmentsmade to the federal securities laws by the National Securities MarketsImprovement Act of 1996 (NSMIA)).

NSMIA significantly amended the federal securities laws, imposeduniformity on the regulation of national securities offerings, and inlarge part eliminated burdensome state regulations. NSMIA preemptsstate registration of “covered securities” as defined in section 18(b) ofthe Securities Act. Pursuant to section 18(b)(4)(F), securities issued inan exempt transaction under rules promulgated by the SEC undersection 4(a)(2) of the Securities Act are covered securities. Accordingly,securities issued in Rule 506 offerings are covered securities and notsubject to state registration.50

With respect to these securities offerings, states may continue tocollect fees and require notice filings,51 but will not be permitted toconduct “merit” review of such offerings or regulate any offering

50. NSMIA does not preempt state registration of Regulation A, Rule 504,Rule 505 or Regulation E offerings.

51. A notice filing typically consists of a Form D and a consent to service ofprocess.


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document for such offerings. In addition, states will continue to haveauthority to investigate and bring enforcement actions against fraudand deceit and against unlawful conduct by a broker or dealer inconnection with such offerings. It is customary for counsel to an issuerto review the state blue sky laws of every state in which an offering ismade to ensure a good exemption exists. This review is often sum-marized in a blue sky memorandum.

In addition, the two JOBS Act exempt offerings discussed elsewherein this chapter will preempt the authority of state securities commis-sioners to require registration and establish offering requirements forsuch offerings, subject to certain conditions.


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Documents

Limited Offerings and Private Placements · § 2:11 Rule 147 and Rule 147A Intrastate Offerings § 2:12 Crowdfunding Exempt Offerings ... • Effective January 20, 2017, the SEC amended