The Securities Act and the Exchange Act prohibit the sale and transfer of securities without first registering them with the Securities Exchange Commission (”SEC”), except if the securities offering takes advantage of one of SEC’s exemption rules. One such exemption is securities offerings under Regulation D. Reg D actually has three distinct registration exemptions—one of which is established in SEC Rule 505. If you are looking to sell securities under Rule 505 of Regulation D, it is important to speak with a qualified securities lawyer to find out if this is the best option for your company’s needs.
Understanding Rule 505
Regulation D has three exemptions that permit companies to make private offerings without completing the registration requirements otherwise set forth in the Code of Federal Regulations. Rule 505 is one of the most commonly used Reg D exemptions.
When Rule 505 Applies
Any company can make an offering under Rule 505 of Regulation D, but they must meet four conditions set forth in the Code of Federal Regulations in order to properly take advantage of the Rule 505 exemption.
No more than $5 million of securities can be sold in any 12-month period.
The securities can only be sold to up to 35 non-accredited investors and an unlimited number of qualified accredited investors.
The company must inform investors that the securities are restricted and cannot be resold within six months unless they are first registered.
The offering cannot be advertised for general solicitation.
Rule 505 does not require any specific disclosures be given to accredited investors. Instead, the company may decide what disclosures are appropriate. Non-accredited investors, on the other hand, must be given disclosures equivalent those used in a registered offering. This generally includes full financial statements audited and certified by an independent CPA.
An issuer using Rule 505 to make a private offering must notify the SEC within 15 days by filing Form D. Form D provides detailed information about company’s promoters, executive officers, and directors and as well as some basic details about the offering. After a company files Form D the offering is listed in the public EDGAR database.
Who is an accredited investor under Rule 505?
Accredited investors for the purposes of Rule 505 are defined in Rule 501 of Regulation D. These are entities with sophisticated financial knowledge, such as banks, insurance companies, registered investment companies, business development companies, and small business investment companies, as well as employee benefit plans, businesses, and trusts with greater than $5 million worth of assets. Individuals can also be considered accredited investors if they earn at least $200,000 per year (or $300,000 jointly with a spouse) or have a net worth exceeding $1 million.