What Private Offering Types Are Available?

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In This Article

• Reg D Offering
• Reg A Offering

Private offerings provide businesses with an opportunity to gather funding without going public. This enables them to maintain more control over their operations while still accessing crucial resources. As these offerings come with specific regulations and forms, it’s essential to know which one aligns best with a company’s goals and resources.

Reg D Offering

Regulation D, or Reg D, offers several exemptions allowing companies to raise capital without registering securities with the SEC. One of the essential aspects of making a Reg D offering is filing Form D. This form outlines the specifics of the offering and ensures companies comply with federal laws. There are several federal exemptions and exclusions that companies must know.

Below is a summary of key Reg D rules and related provisions, highlighting the main offering limits, investor qualifications, and disclosure expectations associated with each exemption. This overview helps issuers quickly identify which exemption may apply to their fundraising activities and understand the basic conditions they must meet to remain compliant.

Rule 504(b)(1)

Rule 504(b)(1) allows issuers to offer and sell up to $10,000,000 of their securities in any 12-month period, less the aggregate offering price for all securities sold within the 12 months before the start of and during the offering of securities under this rule or in violation of section 5(a) of the Securities Act. The increase from the previously mentioned $5 million to the updated $10,000,000 cap can provide greater flexibility for companies seeking larger amounts of capital, potentially enhancing their growth plans or business objectives. Companies using Rule 504 must file Form D with the SEC and make more advanced registrations with the states.

Rule 504(b)(1)(i)

Under this exemption, offerings can be made without any specific information requirement or solicitation prohibition, but must be made exclusively in one or more states that provide for the registration of the securities and require the public filing and delivery to investors of a substantive disclosure document before sale. Companies will still need to submit Form D with the SEC after the first sale of the securities. The state registration of these filings can be cumbersome, aligning with the fact that offers and sales under this rule are made in accordance with those state provisions.

Rule 504(b)(1)(ii)

This rule applies when each investor either receives or has reasonable access to the same kind of information they would receive in a registered offering. However, offerings can be made in states that have no provision for the registration of the securities or the public filing or delivery of a disclosure document before sale if the securities have been registered in at least one state that does provide for such processes. Reliance on investors having “reasonable access” to information can be subjective and may result in some investors not having all the details they need. As with the other 504 rules, companies must file Form D. It’s a middle-ground option balancing investor protection and issuer flexibility. The multistate process can be a challenge, given the varying state restrictions.

Rule 504(b)(1)(iii)

This exemption is available when the terms of the offering—both the offering itself and the securities being offered—satisfy state law exemptions from registration that permit general solicitation and general advertising, so long as sales are made only to “accredited investors” as defined in § 230.501(a). After making a sale under this rule, the issuer must file Form D with the SEC. It allows issuers to align with state-specific securities regulations. The rule necessitates that issuers not only understand federal requirements but also comply with varying state regulations, complicating the offering process.

Rule 506(b)

This rule permits sales to an unlimited number of accredited investors and up to 35 non-accredited investors. While a specific disclosure document isn’t mandated for accredited investors, non-accredited investors should be provided with adequate disclosure of the investment. Again, Form D must be filed post the first sale.

Rule 506(c)

Offerings under Rule 506(c) can be openly advertised online and elsewhere, but sales can only be made to verified accredited investors. Issuers must take steps to verify the accredited status of their investors. Form D filing remains mandatory after the first securities sale.

Securities Act Section 4(a)(5)

This section caters to offerings made to accredited investors, not surpassing $5 million in a 12-month span. Unlike other exemptions, issuers can’t use general solicitation or advertising to market the securities. Once sales commence, the obligatory Form D filing is required with the SEC.

Investment Company Act Section 3(c) 

Under the Investment Company Act of 1940, Section 3(c) provides specific exemptions that exclude certain entities from being classified as “investment companies,” thus avoiding a full-blown registration. One of the most commonly relied upon exemptions is Section 3(c)(1), which is designed for issuers whose outstanding securities are owned by 100 or fewer persons and are not offered to the general public. Another notable exemption, Section 3(c)(7), permits offerings to “qualified purchasers,” which typically include institutions and individuals with significant investment portfolios.

Reg A Offering

Reg A, another “private offering”, provides businesses with an opportunity to raise capital without necessarily going public. The process involves two tiers: Tier 1, permitting the raise of up to $20 million, and Tier 2, allowing up to $50 million. Companies must file Form 1-A with the SEC, which will undergo a review. Once approved, businesses can advertise their offerings, giving them more exposure to potential investors.

*To get started on your EDGAR or Blue Sky State filings for any of these filings, please contact us. Please advise your legal counsel for any questions, as we do not provide legal advice.