28. What is a Rule 505 “small offerings” exemption?
Rule 505 of Regulation D provides a transactional exemption from registration of a securities issuance.
• Issuer Protections – The exemption is generally available to all types of issuers (individuals, non-corporate businesses, corporations, as well as those reporting under the ’34 Act) but it is not available for investment companies or for issuers that are subject to any statutory disqualification provisions, such as companies formally sanctioned by the SEC for untrue statements or omissions in securities offerings.
• Dollar Limits – This exemption allows an issuer to raise up to $5 million within a 12-month period.
• Purchaser Requirements – The exemption allows for sale to an unlimited number of accredited investors and up to 35 non-accredited investors.
⁃ Note: Exceeding the number of non-accredited investors can forfeit the exemption.
• Restricted Securities – The securities exempted in the issuance are restricted from resale.
• General Solicitation – General solicitation of purchasers is prohibited in the same manner as under a Rule 504 exemption.
• Private Placement Memorandum – The issuer does not have to make specified disclosures to accredited investors, but it must make extensive disclosures to non-accredited investors. This is normally done through the private placement memorandum, a disclosure document similar in nature to the prospectus. Notably, the disclosures must include certified financial statements.
• State Regulation – Rule 505 does not provide an exemption from registration of securities under state law. This is similar to a Rule 504 offering.
• Discussion: The primary differences between a Rule 504 and 505 exemption is the dollar value of the issuance and classification of purchasers of securities. Why do you think Rule 505 separates classes of purchasers of securities into accredited and unaccredited investors?
• Practice Question: ABC Corp is an established company that is steadily growing. ABC needs about $5 million in investment capital reach its growth goals for the next 18 months. In a brief letter, can you summarize the benefits and drawbacks of seeking an exemption from securities registration under Rule 505?