Exempt Offerings and Private Placements
Not every securities offering goes through full Securities and Exchange Commission (SEC) registration. Several exemptions allow issuers to raise capital with reduced regulatory requirements, but each comes with its own rules and limitations.
Regulation A (Conditional Small Issues Exemption)
Regulation A provides an abbreviated registration process using Form 1-A (not a full S-1 registration statement). The disclosure document is an offering circular, not a prospectus.
Two Tiers
| Feature | Tier 1 | Tier 2 |
|---|---|---|
| Maximum offering | $20 million in 12 months | $75 million in 12 months |
| Affiliate sales limit | $6 million | $22.5 million |
| State registration | Required (blue-sky compliance) | Preempted (federal only) |
| Financial statements | Not required to be audited | Must be audited |
| Ongoing reporting | Not required | Required (annual, semiannual, current event reports) |
| Investment limits (non-accredited) | None | Greater of 10% of annual income or 10% of net worth |
Regulation D (Private Placements)
Regulation D provides an exemption from SEC registration for private offerings. These are the most commonly used exemptions for capital raising.
Key Rules
| Rule | Maximum Offering | Investor Limits | General Solicitation |
|---|---|---|---|
| Rule 504 | $10 million in 12 months | No limit on number or type | Generally not permitted (exceptions apply) |
| Rule 506(b) | No dollar limit | Unlimited accredited + up to 35 non-accredited (must be sophisticated) | NOT permitted |
| Rule 506(c) | No dollar limit | Unlimited accredited only | Permitted (must verify accredited status) |
Accredited Investor Definition (Rule 501)
An accredited investor includes:
- Individuals with income exceeding $200,000 ($300,000 joint) for each of the last 2 years with reasonable expectation of the same
- Individuals with net worth exceeding $1 million (excluding primary residence)
- Certain entities: banks, insurance companies, registered investment companies
- Entities with total assets exceeding $5 million
Filing Requirement
- Form D must be filed with the SEC within 15 days of the first sale (SEC Rule 503)
- Securities sold under Reg D are restricted securities. They cannot be freely resold without registration or an exemption.
Exam Tip: Gotchas
Rule 506(b) allows up to 35 non-accredited investors but prohibits general solicitation. Rule 506(c) permits general solicitation but requires ALL investors to be accredited and the issuer must take reasonable steps to VERIFY their status. Know which rule allows what.
Section 3(a)(11) and Rule 147 (Intrastate Offering)
The intrastate exemption covers offerings made entirely within one state to residents of that state.
Requirements
- Issuer must be organized, doing business, and offering/selling within the same state
- Doing business test (80% rule): Must meet at least one of:
- 80% of revenues from in-state
- 80% of assets in-state
- 80% of net proceeds used in-state
- Majority of employees based in-state
- Resale restriction: Securities cannot be resold to out-of-state residents for 6 months from the date of sale by the issuer
Exam Tip: Gotchas
The intrastate exemption under Rule 147 requires ALL buyers to be state residents. Even ONE sale to an out-of-state buyer can destroy the exemption for the ENTIRE offering, not just that one sale.