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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