Regulation D Offerings

Regulation D matters on a trading desk for a reason that is easy to miss. An unregistered offering under the private placement exemption does not meet the IPO-related transactions definition and is expressly excluded from the new issue definition.

The new issue definition's first lettered exclusion removes a limited offering only when its securities are restricted. Either kind can still be a Regulation M distribution, because that test does not turn on registration.

What Does Regulation D Exempt, and What Does It Not?

Regulation D relates to transactions exempted from the Securities Act registration requirement. Those transactions are not exempt from the antifraud, civil liability, or other provisions of the federal securities laws.

Three further provisions shape how the regulation is used:

• Attempted compliance with any rule in Regulation D does not act as an exclusive election. The issuer can also claim the availability of any other applicable exemption. The rule gives its own example: an issuer's failure to satisfy all the terms and conditions of the no-solicitation private placement branch shall not raise any presumption that the Securities Act's private offering exemption is unavailable.
• Regulation D is available only to the issuer of the securities, and not to any affiliate of that issuer or to any other person for resales of the issuer's securities. It provides an exemption only for the transactions in which the securities are offered or sold by the issuer, not for the securities themselves.
• Regulation D is not available to any issuer for any transaction or chain of transactions that, although in technical compliance with Regulation D, is part of a plan or scheme to evade the registration provisions of the Securities Act. In such cases, registration under the Act is required.

Exam Tip: Gotchas

• The exemption attaches to the transaction, not to the security. Securities sold under Regulation D remain restricted in the buyer's hands except where the limited offering exemption's state-law branches apply, which is why the resale limit exists.
• Missing one exemption's conditions does not close the others. The rule says attempted compliance is not an exclusive election, and it names the private offering exemption specifically.
• Technical compliance is not enough where the plan is evasion. The rule withdraws the exemption and states that registration is required.

What General Conditions Apply Across Regulation D?

Integration. To determine whether offers and sales should be integrated, the regulation sends the reader to the Commission's integration rule.

Information requirements. If the issuer sells securities under the no-solicitation private placement branch to any purchaser that is not an accredited investor, the issuer shall furnish the specified information to that purchaser a reasonable time prior to sale. The issuer is not required to furnish that information to purchasers when it sells under the limited offering exemption, or to any accredited investor.

Limitation on manner of offering. Except as provided in the limited offering exemption's state-law branches or in the accredited-only private placement branch, neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising. The rule then gives an open list, including, but not limited to:

• Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio.
• Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

Limitations on resale. Except as provided in the limited offering exemption's state-law branches, securities acquired in a Regulation D transaction have the status of securities acquired in a transaction under the Securities Act's private offering exemption and cannot be resold without registration under the Act or an exemption therefrom. The issuer shall exercise reasonable care to assure that the purchasers are not underwriters within the meaning of the Securities Act.

Exam Tip: Gotchas

• The general solicitation list is open. The rule says "including, but not limited to", so a communication outside the two named examples can still be a general solicitation.
• The information requirement is keyed to one branch and one kind of purchaser. It applies to a non-accredited purchaser under the no-solicitation branch, and never to an accredited investor.

What Are the Two Exemptions and Their Conditions?

The limited offering exemption. Offers and sales that satisfy its conditions are exempt from the Securities Act registration requirement under that Act's small-offering exemptive authority, but only where the issuer is not:

• Subject to the Exchange Act reporting requirements;
• An investment company; or
• A development stage company that either has no specific business plan or purpose, or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person.

Its offers and sales must satisfy the terms and conditions of the definitions rule and of the integration, manner-of-offering and resale conditions. The manner-of-offering and resale conditions do not apply to offers and sales made in any of three state-law situations:

• Exclusively in one or more states that provide for the registration of the securities, and require the public filing and delivery to investors of a substantive disclosure document before sale, and made in accordance with those state provisions.
• In one or more states that have no provision for such registration, public filing or delivery, if the securities have been registered in at least one state that does provide for it, offers and sales are made in that state in accordance with those provisions, and the disclosure document is delivered before sale to all purchasers, including those in the states with no such procedure.
• Exclusively according to state law exemptions from registration that permit general solicitation and general advertising, so long as sales are made only to accredited investors.

Its ceiling: the aggregate offering price shall not exceed $10,000,000, less the aggregate offering price for all securities sold within the 12 months before the start of and during the offering under this exemption or in violation of the Securities Act registration requirement.

The private placement exemption. Offers and sales of securities by an issuer that satisfy either of its two condition sets shall be deemed to be transactions not involving any public offering within the meaning of the Securities Act's private offering exemption. It carries no dollar ceiling.

Exam Tip: Gotchas

• The purchaser cap carries a rolling window. It is 35 purchasers in any 90-calendar-day period, not 35 purchasers over the life of the issuer.
• Accredited investors do not count toward the 35. Any accredited investor is excluded when the number of purchasers is calculated under the no-solicitation branch.
• The accredited-only branch drops the manner-of-offering condition but keeps the resale limit. Its condition list names the integration and resale conditions, so the securities are still restricted.
• Reasonable belief runs wider than the sophistication test. The accredited investor definition carries it at the time of the sale, the 35-purchaser count carries it with no timing stated, and the sophistication test carries it immediately prior to making any sale.

Who Is an Accredited Investor?

An accredited investor is any person who comes within, or who the issuer reasonably believes comes within, any of thirteen categories, at the time of the sale of the securities to that person. The reasonable-belief branch is part of the definition itself.

In the net worth calculation, the person's primary residence shall not be included as an asset.

Exam Tip: Gotchas

• The income test needs three years, not two. Two completed years above the threshold plus a reasonable expectation of the same level in the current year.
• The reasonable-belief branch sits in the definition. A person the issuer reasonably believes comes within a category is accredited, tested at the time of the sale.

How Does a Regulation D Offering Meet the Other Regimes?

An unregistered Regulation D offering does not meet the IPO-related transactions definition, because that definition requires Securities Act registration. The new issue analysis is different: the definition reaches an initial public offering of equity made under either a registration statement or an offering circular, but its exclusions expressly remove offerings under the private placement exemption and offerings under the limited offering exemption only when the securities are restricted.

Regulation M can still attach. A distribution is defined whether or not the offering is subject to registration under the Securities Act, so an unregistered offering with the magnitude and the special selling efforts is a distribution.

Exam Tip: Gotchas

• The three regimes trigger on three different facts. The IPO-related transactions definition turns on Securities Act registration by an issuer that was not a reporting company immediately before filing that offering's registration statement.
• The new issue definition uses a different path. It reaches an initial public offering of an equity security under a registration statement or offering circular, subject to its exclusions.
• Regulation M turns on magnitude plus special selling efforts. An unregistered offering under the private placement exemption can sit outside the IPO-related transactions definition, within a new issue exclusion and inside Regulation M at the same time.

What Should You Check on Exam Day?

• Confirm Regulation D exempts the transaction from registration only, and never from the antifraud or civil liability provisions.
• Match the branch to the facts: a $10,000,000 ceiling and issuer eligibility tests, or an uncapped private placement with a no-solicitation or accredited-only condition set.
• Count purchasers within a 90-calendar-day window, excluding accredited investors.
• Test an accredited investor at the time of sale, and allow the issuer's reasonable belief as part of the definition.