Free Initial Consultation
Laura Anthony, Founding Partner
Toll Free: 800-341-2684
Phone: 561-514-0936
Fax: 561-514-0832
LauraAnthonyPA@aol.com |
West Palm Beach
Legal & Compliance, LLC
330 Clematis Street, Ste. 217
West Palm Beach, FL 33401 |
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Offerings
Under the Securities Act of 1933, any offer to sell securities
must either be registered with the SEC or meet an exemption
from registration. (or Reg D) sets forth three
exemptions from the registration requirements, allowing small
and large-cap companies to offer and sell their securities without
having to register the securities with the SEC. Those three
exemptions are Rule 504 and 505 promulgated under Section 3(b)
of the Securities Act of 1933 and Rule 506 promulgated under
Section 4(2) of the Securities Act of 1933.
While companies using the Reg D exemption do not have to register their
securities and usually do not have to file ongoing reports with the SEC, they
must file what's known as a Form D within fifteen days of the first sale of
securities. Form D is a brief notice that includes the names and addresses of the
company's owners; a brief description of the type of business; the amount of
the offering and the use of proceeds; but contains little other information
about the company.
504 Offering - Rule 504 of permits
a capital raise not to exceed $1,000,000, less the total dollar
amount of exempt securities sold during the preceding twelve
months. The offering can be private or a registered offering
on the state level. Disclosure requirements vary in accordance
with state law.
As these offerings are always subject to state and federal fraud
provisions, even when disclosure requirements are minimal or
not specified, it is recommended that companies provide substantially
the same disclosure as they would for a 505 or 506 offering.
Some states allow some form of solicitation if the offering
is registered in that particular state or limited to accredited
investors. The 504 Offering is primarily controlled by state
law.
Rule 504 does not have requirements regarding limits on the
number of purchasers nor does it have investor sophistication
standards. Private offerings that are exempt under Rule 504
are generally inexpensive to undertake and require relatively
little time to initiate. Public offerings are more expensive
and time consuming than private offerings, but are still much
less expensive than a federally registered offering. However,
some states have disqualification provisions for individuals
and companies that have had previous securities regulatory issues.
These are referred to as bad boy provisions.
504 Offerings are not available to reporting companies (that
is companies that are already public and are required to file
periodic reports with the SEC, such as companies trading on
the OTC Bulletin Board or any national exchange). In addition,
504 Offerings are not available to investment companies, development
stage companies or shell companies; a fully operating business
is required.
Although the re-sale of shares sold in a 504 offering is usually
restricted, no such re-sale restriction exists when the offering
is state-registered.
505 Offering - Companies can raise up to $5,000,000,
less the total dollar amount of securities sold during the preceding
12 month period pursuant to a registration exemption. This exemption
limits the number of non-accredited investors to 35 but has
no investor sophistication standards. Rule 505 has the same
disclosure requirements as Rule 506 Offerings with disclosure
requirements tiered for offerings under $2,000,000 then under
$7,500,000 and over $7,500,000.
505 Offerings must comply with both state and federal regulations
and every state has applicable laws that vary drastically. Accordingly,
this offering is not considered cost effective. The restrictions/requirements
of the 505 Offering include;
- It is not available to investment companies
- Cannot include more than 35 unaccredited investors or
purchasers
- All unaccredited investors must be provided the following
information prior to the sale: the same information contained
in the non-financial portions of a registration statement
and the same financial statements required in a registration
statement except that only the balance sheet need be audited
for small offerings under $2 million. Moreover, it is highly
recommended that all accredited investors be provided with
the same information.
- If the issuer is a reporting company these requirements
can be satisfied by providing copies of recent annual reports
or registration statements filed with SEC
- There can be absolutely no general solicitation or advertising
- Resale of Securities are restricted and subject to Rule
144
- This offering may not be available to certain issuers
due to disqualifying bad boy provisions
The 505 Offering is not preempted by federal law as in the case of a 506 and therefore
costs and fees associated with Blue Sky filings and compliance
can make this offering economically impractical. Due to this
fact and other restrictions, the 505 Offering has been used
less in recent years.
506 Offering - This is the most commonly used
exemption. This particular offering has no dollar
limit and federal law pre-empts any relevant state laws. Issuers
must file a form D with the SEC and states can require that
a copy of that form D be filed with the state together with
a consent to service of process and a fee.
The features of the 506 Offering include;
- The offering can include no more than 35 unaccredited
investors. An "accredited investor" is any one
investor with a certain minimum net worth or annual income
- The issuer must satisfy itself that each unaccredited
purchaser is "sophisticated" in that they have
knowledge and experience in financial and business matters
and is capable of understanding and evaluating the risks.
- All unaccredited investors must be provided the following
information prior to the sale; the same information contained
in the non-financial portions of a registration statement
and the same financial statements required in a registration
statement except that only the balance sheet need be audited
for small offerings under $2 million. Moreover, it is highly
recommended that all accredited investors be provided with
the same information.
- All non-accredited purchasers, either alone or together
with a designated representative must be sophisticated enough
(i.e., have the knowledge and experience necessary) to evaluate
the merits and risks of the investment. (An offering company
typically determines the sophistication of its investors
with a questionnaire subscription agreement.)
- If the issuer is a reporting company these requirements
can be satisfied by providing copies of recent annual reports
or registration statements filed with SEC
- Absolutely no general solicitation or advertising is permitted
- Resale of the securities are restricted and subject to
Rule 144
Rule 505 and Rule 506 requires detailed disclosure of relevant information to
potential investors; the extent of disclosure depends on the
dollar size of the offering. |
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