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Private Placements

A direct placement is a type of offering that allows companies to raise capital by selling securities directly to the public. It eliminates the intermediaries that are often involved in the offering process, thereby cutting down on the costs of raising capital. The issuer is required to meet regulatory requirements of the state where it plans to sell the securities. Many direct offerings are exempted from most of the requirements set out by the Securities Exchange Commission (SEC). 

Direct offering allows a company to raise capital from the community where it operates from, instead of borrowing from financial institutions such as banks. Such an arrangement allows the issuing company to determine the terms of the offering, rather than struggle to meet the stringent requirements set up by banks or venture capital firms. Most direct offerings are not required to be registered with the SEC since they qualify for certain exemptions. For example, Rule 147 (Intestate filing exemption) allows a company to raise funds by selling securities to the public, if the securities are sold in the primary state where the company does business. The exemption is only valid when both company and the investors are residents of the same state.

An issuer relying on Regulation D exemption is required to file a document called a Form D no later than fifteen days after it first sell the securities in an offering. The form D will include brief information about the issuer, its management and promoter, and the offering itself.

Regulation D includes three SEC rules –Rules 504, 505 and 506.
A company can rely on these to sell securities in an unregistered offering.

Rule 504

Rule 504 permits certain issues to offer and sell up to $1m of securities in any 12-month period. These securities may be sold to any number and type of investor, and the issuer is not subject to specific disclosure requirements. Generally, securities issued under Rule 504 will be restricted securities, unless the offering meets certain additional requirements.

Rule 505

Under Rule 505, issuers may offer and sell up to $5 million of their securities in any 12-month period. There are limits on the types of investors who may purchase the securities. The issuer may sell to an unlimited number of accredited investors, but no more than thirty five non-accredited investors. If the issuer sells its securities to no accredited investors, the issuer must disclose certain information about itself, including its financial statements. If sales are made only to accredited investors, the issuer has discretion as to what to disclose to investors. Any information provided to accredited investors must be provided to non-accredited investors.

Rule 506

An unlimited amount of money may be raised in offering relying on one of two possible Rule 506 exemptions. Like Rule 505, an issuer relying on Rule 506(b) may sell to an unlimited number of accredited investors, but no more than thirty-five (35) non-accredited investors. However, unlike Rule 505, the non-accredited investors in the offering must be financially sophisticated or, in other words, have sufficient knowledge and experience in financial and business matters to evaluate the investment. This sophistication requirement can be satisfied by having a purchaser representative for the investor who satisfies the criteria.

As with Rule 505 offering, if non-accredited investors are involved, the issuer must disclose certain information about itself, including its financial statements. If selling only to accredited investors, the issuer has discretion as to what to disclose to investors. Any information provided to accredited investors must be provided to non-accredited investors.

General advertising. A company relying on the Rule 506© exemption can generally advertise its offering through the Internet, social media, seminars, print, or radio or television broadcast. Only accredited investors, however, can purchase in a Rule 506(c) offering that is widely advertised, and the issuer will have to take reasonable steps to verify accredited investor status.

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