Securities Act
Registration Exemptions
Regulation D
• Limits: $ size, # and type of investors
• Restrictions: marketing, resales
• Requirements: disclosure, SEC filing
(last updated 25 Feb 13)
What are the stakes?
Compare §4(2) exemption to Reg D …
Statute
Section 3(b)
Safe harbor
§4(2)
Rule 504
Rule 505
Rule 506
Any issuer
No 34 Act, inv
cos, blank ch
No inv cos,
“bad boys”
Any issuer***
None
$1 MM
(12 months)
$5 MM
(12 months)
None
No offers to
“unqualified”
No general
solicitations*
No general
solicitations
No general
solicitations
No limits
No limits
35 nonaccredited***
35 nonaccredited***
Type of investor
Only “qualified
investors”
No limits
Accredited /
non-accred
Accredited /
non-accred**
Disclosure
“access”
(sliding scale)
None
Only to nonaccredited
Only to nonaccredited
Only to “qualified
investors”
“restricted”*
“restricted”
“restricted”
None
(until file RS)
Yes
Yes
Yes
Issuer
$$ limits
Marketing
# of investors
Resales
SEC filing
* N/A – if offering state-registered or subject to state exemption for accredited investors
** Non-accredited must be sophisticated or have purchaser rep
*** amended by Dodd-Frank
§ 4(2) Exempted transactions
The provisions of section 5 shall not
apply to … transactions by an issuer
not involving any public offering.
________________________________
§ 3(b) Additional exemptions
The Commission may … by its rules and
regulations … add any class of
securities to the securities exempted
as provided in this section, if it finds
that the enforcement of this title … is
not necessary … by reason of the
small amount involved or the limited
character of the public offering … [up
to] $5,000,000.
Edward F. Greene
• JD, Harvard (1966)
• Law professor (avoid military draft);
private practice in NYC (1966-1979)
• Director, SEC Div Corp Finance
(1979-1981)
• General Counsel, SEC (1981-1982)
• Partner, Cleary Gottlieb Steen &
Hamilton (1982 to 2004 – DC, Tokyo,
London)
• First licensed foreign lawyer to
practice law (Japan, 1987)
• General Counsel, Citigroup
Institutional Clients (2004 – 2009)
• Partner, Cleary Gottlieb Steen &
Hamilton
And the Reg D details …
(9 hypotheticals)
#1 (overview/disclosure)
E-B Corp., a mail-order furniture retailer, wants to
expand its business to the Internet. It will need
$3 million in new capital.
First Lynch Securities, the company’s investment
banker, has identified 30 investors interested in
investing – many out-of-state millionaires. Each
will buy $100,000 of E-B stock – total $3
million. Structure an offering without a formal
disclosure document / audited financials.
Consider -• dollar limits
• number of investors
• type of investor
• disclosure requirements
Statute
Section 3(b)
Safe harbor
§4(2)
Rule 504
Rule 505
Rule 506
Any issuer
No rep or inv
cos, blank ch
No inv cos,
“bad boys”
Any issuer ***
(no “bad boy”)
None
$1 MM
(12 months)
$5 MM
(12 months)
None
No offers to
“unqualified”
No general
solicitations *
No general
solicitations
Varies
****
No limits
No limits
35 nonaccredited
35 nonaccredited ***
Type of investor
Only “qualified
investors”
No limits
Accredited /
non-accred
Accredited /
non-accred **
Disclosure
“access”
(sliding scale)
None
To nonaccredited
To nonaccredited
Only to “qualified
investors”
“restricted”
*
“restricted”
“restricted”
None
(until file RS)
Yes
Yes
Yes
Issuer
$$ limits
Marketing
# of investors
Resales
SEC filing
* N/A – if offering state-registered or subject to state exemption for accredited investors
** Non-accredited must be sophisticated or have purchaser rep
*** amended by Dodd-Frank / **** amended by JOBS Act
#2 (accredited investor)
Who is accredited? So what? Rule 501
1. Ivan, a home builder, will have his bank
buy the stock. See Rule 501(a)(1).
2. Iris, E-B's VP for sales, has no investment
experience. See Rule 501(a)(1) / Rule
501(f)
3. Imelda, who owns a $1.3 million collection
of shoes. See Rule 501(a)(5) [and intro].
4. A VC firm with $4 million in assets. See
Rule 501(a)(2). Compare to 501(a)(3).
5. A state pension fund, with assets of $30
million, run by yahoo. See Rule 501(a)(1).
6. A "dink" couple: each with income last
year of $160,000. See Rule 501(a)(6).
7. First Lynch fails to get documentation on
the "dink" couple. See Rule 501(a)(1)
[intro].
#3 (general solicitation)
E-B continues with its Rule
506 offering. E-B plans to
mail out a cover letter, an
offering circular and a reply
card to the following
potential investors. But it
will only sell to accredited
investors. See Rule
502(c)
1. All North Carolina
physicians and lawyers
with a full-time practice.
2. All chief executives of
companies (38 of them)
who are members of the
NC Furniture
Manufacturing Association.
#4 (prior relationship)
E-B hires First Lynch Securities, a
registered broker-dealer, to sell the
offering. FL mails an offering circular
to the following See Rule 502(c))
1. FL’s customers who had indicated prior
interest in mail-order investments.
2. FL sends a questionnaire to physicians
and lawyers with a full-time practice in
North Carolina. The questionnaire asks
them to indicate their investment
background, wealth, interest in start-up
investments. FL then mails the E-B
investment package to some.
3. FL sends its customers a newsletter
which describes E-B's and others'
offerings.
#5 (Reg D coverage)
Tom Paine sells a newsletter to
accountants and tax attorneys who
advise investor clients. Tom
interviews start-up company
officials and analyzes their
disclosure documents; he rates and
compares these start-up
investments. See Rule 502(c).
#6 (aggregation/integration)
Consider the following sequences. See Rule
502(a)
• On March 1 E-B sells $10 million in stock to
50 purchasers in an intrastate offering. On
April 1 the company sells $5 million under
Rule 505 to 30 purchasers, many of whom
are out-of-state residents. Problems?
• On January 1 the company begins a Rule
505 offering. It sells the final $5 million on
April 1. When can the company begin
another Reg D offering?
• The company did not sell stock last
year. On January 1 it begins a Rule 505
offering, which it completes in June 1 after
selling $4.5 million. On May 1 it begins a
Rule 504 offering, and it sells $750,000.
Problems?
#7 (mistakes)
E-B completes a $7 million offering
under Rule 506 to ten investors – all
accredited individual and institutional
investors.
Two wealthy individuals were
recruited through cold calls and have
no pre-existing relationship to the
company or its underwriter.
Some of the big pension funds that
purchased now want to rescind. Can
they? See Rule 508
#8 (personal rep)
You use Rule 506. Imelda (whose “shoe”
collection is worth less than $1 million)
wants to invest as a non-accredited
investor, but she needs some
investment help. She turns to George,
an experienced investment adviser.
• George is an officer of E-B, and he tells
Imelda of his position and his conflicting
interests. See Rule 501(h)(1), (h)(4).
• George has no prior relationship with EB or with Imelda, but he is planning to
buy stock in the private
placement. See Rule 501(h)(4).
#9 (Form D)
You use Rule 506. What do you have
to file? If you don’t?
•
•
•
•
•
•
Name / juris / type
Principal place / industry
Related person
Revenue ranges
Exemption claimed
Offering info – when, what, how
much, for what
• Non-accredited investors
• Sales commissions – what, who
What else if it’s a reporting company?
Regulation A
Section 4(2)
Issuer
$$ limits
Marketing
# of investors
Type of investor
Disclosure
Resales
SEC filing
Section 3(b) - Safe harbor
Rule 506
Rule 504
Rule 505
Reg A
Any issuer***
No 34 Act, inv
cos, blank ch
No inv cos,
“bad boys”
No ‘34 Act,
“bad boys”
None
$1 MM
(12 months)
$5 MM
(12 months)
$5 MM****
(12 months)
No general
solicitations
No general
solicitations*
No general
solicitations
“test waters”
35 nonaccredited***
No limits
35 nonaccredited***
No limits
Accredited / nonaccred**
No limits
Accredited /
non-accred
No limits
Only to nonaccredited
None
Only to nonaccredited
Offer circular
(unaudited)
“restricted”
“restricted”*
“restricted”
None
Yes
Yes
Yes
Yes
* N/A – if offering state-registered or subject to state exemption for accredited investors
** Non-accredited must be sophisticated or have purchaser rep
*** amended by Dodd-Frank // **** JOBS Act increases to $50 million
The end
Hypothetical #xx
Edgar B has many potential investors -- perhaps
more than 35. How many non-accredited
investors are there in the following cases?
1. Investors Henry and Wilma are married. Neither
is an accredited investor. Each invests in the
company. See Rule 501(e)(1).
2. Henry and Wilma are married, and they live
together. Henry is an accredited director of the
company. Wilma is not accredited. Each invests
in the company. See Rule 501(e)(1). Does
Wilma get required disclosure and must she have
a purchaser rep? See Note to Rule 501(e).
3. Bubba and Sissy are brother and sister, and live
in different states. Neither is an accredited
investor. Each owns 50% of corporation
Combined Investments, Inc. Bubba, Sissy and
Combined all invest in the company. See Rule
501(e)(2).
Bubba
Corp
Sissy