Advantages to Regulation D Rule 505
Rule 505 of Regulation
D allows some of the companies an exemption from the registration
requirements of the federal securities laws, regarding offering of securities.
As per the regulation, a company can raise a maximum of $5 million in a
12-months period. The rule allows the sale to an unlimited number of qualified
investor plus 35 additional investors. Disclosure documents, i.e.
a private placement memorandum, must be delivered to all non-accredited
investors, and potential purchasers must be informed of the restricted”
securities (securities cannot be held for six months or longer without
registering them). The rule prohibits the use of general solicitation or advertising
to sell the securities.
Rule 505 of regulation D allows companies to decide what information to
give to qualified investors as long as, of course, this does not infringe
anti-fraud prohibitions of U.S. securities laws. Nevertheless, companies still
must give non-accredited investors disclosure documents - such as an offering
memorandum - that usually are the same to those used in
registered offerings. So if, a company gives information to the accredited
investors, it should also provide information to non-accredited investors. The
company must also be accessible to answer questions by potential purchasers of
the securities.
Advantages
Rule
505 replaces Rule
242 and provides disclosure standards for medium-sized offerings not
asserting full registration and disclosure.
Rule 505 escalates
the $2 million per six
month ceiling of Rule
242 to $5 million
per year.
The
issuer must bring forward audited financial statements for the most current
fiscal year if they are available without difficult to deal with endeavor and expense.
If the expense of presenting audited financial statements is difficult, issuers
other than limited partnerships may provide financial statements in which only
the balance sheet has been audited before 120 days of offering.
There
is also an option for limited partnership under which they can supply investors
with financial statements prepared for federal income tax purpose if accessing
audited financial statement is a burden, but the partnership's financial
statements must be approved by a certified or an independent public accountant.
Earlier
to Regulation D, an
issuer could make
an offering of
less than $1.5 million
consistent to Rules 242, 146,
or Reg. A. Rule 146 and Reg. A each used the Reg. A circular,
similar in detail to Form S-18 as a revelation document for offerings under $1.5
million. As per Rule 242 an eligible issuer could make offerings of up to $2 million
using Form S-18
as a disclosure
document. Rule 505, therefore, does not change the disclosure burden
importantly for these issuers.
Investment
companies and "unworthy issuers," those with dubious securities
records as defined by Reg. A may not use Rule 505. Evidently missing, however, are
the prohibitions incorporated
in Rule 242
on use by
partnerships, foreign corporations, and companies with a significant oil and gas
operations.
Regulation D
requires specific disclosure requirements, as a pre-requisite for rule 505.
This rule is subject to an exception if the securities offered are purchased
solely for accredited investors.
The
Regulation requires non-reporting companies to disclose information which is
“material to an understanding of the issuer, its business, and the securities
being offered.”
Under
505, reporting companies have the option of two disclosure package. The first
one requires an issuer to disclose to shareholders, its latest annual report,
and latest proxy statement filed in connection with the annual report. Also, a
copy of its recent annual report on the 1934 Act’s Form 10-K, if requested by a
purchaser in written. In the second option, the issuer is required to provide
the information given in form 10-K, a registration statement on the 1934 Act’s
Form 10, or a registration statement on the 1933 Act’s Form S-1, which was filed
recently.
Securities acquired under 505 enjoy the same
status as acquired under section 4(2) of the 1933 Act"8, hence can be
resold only on registration or an exemption from registration under the 1933 Act.
Rule 505 cannot be enjoyed by an issuer who fails to exercise reasonable care
to assure that no purchaser of the securities is an underwriter within the
meaning of section 2(11) of the 1933 Act.
Successful
use of limited disclosure requirements under Rule 242 led the SEC to make Rule
505 more extensively accessible to small businesses without considering the
organization form.
For more information on this topic please contact Princeton Corporate Solutions at www.princetoncorporatesolutions.com.
