Private securities transactions are a critical aspect of capital formation for small and emerging businesses. This guide provides a comprehensive overview of three key mechanisms for private securities transactions: Regulation D offerings, crowdfunding, and Regulation A+ offerings. Each section will detail the regulatory framework, eligibility criteria, compliance requirements, and practical considerations for issuers and investors.
Regulation D Offerings
Overview of Regulation D
Regulation D, promulgated by the Securities and Exchange Commission (SEC) under the Securities Act of 1933, provides exemptions from the registration requirements for certain private offerings of securities. The primary goal is to facilitate capital raising by small businesses while ensuring investor protection.
Official Source: SEC Regulation D
Rule 504
Eligibility and Limitations
Rule 504 allows issuers to raise up to $10 million within a 12-month period. It is available to non-reporting companies, excluding investment companies and certain development stage companies.
General Solicitation and Resale Restrictions
General solicitation is permitted under certain conditions, and securities sold under Rule 504 are typically restricted, meaning they cannot be freely resold.
Official Source: SEC Rule 504
Rule 506(b)
Eligibility and Limitations
Rule 506(b) permits issuers to raise an unlimited amount of capital. It allows up to 35 non-accredited investors and an unlimited number of accredited investors.
General Solicitation and Resale Restrictions
General solicitation is prohibited. Securities sold under Rule 506(b) are restricted.
Official Source: SEC Rule 506(b)
Rule 506(c)
Eligibility and Limitations
Rule 506(c) also permits issuers to raise an unlimited amount of capital but only allows accredited investors to participate.
General Solicitation and Resale Restrictions
General solicitation is permitted, provided that all purchasers are accredited investors and the issuer takes reasonable steps to verify their accredited status.
Official Source: SEC Rule 506(c)
Compliance Requirements
Form D Filing
Issuers must file Form D with the SEC within 15 days after the first sale of securities. This form provides basic information about the offering and the issuer.
Official Source: SEC Form D
State Blue Sky Laws
Issuers must also comply with state securities laws, known as Blue Sky laws, which may require additional filings and fees.
Official Source: NASAA Blue Sky Laws
Crowdfunding
Overview of Regulation Crowdfunding
Regulation Crowdfunding, established under Title III of the Jumpstart Our Business Startups (JOBS) Act, allows small businesses to raise capital from a large number of investors through online platforms.
Official Source: SEC Regulation Crowdfunding
Eligibility and Limitations
Issuer Requirements
Issuers can raise up to $5 million in a 12-month period. They must be U.S. entities and cannot be investment companies or disqualified under the "bad actor" provisions.
Investor Limits
Investment limits are based on an investor's annual income and net worth. Non-accredited investors can invest the greater of $2,200 or 5% of their annual income or net worth if both are less than $107,000. If either exceeds $107,000, they can invest up to 10% of their annual income or net worth, not to exceed $107,000.
Intermediaries
Funding Portals and Broker-Dealers
Offerings must be conducted through SEC-registered intermediaries, either funding portals or broker-dealers. These intermediaries facilitate the offering process, including investor education and compliance checks.
Official Source: SEC Funding Portals
Disclosure Requirements
Form C Filing
Issuers must file Form C with the SEC, providing detailed information about the company, its business plan, financial condition, and the terms of the offering.
Official Source: SEC Form C
Ongoing Reporting
Issuers must provide annual reports to the SEC and investors, including financial statements and updates on the company's progress.
Compliance and Liability
Anti-Fraud Provisions
Issuers and intermediaries must comply with anti-fraud provisions, ensuring that all information provided to investors is accurate and complete.
Disqualification Provisions
Certain individuals and entities are disqualified from participating in Regulation Crowdfunding due to past securities law violations or other misconduct.
Official Source: SEC Disqualification Provisions
Regulation A+ Offerings
Overview of Regulation A+
Regulation A+, an amendment to Regulation A under the JOBS Act, provides an exemption from registration for public offerings of securities up to $75 million. It is divided into two tiers: Tier 1 and Tier 2.
Official Source: SEC Regulation A
Tier 1 Offerings
Eligibility and Limitations
Tier 1 allows issuers to raise up to $20 million in a 12-month period. It is available to U.S. and Canadian companies, excluding certain entities such as investment companies.
Disclosure and Reporting
Issuers must file an offering statement on Form 1-A with the SEC, including financial statements and other disclosures. There are no ongoing reporting requirements after the offering.
Official Source: SEC Form 1-A
Tier 2 Offerings
Eligibility and Limitations
Tier 2 allows issuers to raise up to $75 million in a 12-month period. It is also available to U.S. and Canadian companies, with similar exclusions as Tier 1.
Disclosure and Reporting
Issuers must file an offering statement on Form 1-A with the SEC, including audited financial statements. They must also provide semi-annual and annual reports, as well as current event updates.
Official Source: SEC Tier 2 Reporting
Compliance Requirements
State Preemption
Tier 2 offerings are exempt from state Blue Sky laws, simplifying the compliance process for issuers. However, Tier 1 offerings must comply with state securities regulations.
Testing the Waters
Issuers can "test the waters" by soliciting interest from potential investors before filing the offering statement, provided they comply with specific disclosure requirements.
Official Source: SEC Testing the Waters
Practical Considerations
Costs and Timeframes
Regulation A+ offerings can be costly and time-consuming due to the need for legal, accounting, and compliance services. Issuers should carefully consider these factors when planning their capital-raising strategy.
Market Reception
The success of a Regulation A+ offering depends on market conditions and investor interest. Issuers should conduct thorough market research and engage with potential investors early in the process.
Conclusion
Private securities transactions, including Regulation D offerings, crowdfunding, and Regulation A+ offerings, provide valuable opportunities for small businesses to raise capital. Each mechanism has its own regulatory framework, eligibility criteria, and compliance requirements. By understanding these nuances, issuers can effectively navigate the capital-raising process while ensuring compliance with securities laws.
For more detailed information, please refer to the official sources provided throughout this guide.
