- April 8, 2014
- Posted by: John Fischer
- Categories: Accredited Investors, Reg D, SEC
When issuing a private placement it is important to select the rule under Regulation D that will provide you with the flexibility you need to raise money and operate business as usual. Regulation D has Rule 504, Rule 505, and Rule 506. Each of them have different requirements and regulations regarding who can invest, how much money you can raise, and the disclosures you need to give. Rule 506 is the most widely used exemption but there are some flexibility benefits of using Rule 505 instead.
Expand your investor pool using Rule 505.
In Rule 505 you can have up to 35 non-accredited investors participate. On the surface this appears to be the same when using Rule 506 but that is not the case. Rule 506(b) requires that all non accredited investors are sophisticated and Rule 506(c) does not allow for non accredited investors at all. It is recommended that you focus on accredited investors, regardless of the rule that you use. You can even purchase leads from www.accreditedinvestorleads.com. However, you never know when an accredited investor may have a cousin or coworker that also wants to invest but doesn’t meet the requirements. If you have issued a private placement using Rule 505, you can work with them as well.
Disclosures and Information
When using Rule 505 you get to decide what information to give investors. The more you disclose, the safer you are in the event of an investor complaint. However, the disclosures are based on what you want to share and not specific requirements. Rule 506 has additional disclosure requirements. This can be beneficial for companies that do not have a lot of capital and are putting together their private placement in house. It is not always affordable to hire a CPA to certify or audit your financials. When using Rule 505, they don’t have to.
One drawback to Rule 505 is that you are limited in how much money you can raise. It caps companies at $5 million during a 12 month period. It is geared towards smaller offerings and that’s why the disclosure requirements are virtually non-existent. Simultaneously companies that are doing a larger raise typically have the funds to hire people to assist with producing the additional disclosures and materials.
Prior to issuing your private placement consider the following:
- Who will invest in your offering? If you are going to depend on local investors and people that you know it may become important to accept investment dollars from non-accredited investors. This makes Rule 505 a good option.
- Do you want to advertise? If you don’t know any investors you can purchase a list and cold call them or you can advertise using Rule 506(c). General solicitation is only allowed under Rule 506(c) so this could be the determining factor.
- Can you afford to hire a CPA or professional? If the answer is no, use Rule 505. With no set disclosure requirements you can produce everything in house without worrying that you are not meeting the disclosure standards. This does not protect you from an investor complaint but can help get your private placement out there faster.
Carefully evaluate how you want to structure your offering and how you will target accredited investors before deciding which rule to use.