» What You Need to Know About Rule 505 of Regulation D
Last Updated on January 21, 2020 by John Fischer
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 AccreditedInvestorLeads.com we can help you connect with Accredited Investors once your PPM is ready.