Securities Law

Private placements of securities under Regulation D

As a securities attorney, Mr. Staub has represented entrepenuers in structuring and documenting a wide range of securities offerings. The types of securities have included common stock, preferred stock, LLC membership interests and limited partnership interests. The issuers have been engaged in such diverse businesses as real estate, telecommunications, and information technology.

What is a private placement?

The term "private placement" or "private offering" is generally applied to the offering and sale of debt or equity securities that are exempt from public registration under the Securities Act of 1933. Private placements are not allowed to involve a "general solicitation" or advertising. Therefore, a private placement of securities is typically purchased by a relatively small number of investors. There is generally no secondary market for the securities sold in a private offering. Transfer of the securities purchased in a private placement are typically restricted, both by law and by the terms of the private offering documents.

What is Regulation D?

The SEC has established safe harbor rules in Regulation D (or Reg D) to establish that an offering of securities is exempt from public registration under the Securities Act of 1933. Reg D contains three rules providing exemptions from the registration requirements, allowing some smaller companies to offer and sell their securities without having to register the securities with the SEC. Rule 504 allows sales of securities up to $1,000,000, Rule 505 allows sales of securities up to $5 million, and Rule 506 puts no limit on the dollar amount of securities sold.

While companies using a Reg D exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company's executive officers and stock promoters but contains little other information about the company.

Are there other exemptions besides Reg D?

Yes. Some of the other options for selling securities without federal registration are the "intrastate offering exemption" under Section 3(a)(11) of the Securities Act, a "non-public" offering exemp under Section 4(2) of the Securities Act, an offering under Regulation A, and a sale under the accredited investor exemption under Section 4(6) of the Securities Act.

Due Diligence and Documentation

All securities transactions, even exempt transactions, are subject to the antifraud provisions of the federal securities laws. This means that you and your company will be responsible for false or misleading statements, whether oral or written. The government enforces the federal securities laws through criminal, civil and administrative proceedings. Some enforcement proceedings are brought through private law suits. Also, if all conditions of the exemptions are not met, purchasers may be able to obtain refunds of their purchase price.

It is up to you to decide what information you give to accredited investors, so long as it does not violate the antifraud prohibitions. But you must give non-accredited investors disclosure documents that generally are the same as those used in registered offerings. If you provide information to accredited investors, you must make this information available to the non-accredited investors as well. You must also be available to answer questions by prospective purchasers.

The information that you choose to give to investors must be accurate. Your legal counsel assisting in the preparation of the disclosure documents will ask for supporting documents to establish the accuracy of any material claims made in your disclosure. This investigation, known as "due diligence" is an essential part of the private offering process.

What is a private placement memorandum?

The disclosure you make in connection with your private offering can take many forms. The most typical method is to package the disclosure in a single document that contains the same type of information found in the prospectus of a public offering. The disclosure document goes by many names - offering circular, offering memorandum, prospectus - but the most common name is the "private placement memorandum" or PPM. Among the information contained in a private placement memorandum is a description of the company and its business, a description of the securities being sold, a discussion of the management and their compensation, historical financial information and disclosure of the risk factors that may affect the performance of the investment.

Are there other requirements?

Yes. Every state has enacted laws governing the sale of securities within that state. Exemption from Federal registration does not exempt an offering of securities from the application of state law. Therefore, a company issuing securities must also comply with the securities or "blue sky" laws of each state in which it plans to make an offer or sale of the security.

For more information on how Illinois securities attorney David Staub and the lawyers at Staub Anderson can help you successfully navigate your private offering, call David Staub at (312) 345-0545.

Contact David Staub:

David K. Staub
Staub Anderson LLC
55 West Monroe Street
Suite 1925
Chicago, Illinois 60603

312.345.0545 phone
312.345.0544 fax


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