Types of Private Placements

Private placements are non-public offerings sold to private investors which are subject to the Securities Act of 1933 and do not have to be registered with the Securities and Exchange Commission. Most private placements are offered under rules known as Regulation D. Regulation D establishes three exemptions from Securities Act registration.

RULE 504

Exemption for the offer or sale of up to $1,000,000 of securities sold in a 12-month period. General solicitation is permitted as long as it’s to accredited investors. The issuer need not restrict the right to resell the securities as long as one of the following conditions is met:

  1. The issuer registers the offering exclusively in a state that requires a publicly filed registration and delivery of substantial disclosure documents
  2. Sale and registration take place exclusively in one or more states that requires registration and disclosure
  3. Securities sold exclusively according to state law exemptions and only to accredited investors

RULE 505

Exemption allows for sale and offer of securities totaling up to $5 million dollars in any 12-month period to an unlimited number of accredited investors and up to 35 investors who do not satisfy sophisticated investor status or wealth standards.

If you are an accredited investor, the issuer is permitted to decide what information to provide you.

If you are among the 35 non-accredited investors, you must receive disclosure documents equivalent to those delivered in registered offerings from the issuer.

Purchasers must invest for investment purposes only and not for resale. Financial statements need to be audited, however, if that can’t be done without unreasonable effort and expense, then an audited balance sheet within 120 days of offer must be included.

The issuer’s securities are restricted; investors may not sell for two years without registering the security. General solicitation or advertising to sell securities is prohibited.

RULE 506

An issuer satisfies the exemption from registration requirements if they sell to an unlimited number of accredited investors and up to 35 other purchasers; but unlike Rule 505, Rule 506 requires all non-accredited investors to be sophisticated or have, or with purchaser representative, sufficient knowledge and experience that makes them capable of evaluating the investment. Sellers of Rule 506 offerings must be able to answer any questions of prospective investors. The issuer can raise an unlimited amount of capital. New general solicitation rules apply. The U.S. Securities and Exchange Commission (SEC) is in the process of developing these new general solicitation rules, but currently these new rules have not been published for comment or finalized.

Some of the important things that differentiate Rule 506 from the other private offerings include:

  1. There is no restriction on amount of money that can be raised
  2. No publicly filed registration is required; and
  3. No substantial disclosure document is required.

Also, Rule 506 does not require audited or unaudited financial statements to be given to accredited investors. Therefore, we again suggest that accredited investors should consider purchasing Rule 506 offerings through registered broker/dealers acting as placement agents for the issuer. While issuers are allowed to market their 506 offerings to investors, issuers must restrict their offerings to accredited investors only, and this can lead to minimal amounts of disclosure.

More relevant to the investors’ interests is the fact that FINRA (the Financial Industry Regulatory Authority that oversees regulation of broker/dealers) places on broker/dealers the duty to conduct strong due diligence on issuers before recommending the issuers’ securities to investors. FINRA also requires broker/dealers to assess whether the issuer’s offering is suitable for the investor before passing the investor’s subscription agreement and the investor’s investment dollars to the issuer. Thus, while issuers can market 506 offerings without the assistance of broker/dealers, the investor should understand that when he or she purchases a private offering from the issuer directly, the investor does not receive the oversight benefits described above.

Rule 506(c)

Rule 506(c) allows for the general solicitation of investors for Private Placements. The offering is to be made to “only accredited investors” and requires the issuer to verify the investor’s status as an “accredited investor.” Therefore, investors participating in these offerings may need to supply the issuer financial information such as tax returns, statements of assets and liabilities, or a confirmation from a broker-dealer, attorney or CPA verifying the investor as an accredited investor.


Current Offerings