Private Placements Attorney
Private Placements Under Regulation D: Structure, Compliance, and Common Mistakes
Private placements under Regulation D are the most common method of raising capital without SEC registration. The exemption depends on strict compliance with conditions that are easy to violate and difficult to cure after the fact. Securities counsel structures the offering to preserve the exemption.
How Private Placements Work
A private placement is a sale of securities that is exempt from the registration requirements of Section 5 of the Securities Act of 1933. Regulation D provides the most commonly used exemptions, principally Rule 506(b) and Rule 506(c). These rules allow issuers to raise capital without the time, expense, and public disclosure associated with a registered offering, provided the issuer complies with the specific conditions of the exemption. The conditions relate to who can purchase, how the offering is marketed, what disclosure must be provided, and what filings must be made with the SEC and state regulators.
The Role of Securities Counsel
Securities counsel in a private placement serves multiple functions. Counsel structures the offering to comply with the applicable exemption, prepares or reviews the offering documents, advises on investor qualification requirements, ensures that Form D is filed timely, coordinates with state Blue Sky law requirements, and reviews subscription agreements and investor questionnaires. The goal is to create a record that demonstrates the issuer's compliance with every condition of the exemption, because the burden of proving exemption availability falls on the issuer in any enforcement proceeding.
Compliance Risks That Issuers Underestimate
The most common compliance failures in private placements involve integration of separate offerings, general solicitation in 506(b) offerings, inadequate accredited investor verification in 506(c) offerings, and failure to provide required disclosure to non-accredited investors. Each of these failures can destroy the exemption and convert the offering into an unregistered public offering in violation of Section 5. The consequences include rescission rights for investors, SEC enforcement action, and potential criminal liability in egregious cases. Securities counsel identifies and addresses these risks before they materialize.
Frequently Asked Questions
What is a private placement?
A private placement is a sale of securities that is exempt from SEC registration under Regulation D (typically Rule 506(b) or 506(c)). The issuer sells securities directly to a limited number of investors, usually accredited investors, without the public offering process required for registered securities.
What is the difference between Rule 506(b) and 506(c)?
Rule 506(b) allows the issuer to raise unlimited capital from an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors, but prohibits general solicitation. Rule 506(c) allows general solicitation and advertising but requires the issuer to take reasonable steps to verify that all purchasers are accredited investors.
Do private placements need a PPM?
While not strictly required for offerings limited to accredited investors, a private placement memorandum (PPM) is strongly recommended and is practically necessary for offerings that include non-accredited investors. The PPM provides disclosure that protects the issuer against claims of material misrepresentation or omission and demonstrates compliance with the antifraud provisions of the securities laws.
What mistakes invalidate a private placement exemption?
Common mistakes that can invalidate a Regulation D exemption include conducting general solicitation in a 506(b) offering, failing to verify accredited investor status in a 506(c) offering, selling to too many non-accredited investors, failing to provide required disclosure to non-accredited investors, failing to file Form D timely, and integration of offerings that should have been treated as separate transactions.
Questions about your specific situation?
Frederick M. Lehrer is a former SEC Enforcement Attorney with over 30 years of issuer-side securities law experience. All consultations are confidential. Flat-fee engagements.