The Private Placement Memorandum Templates in the Private and Public Placement Producers™ are formulated to comply with Regulation A & Regulation D § 230.504, 230.505, & 230.506 (known simply as §504, §505, & §506) and §4(6) the “Accredited Investor Exemption” under section 4(2) of the Securities Act of 1933, as amended. Regulation A, Regulation D & 4(6) the “Accredited Investor Exemption” were adopted by Congress to allow small companies the ability to sell securities exempt from federal registration. These exemptions provide an inexpensive way for small issuers of securities to capitalize their companies.
The Regulation D Templates are written to comply with the highest level of disclosure under Regulation D §506, which would cover the disclosure requirement of §504 & §505. The only thing that the Templates are missing in order to comply with Regulation D §506 is your company’s audited financial statements (which are required only if you allow any non-accredited investors in the offering). If your company is a “start-up or early-stage” company, it should be relatively easy to have a CPA firm audit your company’s books, as there is a limited history of operations, if any. Simply get your new company’s tax ID through the IRS, open a bank account, and have the CPA firm audit your first bank statement with accompanying receipts. Companies that are seeking less than $1,000,000 over a 12-month period qualify for Regulation D §504, which does not require audited financial statements to claim exemption from registration.
If you have a company that has been operating for some time now, you have two choices regarding audited financial statements:
- Spend the money to produce those audited financial statements; or
- Request a waiver from the SEC and the state(s) where solicitation and sales of securities will occur. The waiver most often will be accompanied by a request that a CPA firm at least compiles the financial statement up to GAAP (Generally Accepted Accounting Principals) standards.
Summary of Regulation D.
Regulation D has three disclosure levels and restrictions thereof, they are as follows:
§ 504 involves the least amount of disclosure requirements and restricts you to the least amount of capital ($1,000,000) you can raise in any given 12-month period. With this type of offering you are allowed 35 Non-Accredited Investors with an unlimited number of Accredited Investors. NO audited financial statements are required. Some states do not recognize this exemption if you allow any Non-Acredited Investors in the offering. Keep in mind that §504 can be claimed as an exemption from registration on the federal and the state level (NO General Solicitation – advertising) OR be registered at the state level, only in certain states with a merit review process, allowing for general soicitation – i. e. advertising. We have found that the time and expense it takes to register at one or more states is often more costly than simply filing for a Regulation A exemption at the federal and state(s) level. In addition, if an investor would like to refer another investor, who resides in a different state, to your company to make an investment you must register your §504 offering in that state before you can accept the funds. Some state administrators think you are attempting to register the offering when you are only claiming an exemption. Therefore, we rarely recommend claiming a §504 exemption. However, if you have a company that has been in business a while, where producing audited financial statements are cost prohibitive, you need to raise seed capital from personal and professional contacts, then you need to claim the §504 exemption and only attempt to raise $1,000,000 for that round of financing.
§ 505 requires the next least amount of disclosure and restricts you to the amount of capital ($5,000,000) you can raise in any given 12-month period. With this type of offering, you are allowed 35 non-Acredited Investors with an unlimited number of Accredited Investors. Audited financial statements are required if you are allowing any Non-Acredited Investors in the offeirng. Some states do not recognize this exemption if you allow any Non-Acredited Investors in the offering. Therefore, §505 is rarely used.
§ 506 requires the most disclosure but does not restrict you to any amount of capital you can raise in any given 12-month period. With this type of offering you are allowed 35 Non-Accredited Investors with an unlimited number of Accredited Investors. Audited financial statements are required if you are allowing any Non-Acredited Investors in the offeirng. All states must recognize this exemption if you allow any Non-Acredited Investors in the offering and are providing audited financial statements or are not providing audited financial statements, but are only allowing accredited investors in the offering. Under the National Securities Markets Improvement Act of 1996, Securities are considered federally “Covered Securities,” of which securities issued in compliance with Regulation D §506 and under section 4(2) of the Securities Act of 1933, as amended. (Taken from the context of the Act): “The States may not directly or indirectly, prohibit, limit or impose conditions based on the merits of such offering or issuer.” This means that Regulation D §506 offerings no longer need to be pre-filed at the state level and technically they cannot disallow the exemption or the offering. This is of great relief to the average small issuer of securities.
See Regulation D in the Compliance Navigation Menu.
(See https://www.sec.gov/about/forms/regd.pdf for current rules, accreditation standards, and definitions.)
Under the 4(2) of the Securities Act of 1933, as amended, (the “Act”), there is another exemption from registering the securities at the State and Federal level. That exemption is known as “The Accredited Investor Exemption” or 4(6). Section 4(6) of the Securities Act exempts from registration offers and sales of securities to accredited investors when the total offering price is less than $5 million over a 12-month period. Under 4(6), no non-accredited investors are allowed to purchase your company’s securities. The definition of accredited investors is the same as that one used in Regulation D. Like the exemptions in Rule 505 and 506, this exemption does not permit any form of advertising or public solicitation. There are no document delivery requirements. Of course, all transactions are subject to the anti-fraud provisions of the securities laws. However, the SEC strongly recommends that anyone selling securities under the “The Accredited Investor Exemption” or 4(6), produce the required to disclosure under Regulation D §506, to further assure protection from the anti-fraud provisions of the Act.
Under Regulation D §506, you may allow 35 non-accredited investors (only if you have audited financial statements) and an unlimited amount of accredited investors to purchase your company’s securities. Most of our clients would produce a Regulation D §506 document to raise their Seed Capital by selling securities to their friends and family, thereby allowing non-accredited investors in on the deal. They would then Produce a document under Regulation D §506 and limit their development capital to Accredited Investors only.
Remember, it is far safer and more productive to attract small amounts of capital from wealthy “accredited” investors than attempting to attract relatively large sums from those who are not accredited. The accreditation requirements are listed in the “Subscription Agreement” contained in each Memorandum Template.
Why would one need a document under 4(6) “The Accredited Investor Exemption” when it is not required by federal or states securities laws? You need to disclose your deal structure to attract investors and by producing the document to Regulation D §506 standards you protect your company and yourself from the anti-fraud provisions of the Act. In addition, you should produce a securities offering document under Regulation D §506, so that you can illustrate GAAP complaint pro forma financial projections, as well as other disclosures, otherwise the probability of attracting investors and capital may be minimal.
Under Regulation D and the “Accredited Investor Exemption” or 4(6) you are “Claiming” an exemption from registration, which you may need to defend if a regulator requests information on the securities offering. Regulation A is a pre-filing of a Private Placement Memorandum, with different disclosure requirement than Regulation D, to the Securities and Exchange Commission (SEC) and the state(s) where securities will be offered. This is done to “Qualify” for an exemption from Registration. Once “Qualified”, you do not necessarily need to defend the exemption. The Instructions in the Public Placement Producer and any comments you will receive from the SEC or state administrators, after you have filed for qualifcation, should be followed as your primary instructions and will be sufficient protection from a regulatory violation.
See Regulation A in the Compliance Navigation Menu.
Summary of Above Exemptions
|Exemption||Reg D. 504||Reg. D 505||Reg. D 506||Reg. A||4(6) Accredited
|Maximum Amount $1,000,000||YES||NO||NO||NO||NO|
|Maximum Amount $5,000,000||NO||YES||NO||YES||YES|
|Maximum Amount Unlimited||NO||NO||YES||NO||NO|
|Notice of Sales Required?||YES||YES||YES||YES||YES|
|Auditing Financial Statements Required?||NO||YES||YES||NO||NO|
|Pre-Filing with SEC Required?||NO||NO||NO||YES||NO|
|General Solicitation – Advertising Allowed?||YES*/NO||NO||NO||YES||NO|
|* Reg D 504 may be eligible for a SCOR offering, which is registered at the state level as an Intrastate offering. If registered at the state level you may be able to advertise through general solicitation, depending on the state.|
You must go to the SEC’s website https://www.sec.gov/about/forms/formd.pdf, fill in their “FORM D – Notice of Sales” online, follow the instructions throughout FORM D to fill it out, print it out, sign and send 5 manually signed copies to the SEC and one copy, unless otherwise notified, to the state(s) in which the sale of securities were made. If you do not have Adobe Acrobat and/or are unable to save the SEC form off their website then, keep one hard copy for your files to work off of when updating and amending the form.
The first “FORM D – Notice of Sales” and all subsequent amendments to FORM D are to be filed with the SEC and any states where securities are sold within 15 calendar days of the first sale and each subsequent sale until the offering is closed. 5 copies to the SEC at the address included on the cover. Currently, there is no federal filing fee with the SEC. Send one or more signed copies of FORM D, as directed by the state(s) administrator(s) and to the office where directed, along with a signed and notarized U-2 & U-2A corporate resolution (change name to “company” resolution if your firm is an LLC or partnership resolution if your company is a partnership), to the securities administrator for the state(s) in which the securities were sold. There may be a filing fee for the original and or amendment filings, so be sure to check on that with each state.
*NOTE: Some states do not require a filing under Regulation D §506.
See a Current Copy of Form D.
See current List of State Securities Administrator addresses to file Form D, as well as, additional state regulatory information. Make copies of all documents and be sure to have proof of the date of mailing (i.e. postal receipt, etc.) and keep in a safe place.
*NOTE: Please keep in mind that when you have more than 499 investors your company will automatically become an “SEC Reporting Company”, whereby certain quarterly disclosures, including audited financial statements are required to be filed.
You must not collect any funds before issuing a securities offering document, also known as a Private Placement Memorandum, unless the investor offers the terms and conditions of the financing. Do not deviate from this process without the expressed written permission and procedural instructions from a qualified securities attorney. You should have your documents reviewed by an attorney before its issuance.
Thank You and Good Luck!
Timothy D. Hogan, CEO
Commonwealth Capital Advisors