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Regulation D and the JOBS Act |

Disqualification under Regulation D

On July 31st, in what many are hailing as a landmark change, the Securities and Exchange Commission (SEC) adopted amendments to the rules governing the Regulation D waivers. The major thrust of these changes were based on the Jumpstart Our Business Startups (JOBS Act) signed into law by President Obama on April 5th, 2012. The SEC simultaneously adopted amendments designed to implement section 926 of the Dodd Frank Wall Street Reform Act, which disqualifies certain individuals from participating in exempt securities offerings. These “bad actors” being banned from participation is good news for investors and potentially sends a serious message about ethical behavior to the entire community.

Section 926 of the Dodd-Frank Act requires the SEC to adopt rules that would make the Rule 506 exemption unavailable for any securities offering in which certain “felons” or other “bad actors” are involved. The new provisions generally track those in Section 926 of the Dodd-Frank Act and Rule 262 of Regulation A under the Securities Act. Any “covered person” under the provisions of Rule 506 (d)(1) would be automatically bared from participating in exempt securities offering, regardless of the making of a public offering or not. The definition of a “covered person” has been extended significantly and now includes –

  • The issuer and any predecessor of the issuer;
  • Any affiliated issuer;
  • Any director, executive officer, other officer participating in the offering, general partner, or managing member of the issuer;
  • Any beneficial owner of 20 percent or more of any class of the issuer’s outstanding voting equity securities, calculated on the basis of voting power;
  • Any promoter (as defined in Rule 405) connected with the issuer in any capacity at the time of the sale;
  • Any investment manager of an issuer that is a pooled investment fund;
  • Any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with such sale of securities (a “compensated solicitor”);
  • Any general partner or managing member of any such investment manager or compensated solicitor; or
  • Any director, executive officer or other officer participating in the offering of any such investment  manager or compensated solicitor or general partner or managing member of such investment manager or compensated solicitor.

The exception to the disqualifying provision through affiliation is only if the disqualifying event occurred prior to the parties being associated and the issuer had no control of the party at the time.

The SEC further goes on to clarify the disqualification under Regulation D events to include the following eight categories:

  • Criminal convictions;
  • Court injunctions and restraining orders;
  • Final orders (as defined in Rule 501(g)) of certain state regulators (such as securities, banking, and insurance) and federal regulators, including the U.S. Commodity Futures Trading Commission (the “CFTC”);Attorney Advertisement
  • Commission disciplinary orders relating to brokers, dealers, municipal securities dealers, investment advisers, and investment companies and their associated persons;
  • Certain SEC cease and desist orders;
  • Suspension or expulsion from membership of, a securities self-regulatory organization (“SRO”);
  • Commission stop orders and orders suspending a Regulation A exemption; and
  • U.S. Postal Service false representation orders.

By broadening and tightening the scope of “bad actors” the SEC has taken active steps to prevent people and organizations with a bad reputation or intention from taking advantage of the Regulation D exemption, accomplishing one of the critical intentions of the Dodd Frank Act.

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For many companies, looking for investments to grow their businesses, there was a sense that this day would never come. The Securities Exchange Commission (“SEC”) concluded its process today and issued a final ruling eliminating the prohibitions on general solicitations, advertising Regulation D offerings to the general public.The final SEC changes to rule 506 have two major changes which impact the industry, the first more so than the second.

Provision number one is in accordance with the Jumpstart Our Business Startups Act (“JOBS Act”) which effectively eliminates the ban on advertising of private offerings claiming a registration exemption under Regulation D. There are provisions, however.  The most serious provision is that the purchasers of securities are still required to be accredited investors.

The second rule change is in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) which amends Rules 501 and 506 to prohibit felons and other “bad actors” from participating in Regulation D offerings.

Our main focus for today is on the first rule, allowing general solicitation.

The SEC effectively punted on giving a detailed description of what “General Solicitation” and “General Advertising” entails, instead giving a broader description that describes these activities as such “published in newspapers and magazines, communications broadcast over television and radio, and seminars where attendees have been invited by general solicitation or general advertising.”  Further, the SEC has “confirmed that other uses of publicly available media, such as unrestricted Web sites, also constitute general solicitation and general advertising.”

Additionally, in passing the final ruling, section(C) was added to Rule 506 in order to list out the particular conditions under which a general solicitation, for a securities offering exempt under regulation D, may occur. This new section requires the issuer to take reasonable steps to verify whether or not an investor is accredited. It provides a list of both non-exclusive and non-exhaustive factors to be considered by a company when reviewing the accreditation status of an investor. These are the SECs encouraged methods of verification to reach a standard of “reasonableness” are:

  • Reviewing the tax records of the individual for the two most recent years and obtaining written representation that the individual believes that they will reach the necessary income levels to qualify in the current year.
  • Reviewing third-party documentation from the prior three months such as bank and brokerage statements, tax assessments, appraisal reports, and credit reports that identify the potential purchaser’s net worth, including assets and liabilities, together with a written representation from the individual that all liabilities necessary to make a determination of net worth have been disclosed.
  • Obtaining a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a certified public accountant that such individual has taken reasonable steps to verify that the potential purchaser is an accredited investor within the prior three months and has determined that the potential purchaser is an accredited investor; and
  • Regarding an existing investor who qualified as an accredited investor prior to the effective date of the new rule 506(c), obtaining a certification by the investor at the time of sale that he or she qualifies as an accredited investor.

The SEC has made it clear in the ruling that it does not consider the checking of a box on a questionnaire or a signed form, in the absence of other information, to be sufficient diligence in meeting the “reasonable” threshold. It is extremely important for companies and investment representatives to understand that by lifting the advertising ban on Rule 506 the SEC has effectively placed additional controls on the process.  While general solicitation does open the door to acquiring additional investors, it is coming with a price.

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Form D and SEC Reporting Requirements for Rule 506

Rule 506 of Reg D provides a safe harbor within the Securities and Exchange Act of 1933.  Companies can raise money through a private placement offering without having to formerly register with the SEC and provide the disclosure documents required for issuing a public offering.  Companies typically select Rule 506, rather than Rule 505, if they want to raise more than $5 million.  You can raise an unlimited amount of money with Rule 506.

The SEC reporting requirements when using Reg D are often open for interpretation.  For example a company needs to provide financial disclosures but, as long as your funds are raised from accredited investors, the company decides what disclosures to give.  This applies to all company information.  As long as a company is making best efforts, and not attempting to commit fraud, the company itself can determine what disclosures to make.

These loose guidelines lead many companies to believe that they don’t need to do anything with the SEC as long as they are using Rule 505 or Rule 506.  That is actually not the case.

Companies selling restricted securities under Rule 506 of Reg D need to follow the SEC reporting requirements:

  • EDGAR.  This is the electronic database the SEC uses for maintaining information on companies.  Before you can upload or report on anything you need to gain access to this system.  Allow for a couple of days for processing.
  • Company Information.  You will need to upload your company information into EDGAR.  Have all of your data handy and determine who will be the company representative ahead of time.  Who do you want the SEC or other investors to call with questions?  This shouldn’t be the company secretary but someone familiar with the offering.
  • Form D.  According to SEC regulations a company must file a “Form D” after they sell their first security.  As of 2009 this is all done electronically through the EDGAR system. Form D contains the names and addresses of the company owners and people promoting the offering.  While only a brief notice it is an important requirement.

Companies that are issuing their first private placement memorandum should carefully pay attention to the SEC guidelines for Rule 505 and Rule 506 in order to ensure that they remain within the safe harbor provisions of Reg D.  Filing Form D as part of the SEC requirements is not an overly difficult task but it will take some time to get registered in the system.  Once your PPM is done register with EDGAR.  The process can take a few days and it is important to register early so that when you sell your first security you can easily complete and upload Form D.  Once you have finished the process on EDGAR investors will be able to view your Form D online.  This can also help to solidify your offering as it shows investors that you are willing to openly communicate and follow aspects of the regulation that many companies are unaware of.

For more information on SEC reporting requirements you can click here.  At you can gain access to the leads you need to raise money through your private placement offering.

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What You Need to Know About Rule 505 of Regulation D

Regulation D of the Securities and Exchange Act of 1933 provides the guidelines for raising money through a private placement offering.  These private placements (PPM’s) are exempt from registration requirements within federal securities law, if the guidelines are followed.  It is essential for businesses, investment advisors, business consultants and more to fully understand Rule 505 of regulation D is to ensure they are in compliance.  Falling out of compliance can lead to hefty fines and penalties.  If you are looking to raise money through a private placement offering here is what you need to know:

  • Save Money.  You can save money when issuing a private placement over a public offering.  The reduced disclosure and registration requirements enable many businesses to complete the process without spending a ton on attorneys fees.  It is highly recommended that you use that savings wisely to make sure the guidelines are followed and you stay in Reg D compliance.
  • Raise up to $5 million.  When using Rule 505 of Regulation D you can only raise up to $5 million in a 12 month period.  This works for many businesses but larger raises should be done under Rule 506.
  • Accredited Investors.  There are no limits to how many Accredited Investors you can sell shares of the offering to.  Keep in mind that the more investors you have, the more time you will spend managing them.  Securing several larger investors may increase your ability to manage them on your own.
  • Other Investors.  Under Rule 505 you can sell to non-accredited investors but in a limited quantity.  You can sell shares to no more than 35 non-accredited investors.
  • Restricted Securities.  Shares, or membership units, sold under Rule 505 cannot be sold for a minimum of six months, unless they are registered during that time.  In other words this is not a quick flip for an investor.
  • No Advertising.  Be careful to avoid violating the “no advertising” and “no soliciting” clause.  While it may be tempting, avoid buying a full page ad in the Wall Street Journal.  You need to reach out to individual accredited investors and speak with them directly.  Any form of advertising is a direct violation of Rule 505 so while individual conversations may be time consuming it is the most effective way to sell the shares.
  • Information.  According to Rule 505 a company can decide what information to give Accredited Investors.  This goes out the window if you sell shares to Non-Accredited Investors.  Once you do that you have to provide similar disclosures to that of a public offering.  A company should very carefully weigh whether or not it is worth it to sell to Non- Accredited Investors prior to commencing on the additional disclosures.
  • Answer Questions.  Once you put out a private placement offering you need to be available to answer questions.  It is wise to nominate someone from the team to be the point person on investor communication.  If a group will be handling it consider creating a specific, shared email address.

Rule 505 of Regulation D is an excellent way to raise money through a private placement offering.  In order to learn more about the regulations you need to follow visit the SEC website.  At we can help you connect with Accredited Investors once your PPM is ready.

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Make Sure Your Private Placement is in Compliance

Rule 506 of Regulation D is used by many companies for offering investment opportunities to accredited investors through a private placement memorandum. While Reg D does make it easier to raise funds you must still be careful to ensure that you are in compliance and not accidentally violating the code.

Whether you are an investment advisor, CFO, entrepreneur or business advisor here are some basic facts to keep in mind when preparing, and offering, a private placement investment opportunity to accredited investors.

These rules pertain specifically to Rule 506 of Regulation D:

  • Do Not Advertise.  A company is not allowed to use a “general solicitation” to attract investors.  That means you shouldn’t take out an advertisement in the local newspaper or a billboard on the highway.  Target people individually, rather than through mass media.
  • Accredited Investors.  You can sell the securities to as many accredited investors as you want.  Remember that an accredited investor has over $1 million in net worth, excluding any equity in their primary home.  They also make over $200,000 a year as an individual or $300,000 a year as a couple.
  • Available Investors.  For Reg D an accredited investor can also be a trust, officer of the company, corporation with assets over $5 million, bank, insurance company, small business investment company, or ESOP with over $5 million in assets.
  • Non-Accredited Investors.  You can accept funds from a non-accredited investor as long as they are sophisticated with knowledge about the investment and financial risks.  Reporting requirements can increase when you accept non-accredited investors so keep that in mind.
  • Disclosures.  You can decide what information to provide unless you sell the securities to non-accredited investors.  At that point you need to provide disclosures similar to a registered offering.
  • Answer Questions.  A company representative must be available to answer investor questions.  Be sure to designate someone prior to putting the offering out.
  • Securities Are Restricted.  Investors cant sell the securities for one year after purchase – unless they become registered.
  • Financial Statements.  An independent CPA needs to certify your financial statements.  If you are an established business simply speak with your existing accountant.  If you are a start up finding a CPA to perform the certification may be challenging so it is best to ask other business owners for a referral.

The largest benefit to using Rule 506 of Reg D, over Rule 505, is the ability to raise over $5 million.  This is a good solution for larger projects.  Just be sure to review your private placement memorandum to ensure it is in compliance prior to soliciting accredited investors.  It is also wise to use sales leads that have been scrubbed against the Do Not Call Registry to ensure you don’t violate any laws while selling your securities.

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The Deficiency of Financial Engineering

Financial Engineering leads to greater financial risks, rather than mitigating it. In these time of ever changing economic markets, the once useful methods of financial engineering are no longer advantageous to its users. These theoretical formulas were first perceived as a positive discovery, a part of financial technology that allowed enormously complex risks to be modeled with more simplicity and precision than ever before. Financial engineering made it possible for traders to sell immense quantities of new securities, expanding financial markets to incredible heights. Because these methods were making people so much money, many of the risks and limitations of the models went largely overlooked.

It is important to explore the risks to investors that are associated with financial engineering.

  • Financial engineering doesn’t account for market turbulence.
  • Financial engineering isn’t an exact science.
  • It doesn’t calculate all the risks associated with investments.

When you’re dealing with corporate investments, home mortgages, pension funds and other areas of the bond market, the mathematical model ultimately fails which can, and has, caused trillions of dollars to be lost. These models proved worthy to use under certain circumstances. They provided an industry-standard process to calculate the likely value of financial derivatives. The method was fine if you used it prudently and abandoned it when market conditions were no longer appropriate. However, the market began to behave erratically. If the financial market starts behaving in a way that the model didn’t predict or expect it can result in devastating loss.

The US housing market has been a perfect test case for how financial engineering can lead to fantastic gains, only to create devastating losses.   Americans now owe several trillion dollars on their homes. Mortgages ultimately have no guaranteed rate of return to investors, since the amount of money homeowners mutually pay back every month is a function of how many have refinanced and how many have defaulted. There’s also no fixed maturity date because money seems to appear in irregular masses as people pay down their mortgages at erratic or impulsive times—for example, when homeowners decide to sell their house. The most challenging threat of the financial engineering model is that there’s no easy way to assign a single probability to the chance of default. Wall Street solved many of these problems through a process called tranching, dividing a pool and allowing for the creation of safe bonds with a risk-free triple-A credit ratings. Investors following the formula believed there was no way hundreds of homeowners would all default on their loans at the same time. Market losses were expected to be individual. But not all catastrophes are singular, and tranching still hadn’t solved all the problems of mortgage-pool risk. Some things, like decreasing house prices, affect a large quantity of people at once.

People who have surveyed the economic crisis will understand that the real economy of businesses and commodities is being surpassed by complicated financial devices known as derivatives. Derivatives are not money or goods. They are not something tangible or easily measured. They are investments in investments, bets about bets. Derivatives once created a flourishing global economy, but they also lead to turbulent markets, the near collapse of the banking system and the economic downfall. It was the use of financial engineering equations that opened up the realm of derivatives and caused such economic depression. Perhaps it is time to go back to the basics where an investment was valued based on market demand, current and future earnings based in reality.  At times simple common sense can go a long way in ensuring that an investment actually makes sense and is worth what Wall Street says it is.

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SEC Talks about ways of Avoiding Fraud

The SEC issued its recommendations for avoiding fraud when investors are investing through social media.  With various schemes going through the internet investors should take care when reviewing investment proposals found through social media sites.  Many consumers are also using social media for information on particular investments reviewing comments made on LinkedIn, Facebook, Twitter and more for tips, evaluations, and ideas.  The challenge is that there is no way to prove where this information came from or how accurate, or inaccurate, it may be.

The key for investors is to evaluate information they receive, regardless of how great it looks on social media.  Verify the information through additional sources prior to viewing it as fact in avoiding fraud.

Here are some tips for how to avoid investment fraud:

  • Verify the Source.  Research the person that is posting the information.  What credentials do they have for providing investment analysis or advice?  If you can’t locate information on them anywhere other than the social media sites this should be a red flag.
  • Be an Educated Investor.  Learn everything you can about the industry you are investing in.  What are typical profit margins, investor returns, and strategic positioning that makes an investment good or bad?
  • Unsolicited Offers.  If someone you don’t know sends you a private message, posts on your wall, or sends a tweet mentioning you “exercise extreme caution”.  Find out who this person is.  Research them prior to responding.  If people have mentioned them as a potential fraudster block them from viewing your profile.
  • Report Suspicious Activity.  The SEC Complaint Center will take reports of suspicious activity and investigate it.  If all investors filed reports more people would be saved from becoming a victim of a scam.
  • Too Good to Be True.  If something is too good to be true – it probably is.  Industry standards hold steady because there are certain facts that do not change, regardless of the company.  For example a medical drug has to go through FDA trials.  There is no way around it.  If someone is offering for you to invest in something that can skip these trials and go straight to market… this is a red flag. This is one way in avoiding fraud.  The same holds true for all industries and that is why it pays to be an educated investor.
  • Guaranteed Returns.  Investments are risky which is why the reward can be so great.  Simultaneously there is no way to guarantee returns.  Be suspicious of anyone that offers this to you.
  • Privacy Settings.  Set your social media profiles to private so that only people you know have access to your personal information.  You can also determine what information the site itself shares with its partners.

Investors should use caution when making any investment.  The more informed you are the better decisions you will be able to make.  Rather than taking people’s word for the outlined facts, learn about the industry and the company so that you can ask educated and informed questions prior to making investment decisions.

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Insure Your Investments Against Market Volatility

The financial market changes every day.  It makes millionaires and with a few bad trading days can deplete your investment holdings and put your retirement at risk.  In order to protect yourself against market volatility many investment advisors will scream, “diversification… diversification.”  What does that actually mean?  The exact strategy will be based on your current investment portfolio and future goals.  Your investment advisor is the best person to give you specific advice.

Here are some general strategies for protecting your investments against market volatility:

  • Invest in Gold.  Commodities are a good thing to have in your portfolio.  Gold has historically gained in value regardless of what the financial markets are doing.  It is also a currency that can be used throughout the world, regardless of what language you speak, or where you go.  As an added bonus you can wear your investment as beautiful jewelry.
  • Real Estate.  Incorporate some real estate assets into your retirement portfolio.  You can earn rental income and provide an additional source of monthly revenue in an asset that traditionally gains in value.  Even if the gains are slow, the cash flow can help to substitute your monthly employment income as you age.
  • Energy.  We need energy in order to power our economy.  Our manufacturing plants, cars, airplanes, trucks, houses, schools, and companies all depend on energy in order to function.  Whether you invest in oil and gas or wind energy, incorporate some energy investments into your portfolio.
  • Small Businesses.  You can invest in your local economy by investing in small businesses.  A great way to do so is by becoming an Angel Investor.  You can join an angel investment group and have entrepreneurs pitch you on their ideas every month.  You will have access to quality deal flow, be able to perform your own due diligence, and visit your investments as often as you want.  That is the best part about investing in local companies.  You can become directly involved in the business and help it succeed.  You can also become a passive investor.  How you structure the deal is up to you.
  • Private Placement Memorandums.  You can invest in companies that are raising funds through PPM’s.  These are companies that traditionally would go after bank financing but are seeking alternative capital sources.  This gives investors access to established businesses with a proven track record that have not yet taken their company public.  You can work with several broker-dealers and become an investor on their list to gain access to these deals.  Just be aware that they typically have set closing dates.

We are not an investment advisor and can only give tips and ideas.  Speak with your licensed advisor to discuss the options available to you.  Diversifying your portfolio is a smart investors way to insure against the unexpected.  There is no way to know exactly what the market will do in the future so investing in multiple avenues is a good way to ensure that your portfolio holds steady and grows as the market fluctuates and changes.

We hope this article helps protect you against market volatility.

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Americans are Investing in Gold

According to CNBC’s All-America Economic Survey investing in gold is a top pick of many Americans.  According to the survey investing in gold was the top pick for 35% of respondents, over real estate at 27% and stocks at 21%.  This is in spite of the fact that the Dow Jones Industrial Average and the Standard & Poor’s 500 Index are back on track and hitting record highs.

Those polled are still unsure about investing in the stock market and view gold as a safer alternative.  Of those that responded 21% said they were sure it was a good time to invest in the stock market.  This is however an increase from the previous year at 9%.

There are many reasons that people like to invest in gold.  One of them being that it is a commodity, something you can touch and hold.  People have used gold as currency for thousands of years and with economic uncertainty people tend to cling to things they are sure of – gold being one of them.  The reason the cost of gold continues to go up is that the demand isn’t going down.  Gold is still used in jewelry, electronic devices, piping, and more.  As precious metals are used in new electronic devices the demand will continue to rise.

Gold is a long term investment.  It is something that you purchase and hold on to, selling after years of accumulation.  Many people are investing in gold to use during their retirement.  The gains may not be astronomical but they are steady and can help to balance some of the risk from other investments.  Many people view gold as “safe money”.  It is safe because it doesn’t depend on a particular currency or economic conditions.  It will hold steady, at least traditionally.

Those that invest in gold should also consider allocating a portion of their portfolio into other investments.  Whether investing in the stock market, private placement memorandums, crowdfunding, or as an angel investor – include some higher risk/higher payout investments in your portfolio.  Use gold as a way to even out your investment portfolio and act as safety net.  Investing in gold alone is typically not a sound strategy for retirement planning.  As with any portfolio, a gold only retirement plan may not deliver the results you are looking for.  A seasoned financial adviser can help you to decide how much money to allocate towards specific investment categories.  In the meantime go buy some gold and enjoy wearing your investment.  It’s a lot more fun than carrying around a stock certificate.

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Private Placement Memorandums

Private Placement Memorandums (PPM’s) are an excellent way to raise capital and many companies have used them as an alternative to raising funds through the stock market.  As traditional bank financing has declined Private Placement Memorandums is to provide a way to raise capital through debt, equity, or a combination of the two.  Small broker dealer firms along with large industry players like HSBC have begun to offer these services to more and more clients.  Recognizing the trend for more broker dealers to use Private Placement Memorandums to raise capital, FINRA has issued a new FAQ on guidelines and regulations for disclosure documents and filings.

If you are a registered broker dealer raising money through Private Placement Memorandums here are some things you should know.

  • FINRA has a Private Placement Filing System in the FINRA Firm Gateway.  Member Firms need file the offering documents prior to soliciting investors.
  • Obtain an “SSA” to get access to FINRA’s system by completing an SSA entitlement form.
  • All offering documents need to be uploaded.  This includes the PPM, term sheet, reservation forms, and any other documents associated with offering and securing investment.
  • In typical government fashion, even if no offering documents were used, firms are required to upload a document stating “no offering documents were used.”
  • If any changes are made to the offering documents the amended versions also need to be uploaded.
  • There are no specific FINRA disclosure requirements.  Broker dealers need to use their best judgment to ensure that all offering documents are accurate, clear, and comply with the Securities Act of 1933.
  • PPM’s sold to Accredited Investors must be uploaded into the system.  This also applies to directors and general partners of the issuer.
  • If the PPM is sold to a bank, insurance company, registered investment company, or business development company it does not need to be uploaded.
  • Member Firms that are participating in crowdfunding activities do not need to upload offering documents for crowdfunding campaigns.

Broker dealers can get additional information by visiting FINRA’s website or by calling them directly at (240) 386-5520.  FINRA also offers continuing education classes for broker dealers that want more information on how to stay in compliance with changing laws.  You can also access their online library for educational materials and tools.

Staying in compliance with FINRA regulations is essential for broker dealers raising funds through accredited investors.  While Reg D does provide the opportunity to raise capital, there are still regulations that must be followed in order to avoid any violations.  When in doubt, avoid making a mistake and give FINRA a call.  At we provide you with the leads you need to reach investors and raise money.  FINRA outlines the method in which you do so.

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