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Section 4(a)(2) of the Securities Act exempts from registration transactions by an issuer not involving any public offering.
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Section 4(a)(2)

To qualify for this exemption, which is sometimes referred to as the “private placement” exemption, the purchasers of the securities must:

  • either have enough knowledge and experience in finance and business matters to be “sophisticated investors” (able to evaluate the risks and merits of the investment), or be able to bear the investment’s economic risk
  • have access to the type of information normally provided in a prospectus for a registered securities offering and
  • agree not to resell or distribute the securities to the public

In general, public advertising of the offering, and general solicitation of investors, is incompatible with the private placement exemption.

The precise limits of the private placement exemption are not defined by rule. As the number of purchasers increases and their relationship to the company and its management becomes more remote, it is more difficult to show that the offering qualifies for this exemption. If your company offers securities to even one person who does not meet the necessary conditions, the entire offering may be in violation of the Securities Act.

Rule 506(b) of Regulation D is considered a “safe harbor” under Section 4(a)(2). It provides objective standards that a company can rely on to meet the requirements of the Section 4(a)(2) exemption. Companies conducting an offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors. An offering under Rule 506(b), however, is subject to the following requirements:

  • no general solicitation or advertising to market the securities
  • securities may not be sold to more than 35 non-accredited investors (all non-accredited investors, either alone or with a purchaser representative, must meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment)

If non-accredited investors are participating in the offering, the company conducting the offering:

  • must give any non-accredited investors disclosure documents that generally contain the same type of information as provided in Regulation A offerings (the company is not required to provide specified disclosure documents to accredited investors, but, if it does provide information to accredited investors, it must also make this information available to the non-accredited investors as well)
  • must give any non-accredited investors financial statement information specified in Rule 506 and
  • should be available to answer questions from prospective purchasers who are non-accredited investors

Purchasers in a Rule 506(b) offering receive “restricted securities." A company is required to file a notice with the Commission on Form D within 15 days after the first sale of securities in the offering. Although the Securities Act provides a federal preemption from state registration and qualification under Rule 506(b), the states still have authority to require notice filings and collect state fees.

Rule 506(b) offerings are subject to “bad actor” disqualification provisions.