Study guide
Every securities offering in the United States must either be registered with the SEC or fit within an exemption from registration, and a private securities offerings representative works entirely inside those exemptions. This chapter maps the exemption framework: Regulation D and its three operative rules, the accredited investor definition, the resale rules for restricted securities, the Regulation A and Regulation Crowdfunding alternatives, and the rules governing how you may communicate while seeking business. It is the most heavily tested territory on the Series 82.
Registration or Exemption: The Securities Act Framework
The Securities Act of 1933 rests on a single command. Section 5 makes it unlawful to offer or sell a security unless a registration statement is in effect or the transaction qualifies for an exemption. Registration means full public disclosure through a registration statement and statutory prospectus filed with the SEC. Exemption means the issuer may sell without that process, but only inside the boundaries the exemption draws. The foundation for most private offerings is Section 4(a)(2), which exempts transactions by an issuer not involving any public offering. The Supreme Court gave that phrase its working meaning in the Ralston Purina case: an offering is private when the people invited can fend for themselves, meaning they are financially sophisticated and have access to the kind of information registration would otherwise supply. Because that standard is fact-specific and uncertain, the SEC adopted Regulation D as a safe harbor; satisfy its conditions and the offering is treated as exempt. Two points deserve emphasis. First, an exemption from registration is never an exemption from the antifraud rules. Rule 10b-5 applies to every offer and sale, registered or not, so every statement made to investors must be accurate and not misleading. Second, securities sold in most exempt offerings emerge as restricted securities, which cannot be freely resold. Suppose Meridian Robotics, a private manufacturer, raises eight million dollars from a small circle of wealthy investors without filing a registration statement. The exemption spares Meridian the registration process, but its offering materials still carry full antifraud liability, and its investors receive shares they cannot simply sell on an exchange.
Regulation D: Rules 504, 506(b), and 506(c)
Regulation D contains three operative exemptions. Rule 504 permits an eligible issuer to raise up to ten million dollars in any twelve-month period. Reporting companies, investment companies, and blank-check companies may not use it, general solicitation is generally prohibited, and because Rule 504 securities are not federally covered securities, state registration or exemption requirements still apply in most states. Rule 506(b) is the workhorse of private capital raising. It allows an unlimited dollar amount from an unlimited number of accredited investors, plus up to thirty-five non-accredited purchasers within any ninety-day period. Every non-accredited purchaser must be sophisticated, meaning capable, alone or with a purchaser representative, of evaluating the merits and risks, and must receive specified disclosure documents. General solicitation is prohibited. Rule 506(c) removes that prohibition: the issuer may advertise broadly, but every purchaser must be an accredited investor and the issuer must take reasonable steps to verify that status rather than simply accept the investor's word. An issuer relying on Regulation D files Form D with the SEC within fifteen calendar days after the first sale; in most states a notice filing of Form D and a fee are also required for Rule 506 offerings. Finally, Rule 506(d) imposes bad-actor disqualification. If the issuer or a covered person, meaning directors, executive officers, general partners, twenty percent beneficial owners, promoters, or compensated solicitors, has a disqualifying event such as a securities-related criminal conviction, court injunction, or certain regulatory orders within the applicable look-back period, Rule 506 is unavailable. Events predating September 23, 2013 do not disqualify but must be disclosed to investors, and an issuer that shows reasonable care in checking for events is protected.
Accredited Investors, General Solicitation, and Communications
Rule 501(a) defines the accredited investor, the concept the entire Regulation D structure leans on. A natural person qualifies with income exceeding two hundred thousand dollars in each of the two most recent years, or three hundred thousand jointly with a spouse or spousal equivalent, with a reasonable expectation of the same this year; or with net worth over one million dollars, alone or with a spouse or spousal equivalent, excluding the value of the primary residence. A person also qualifies by holding, in good standing, the Series 7, Series 65, or Series 82 license, or by being a director, executive officer, or general partner of the issuer, or a knowledgeable employee of a private fund purchasing that fund. Entities qualify in several ways, including corporations, partnerships, LLCs, and certain other organizations with over five million dollars in total assets not formed for the specific purpose of the investment, and any entity owning over five million dollars in investments. General solicitation, addressed in Rule 502(c), includes advertisements, articles, mass emails, unrestricted websites, and seminars whose attendees were invited by general solicitation. A representative can avoid crossing the line by offering only to investors with whom the firm has a pre-existing, substantive relationship, one formed before the offering and based on real knowledge of the investor's financial circumstances. FINRA Rule 2210 governs the communications themselves. Retail communications, those distributed to more than twenty-five retail investors within thirty calendar days, generally require prior approval by a registered principal; correspondence and institutional communications face review-based supervision. All communications must be fair and balanced, must not omit material facts, and may not overstate returns or bury risk.
Reselling Restricted Securities: Rule 144 and Rule 144A
Investors who buy in a private placement receive restricted securities, and Rule 144 is the main safe harbor that lets them resell without being treated as underwriters conducting an illegal distribution. For a non-affiliate of the issuer, the rule turns mostly on a holding period. If the issuer is a reporting company current in its Exchange Act filings, the holder must wait six months; between six months and one year, resales are allowed as long as current public information about the issuer is available, and after one year resales are unrestricted. If the issuer is a non-reporting company, the holding period is one year, after which the non-affiliate may sell freely. Affiliates, meaning control persons such as officers, directors, and large shareholders, face additional conditions that never expire while they remain affiliates: current public information, a volume limit equal to the greater of one percent of outstanding shares or the average weekly trading volume over the preceding four weeks for exchange-listed securities, manner-of-sale requirements contemplating ordinary brokers transactions, and a Form 144 notice filing when sales exceed five thousand shares or fifty thousand dollars in any three-month period. Rule 144A serves a different market entirely. It permits the immediate resale of eligible unregistered securities to qualified institutional buyers, or QIBs, which are institutions owning and investing at least one hundred million dollars in securities of unaffiliated issuers; a registered broker-dealer qualifies at ten million. The securities must not be of the same class as securities listed on a national exchange. Rule 144A is why a large institutional market in unregistered debt can trade actively while retail resales wait out holding periods.
Regulation A and Regulation Crowdfunding Distinctions
Two other exemptions let smaller issuers reach the general public, and the exam expects you to keep them distinct from Regulation D and from each other. Regulation A, sometimes called a mini-registration, allows an eligible U.S. or Canadian issuer to conduct a public-style offering after the SEC qualifies an offering statement on Form 1-A, which includes an offering circular. Tier 1 permits up to twenty million dollars in a twelve-month period and remains subject to state-level review in the states where the offering is made. Tier 2 permits up to seventy-five million dollars, preempts state qualification requirements, and in exchange demands audited financial statements, ongoing annual, semiannual, and current-event reports, and an investment limit for non-accredited investors of ten percent of the greater of income or net worth unless the securities will be listed on a national exchange. Critically, Regulation A securities are not restricted; buyers can resell them freely. Testing-the-waters communications are permitted before qualification. Regulation Crowdfunding is smaller and runs through technology. An issuer may raise up to five million dollars in a twelve-month period, but only through a single online intermediary that is either a registered broker-dealer or a registered funding portal, using Form C disclosure. Non-accredited investors face individual investment caps across all crowdfunding offerings in a twelve-month period, calculated from income and net worth against a dollar threshold the SEC adjusts periodically for inflation; accredited investors have no cap. Crowdfunding securities generally cannot be resold for one year, with exceptions for sales to the issuer, to accredited investors, to family members, or in a registered offering.
Key terms
- Section 4(a)(2)
- — The Securities Act exemption for transactions by an issuer not involving any public offering; the statutory basis for private placements.
- Regulation D
- — The SEC safe harbor containing Rules 504, 506(b), and 506(c), which give issuers defined conditions for conducting exempt private offerings.
- Rule 506(b)
- — Exemption allowing unlimited capital from accredited investors plus up to 35 sophisticated non-accredited purchasers in a 90-day period, with no general solicitation.
- Rule 506(c)
- — Exemption permitting general solicitation and advertising, provided all purchasers are accredited and the issuer takes reasonable steps to verify that status.
- Accredited investor
- — A person or entity meeting Rule 501(a) standards, such as $200,000 individual income ($300,000 joint), $1 million net worth excluding the primary residence, or qualifying licenses or entity status.
- General solicitation
- — Publicly promoting an offering through advertising, mass communications, unrestricted websites, or open seminars; prohibited under Rules 504 and 506(b).
- Form D
- — The notice filing an issuer makes with the SEC within 15 calendar days after the first sale in a Regulation D offering.
- Bad-actor disqualification
- — Rule 506(d) provision barring use of Rule 506 when the issuer or a covered person has a disqualifying event such as a securities-related conviction or regulatory bar.
- Restricted securities
- — Securities acquired in an unregistered offering that cannot be freely resold until an exemption such as Rule 144 is satisfied.
- Rule 144
- — Safe harbor permitting resale of restricted and control securities after holding periods, with volume, manner-of-sale, information, and notice conditions for affiliates.
- Qualified institutional buyer (QIB)
- — An institution owning and investing at least $100 million in securities of unaffiliated issuers ($10 million for broker-dealers), eligible to buy under Rule 144A.
- Regulation A
- — An exemption for public-style offerings up to $20 million (Tier 1) or $75 million (Tier 2) in 12 months, using an SEC-qualified offering circular and producing freely tradable securities.
Exam tips
- F1 carries 25 of the 50 scored questions, so know the Regulation D grid cold: dollar limits, investor limits, solicitation rules, and verification duties for Rules 504, 506(b), and 506(c).
- The 35-investor limit in Rule 506(b) counts non-accredited purchasers within a 90-day period, not offerees; an issuer can offer to more people than it sells to.
- Any general solicitation forces the offering into Rule 506(c) territory, where self-certification is not enough; the issuer must take reasonable steps to verify accredited status.
- Keep the resale outcomes straight: Regulation D securities are restricted, Regulation A securities are freely tradable, and Regulation Crowdfunding securities are locked up for one year with limited exceptions.
- Match the deadlines: Form D goes to the SEC within 15 calendar days after the first sale, and FINRA Rule 5123 requires member firms selling retail private placements to file offering documents with FINRA within 15 calendar days of the first sale.