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Let’s say you decide to do a private placement of securities under the federal exemption from registration requirements Regulation D, Rule 504. Under Rule 504, you can raise up to $1 million. Let’s say you raise $950,000 under this offering.
Two months later you decide to do another securities offering under Rule 504 and your raise another $950,000.
Chances are, you will have violated the requirements of Rule 504. Why? Because the SEC will integrate the two offerings into one and you will have raised $1.9 million total which exceeds the $1 million maximum of Rule 504.
How can you prevent two separate securities offerings from being integrated?
The SEC looks at the following factors when determining whether two offerings should be integrated:
- Whether the two offerings are part of a single plan of financing
- Whether the two offerings are for the same class of securities
- How close together the two offerings are in time
- Whether the same type of payment for the securities is being received in both offerings
- Whether the two offerings are for the same general purpose
It may be difficult to tell whether two offerings are likely to be integrated by the SEC. Luckily, there is a “safe harbor” rule you can use to make sure that two offerings will not be integrated. As long as the end of one offering is separated by at least six months from the beginning of another offering, they will not be integrated.
Under the new Rule 506(c), promulgated by the SEC pursuant to the JOBS Act, a venture will be able to advertise a securities offering as long as all the investors are accredited.
Under the existing Rule 506 (aka Rule 506(b)), public advertising is prohibited. An issuer will now be able to choose between using the “old” Rule 506, which does not allow public advertising, or the “new” Rule 506 which does allow public advertising but adds some requirements to the process. For example, under the “old” Rule 506, investors could sign a document stating that they were accredited. Under the “new” Rule 506, the issuer will be responsible for doing due diligence to ensure that all investors are accredited.
When offering securities under either the old or the new Rule 506, the issuer must file a Form D with the SEC. But under the new Rule 506, the form must be filed no later than 15 calendar days prior to the first use of general solicitation or general advertising for the offering (called an “Advance Form D”). Under the old Rule 506, you do not have to file the Form D until 15 calendar days after the first sale of securities.
The Form D will be amended to include more questions such as
• The issuer’s web site
• The amount raised from accredited versus unaccredited investors
• What fraction of offering proceeds was or will be used to repurchase/retire existing securities; to pay offering expenses; to acquire assets, otherwise than in the ordinary course of business; to finance acquisitions of other businesses; for working capital; or to discharge indebtedness
• The basis of qualification of accredited investors
• If you are using Rule 506(c), the types of advertising to be used
• If you are using Rule 506(c), how you will verify that all investors are accredited
If an issuer under Rule 506(c) is unable to or chooses not to answer all the questions in the Advance Form D, the issuer is required to file an amendment providing the remaining information within 15 calendar days after the date of first sale of securities in the offering.
Can you switch from a private offering (under old Rule 506) to a public offering under Rule 506(c)? Yes! All you would need to do is file an amended Form D 15 days before beginning general solicitation.
The SEC is also requiring temporarily that advertising materials used under Rule 506(c) be submitted to the SEC on its web site.
Under the proposed rule, the following statements are required to be included on written advertising materials:
• The securities may be sold only to accredited investors, which for natural persons, are investors who meet certain minimum annual income or net worth thresholds;
• The securities are being offered in reliance on an exemption from the registration requirements of the Securities Act and are not required to comply with specific disclosure requirements that apply to registration under the Securities Act;
• The Commission has not passed upon the merits of or given its approval to the securities, the terms of the offering, or the accuracy or completeness of any offering materials;
• The securities are subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and
• Investing in securities involves risk, and investors should be able to bear the loss of their investment.
There are additional statements required for private funds.
The new rule also requires the filing of a final amendment to Form D within 30 calendar days after the termination of any offering conducted in reliance on Rule 506 (old or new).
The new rule has not yet gone into effect – there is a comment period on the rule that is currently open. The final rule is expected to be adopted in the next month or two.
Will there be new requirements under state securities law for offerings under Rule 506(c)? There may very well be – it is important to check applicable state requirements before beginning a public offering under Rule 506(c).
For more information on the proposed rule, visit the SEC web page: http://www.sec.gov/rules/proposed.shtml and look at the release called “Amendments to Regulation D, Form D and Rule 156 under the Securities Act.”