Private Placement Exemptions: Which One is For You?

Written by Dave Lavinsky

Regulation D of the 1933 US Securities Act offers three clauses which each delineate a different class of exemption from SEC registration in the sale of securities. A private company trying to raise funds must be familiar with these three rules and understand if they will fall into one of the three categories they lay out. Although these rules permit an unlimited amount of funds to be raises, as the amount you are attempting to raise increases so do the restrictions and paperwork requirements.

Rule 504

Rule 504 offers exemption for raising funds of up to $1 million in a 12 month period. This exemption restricts reselling of the security unless the company meets specific requirements. For example, one way to remove this restriction is to sell the security only to accredited investors (sophisticated investors who meet at least one of 8 requirements given by the SEC).

Rule 505

This rule permits raising up to $5 million in a 12 month period, but carries further restrictions. Rule 505 securities can be sold to an unlimited number of accredited investors, but just 35 who do not meet accreditation requirements. These securities cannot be resold for at least six months. For non-accredited investors approached, significant disclosure documents are required which increase the level of paperwork involved almost to that of a registered offering. Therefore, it is highly recommended to seek only accredited investors. Significant financial statement requirements are introduced as well for Rule 505 offerings.

Rule 506

This rule permits an unlimited amount of cash to be raised. Like Rule 505, it allows selling to accredited investors and up to 35 non-accredited investors. However, even the non-accredited investors must be shown to be “sophisticated” on financial and business matters. The same disclosure and financial statement requirements as for Rule 505 are true for 506. The restriction on resale of the securities is extended to one year for this rule.

Common Guidelines

For any of these three types of exemptions, Form D must be filed with the SEC. This form, which includes just four pages to fill out, can also be filed online. Also, all of these rules (with some specific exceptions to Rule 504) do not permit public or general solicitation or advertising to sell the securities.


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