10.4.1. Types of Private Placements
The SEC’s primary regulation governing private placements is Regulation D, which provides for three main types of private placements. Each type is typically referred to by the part of Regulation D that defines it.
Rule 504 offerings. Only offerings of $10 million or less may be offered under Rule 504, with any securities sold in an earlier Rule 504 offering within the previous 12 months counting toward the $10 million limit. There is no limit on the number of investors, and the investors do not need to be accredited. Rule 504 cannot be used by reporting companies, investment companies, or blank check companies (such as SPACs).
The SEC exempts Rule 504 offerings from certain requirements if they are governed by sufficiently strict blue sky laws. Such Rule 504 offerings may be publicly advertised, and its securities are not designated as restricted securities.
Rule 506(b) offerings. These have no dollar cap and limit the number of non-accredited investors to 35. The non-accredited investors must all be sophisticated or be represented by a purchaser representative who is sophisticated. For purposes of Rule 506(b), sophisticated means having the expertise to assess the investment’s merits and risks. There is no limit on the number of accredited investors.
Rule 506(c) offerings. These have no dollar cap and may be publicly advertised. However, all investors must be accredited. The issuer must take reasonable steps to screen prospective investors, so that the offering is only being sold to accredited investors.
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