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Blog

Securities Offerings & Sales Under Regulation D

Mihir Gandhi

Are you part of a private startup and looking to raise investment capital? Or, are you an investor interested in verifying your accredited status? Rule 506(c) was added to Regulation D per the Jumpstart Our Business Startups Act, giving companies the freedom to participate in general solicitation, their capital raises while still qualifying them as private offerings that don't need to be registered with Securities and Exchange Commission (SEC). The sale of private securities through general solicitation requires accreditation of the investors as "accredited investors," a definition found in the securities laws. Choosing to obtain a third-party review from a licensed professional is one of the safe harbor methods approved by the SEC to validate oneself, or the status of a purchaser, as an accredited investor. In fact, a third-party verification from a licensed attorney has emerged to be the go-to standard in the capital raising industry.

About Regulation D

Under the Securities Act of 1933, offerings involving the sale of securities are required to be registered with the SEC. However, exemptions from having to register securities exist under Regulation D. The purpose of a Reg D offering is to provide small startups and businesses with the opportunity to acquire capital, without having to shoulder the steep costs of registration with the SEC. On September 23, 2013, certain provisions of Title II of the JOBS Act were finally implemented by the SEC which changed the policies surrounding public advertising and general solicitation for certain Reg D offerings.

General Solicitation

Reg D contains several rules but the three primary ones that provide exemptions from SEC securities registration are Rule 504, Rule 505, and Rule 506. Rule 506 is the most widely used exemption because there is no limit on how much money can be raised (there are limits with Rule 504 and Rule 505) and because a qualifying offering under Rule 506 is exempt from state registration (which is not the case with Rule 504 and Rule 505). Before the implementation of the JOBS Act, general solicitation of purchasers was prohibited in Rule 506 securities offerings and most other Reg D offerings. As directed by the JOBS Act, the SEC added a new Rule 506(c) in Reg D, which grants issuers the right to generally solicit and openly advertise securities without having to register said securities. Companies can now take advantage of Rule 506(c) as long as they meet certain heightened requirements for verifying that the eventual purchasers of their securities are accredited investors. Specifically, they need to take "reasonable steps" to verify their purchases as accredited investors.

Role of Accredited Investors

Since generally solicited offerings under Rule 506(c) require that the eventual investments be made by accredited investors only, it's important to understand who qualifies. The term, "accredited investor," is defined in Rule 501 of Regulation D and includes qualifying high income or high net worth individuals and married couples, as well as certain entities and institutions. Investors who meet one or more of the definitions of accredited investors promulgated under Rule 501 of Regulation D are qualified investors for Rule 506(c) offerings. Issuers should validate the status of potential investors using the safe harbor methods outlined by the SEC. Not taking reasonable steps to ensure that an investor is accredited can lead to serious ramifications which may harm the company and its investor as well as possibly disallow an issuer's ability to rely on Regulation D to raise capital in the future.

VerifyInvestor.com provides legally-compliant third-party reviews by licensed attorneys which allow issuers and purchasers to obtain accredited investor verifications quickly and securely.