SEC Rule 501 Lawyers & Attorneys

Regulation D offerings are specific securities offerings that do not have to be registered with the SEC. SEC Rule 501 defines the terms used to talk about and define Reg D exemptions, including who are accredited investors—the most important definition contained in Rule 501. If you are considering issuing a Reg D offering, it’s important to fully understand each of the key SEC Regulation D Rule 501 terms. It may help to speak with a securities lawyer from the Priori network to get better clarity on these terms and conditions.

Rule 501 Accredited Investors

In order to qualify under Rules 505 and 506 of Regulation D, securities can only be sold to accredited investors as defined in Rule 501.

Who Is an Accredited Investor?

The following people and entities are considered accredited investors under Rule 501:

  • Banks, insurance companies, registered investment companies, business development companies, and small business investment companies;

  • Employee benefit plans, businesses, or trusts with over $5 million worth of assets;

  • Directors, executive officers, and general partners of the company issuing securities;

  • Individuals who earn at least $200,000 per year or earn an income of $300,000 jointly with a spouse; or

  • Individuals or married couples with a net worth exceeding $1 million beyond the value of their primary residence.

Why It Matters

If you plan to make a Reg D offering, purchasers must strictly qualify under the definitions provided in Rule 501 of Regulation D guidelines. While all Reg D guidelines are strictly enforced, the accredited investor definition is an extremely important component of the Reg D exemptions. The logic is that investors meeting the accredited investor test are financially sophisticated and have some risk tolerance -- and therefore, these investors have a reduced need for the protections provided by the SEC filings and other regular disclosures mandated for non-exempt offerings. Accordingly, a finding that investors in a purportedly exempt offering do not meet the requirements for “accredited investors” is a serious violation of the spirit of the registration exemptions—and subject to significant sanctions.

Other Key Terms in Rule 501 of Regulation D

SEC Rule 501 also defines a number of other terms used in Reg D offerings, including:

Aggregate Offering Price

The aggregate offering price of a security under Reg D is considered the sum worth of all cash, services, property, notes, cancellation of debt, or other consideration to be exchanged for shares. When using a combination of consideration, however, their worth must be fairly assessed in cash for a reported offering price. Under Rules 504 and 505, this aggregate offering price cannot exceed $1 million and $5 million respectively.

Business Combination

When a share-based merger or acquisition is not registered with the SEC under a Regulation D exemption, it is called a business combination. To qualify, the issuer must be fully under the control of another company after the acquisition.

Number of Purchasers

Reg D exemptions are generally limited to a specific number of purchasers. This number of purchasers counts every business, partnership, and trust once, as well as each individual investor except the following:

  • Relatives who live with another purchaser;

  • Trusts where the majority control is owned by another purchaser or their family; or

  • Corporations where the majority control is owned by another purchaser or their family.

Executive Officer

An executive officer under Reg D offerings includes the president, any vice president in charge of a principal business unit, division, or function, and any other officer who performs any policy-making function on behalf of the issuer. This can include executives of subsidiaries of the issuer if they have the ability to affect overall policies of the company.

Purchaser Representative

To qualify as a purchaser representative under Rule 501, a individuals must:

  • have knowledge and experience in financial matters sufficient to allow them to evaluate the risks and benefits of a possible investment;

  • have been acknowledged as such by the purchaser in writing;

  • have disclosed any material relationship between themselves or their affiliates and the issuer or its affiliates; and

  • not be an affiliate, director, officer, or other employee of the issuer or a beneficial owner controlling 10 percent or more of any class of securities issued by the company.

FAQ

Are there any other terms I should know in order to understand Reg D registration exemptions?

These are the main ones that will apply to a typical offering. Other terms should simply use the common English definitions. If you are having difficulties understanding all the complexities of Reg D offerings it may help to speak with a securities lawyer.

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