Regulation A Offerings

Regulation A has a long history as an exemption for raising capital. It has been revised quite often, most recently in 1992. Reg A, as it's commonly called, allows a company to publicly offer its securities without registration under the 1933 Act. Instead, an offering statement  is filed and "qualified" with the SEC. A principal attraction of Reg A is that only two years of financial statements are required and they may be unaudited if audited information is not readily available. Additionally, the completion of a Reg A offering does not automatically subject the issuer to 1934 reporting.

The dollar limit of a Reg A offering has been raised to $5 million in any 12 month period (of which $1.5 million can be sales by selling security holders). Also, Form 1-A has been revised to allow the optional use of a "user-friendly" question and answer form (See SCOR below).

The new rules allow a issuer to "test the waters" before filing the offering statement. This means you can solicit indications of interest through the distribution or publications of preliminary materials. Oral indications can be solicited but the solicitation materials must be discontinued when an offering statement is filed.

Regulation D

Regulation D is a series of six rules, Rules 501-506, establishing three transactional exemptions from the registration requirements of the 1933 Act.

Rules 501-503 set forth definitions, terms and conditions that apply generally throughout the Regulation. Specific exemptions are set out in Rules 504-506.

Rule 504 applies to transactions in which no more than $1,000,000 of securities are sold in any consecutive twelve-month period. Rule 504 imposes no ceiling on the number of investors, permits the payment of commissions, and imposes no restrictions on the manner of offering or resale of securities. Further, Rule 504 does not prescribe specific disclosure requirements. Generally, the intent of Rule 504 is to shift the obligation of regulating very small offerings to state "Blue Sky" administrators, though the offerings continue to be subject to federal anti-fraud provisions and civil liability provisions of the Exchange Act.

Rule 505 applies to transactions in which not more than $5,000,000 of securities is sold in any consecutive twelve-month period. Sales to thirty-five "non-accredited" investors and to an unlimited number of accredited investors are permitted. An issuer under Rule 505 may not use any general solicitation or general advertising to sell its securities.

Rule 506 has no dollar limitation of the offering. Rule 506 is available to all issuers for offerings sold to not more than thirty-five non-accredited purchasers and an unlimited number of accredited investors. Rule 506, however, unlike 504 and 505, requires an issuer to make a subjective determination that at the time of acquisition of the investment each non-accredited purchaser meets a certain sophistication standard, either individually or in conjunction with a "Purchaser Representative." Like Rule 505, Rule 506 prohibits any general solicitation or general advertising.

"Accredited Investor" is defined in Rule 501(a). The principal categories of accredited investors are as follows: (1) Directors, executive officers, and general partners of the issuer, including general partners of general partners in two-tier syndicating. (The term "executive officers" is more fully defined in the Regulation.) (2) Purchasers whose net worth either individually or jointly with their spouse equals or exceeds $1 million. It is important to note that while there is no definition of "net worth" in Regulation D, there similarly is no requirement of liquidity in the calculation of net worth for this accreditation standard. Thus, a purchaser's home, furnishings, etc. are includable in the determination of net worth. (3) Natural person purchasers who have "income" in excess of $200,000 in each of the two most recent years and who reasonably expect an income in excess of $200,000 in current year (or $300,000, jointly with their spouse). (4) A business entity will be treated as a single accredited investor unless it was organized for the specific purpose of acquiring the securities offered, in which case each beneficial owner of the security is counted separately.

Additional Compliance Considerations For Regulation D

The SEC has pointed out the following regarding Regulation D:

1. Regulation D does not exempt offerings from the anti-fraud and civil liability provisions of the various federal securities laws.
2. Further, Regulation D in no way relieves issuers of their obligation to furnish to investors whatever material information may be needed to make any required disclosures not misleading.
3. Similarly, notwithstanding exemption from registration at the federal level, Regulation D in no way obviates an issuer's obligation to comply with applicable state law.
4. Regulation D is interpreted as providing "transactional" exemptions to issuers only. An investor whose purchase was exempt from registration cannot resell his or her interest without establishing an independent basis of exemption.
5. The three exemptions are not intended to be mutually exclusive, that a reliance on one exemption is not deemed to be an election to the exclusion of any other applicable exemption.
6. Finally, the exemptions of Regulation D may not be claimed with respect to any plan or scheme to evade the registration provisions of the act.

Existing state securities regulations at times impose substantially more onerous limitations on issuers than Regulation D. Issuer's counsel must be consulted regarding the requirements of the securities law of each state in which an offering is going to be sold.

This is not a full disclosure of the Private Placement Regulations, and is not intended to offer legal advice on Private Placement Security Laws.

Small Company Offering Registration (SCOR)

The Form U-7, which is the basic registration/information form used in the SCOR (in some states, this is called Uniform Limited Offering Registration or ULOR) was adopted by the Securities and Exchange Commission in 1992. It allows a company to raise up to $1 million by selling securities. The disclosure statement (Form U-7) is considerably less complicated than standard disclosure forms and it is constructed in a question and answer format. Some states even offer it on a computer disk.

The SCOR/ULOR process is touted as the simplest paper-work process used to complete an exempted offering ever. Still, it's an area that requires you to engage legal and accounting advice, although not to the extent of the other offering processes.