Financing Through Exempt Private Capital Raise Transactions Under Regulation D of the…

Financing Through Exempt Private Capital Raise Transactions Under Regulation D of the Securities and Exchange Commission. Part IV.

Regulation D, Rule 506(b) – Non-Accredited Investor Required Disclosure

While no disclosure is required to be disseminated in offerings to accredited investors in reliance on Rule 506(c) of Regulation D (i.e., sales made to solely accredited investors), owing to the anti-fraud provisions of the federal securities laws, issuers should consider providing such information as is referenced in this article regarding required disclosure to non-accredited investor to accredited investors as well. If the issuer is not a reporting company (in the context of this article, it is assumed that the issuer is not a reporting company), the issuer must furnish to the purchaser, to the extent material to an understanding of the issuer, its business and the securities being offered, the following: 

Non-financial Statement Information – 

If the issuer is eligible to use Regulation A:

 “Tier 1” – where sums of all cash and other consideration to be received for the securities being offered (“aggregate offering price”) plus the gross proceeds for all securities sold pursuant to other offering statements within the 12 months before the start of and during the current offering of securities (“aggregate sales”) does not exceed $20,000,000, including not more than $6,000,000 offered by selling securityholders that are affiliates of the issuer; 

“Tier 2” – offerings in which the sum of the aggregate offering price and aggregate sales does not exceed $75,000,000, including not more than $22,500,000 offered by all selling securityholders that are affiliates of the issuer); and

Additional limitation on secondary sales in first year – The portion of the aggregate offering price attributable to the securities of selling securityholders may not exceed 30% of the aggregate offering price of a particular offering in;

The issuer’s first offering pursuant to Regulation A; or

Any subsequent Reg A offering that is qualified within one year of the qualification date of the issuer’s first offering; 

Then, the same kind of information as would be required in Part II of Form 1-A (Note: The Securities and Exchange Commission (SEC) permits two formats for a Reg. A offering document – a shorter form of Offering Circular applicable to smaller companies, and as to companies intending to upgrade to a formal SEC registration, the disclosure requirement of Form S-1, “Registration Statement under the Securities Act of 1933”). This article focuses on the information to be included in the Offering Circular form where the issuer has no imminent intent to register. Note that the phrase “Offering Circular” in the context of a Regulation D, Rule 506(b) exempt private offering is analogous to the phrases conventionally used interchangeable to describe such disclosure document, including “Private Placement Memorandum” (abbreviated, “PPM”) and “Private Offering Memorandum.”


If the issuer is not eligible to use Regulation A (i.e., where the parameters of its offering would exceed the limits prescribed for a Tier 2 Offering under Regulation A) the same kind of information as would be required in Part I of a registration statement filed under the Securities Act on  the form that the issuer would be entitled to use (e.g., Form S-1 for any issuer as to which no other SEC registration statement is applicable). This article does not contemplate such a generally larger securities offering since it originates in a discussion of a private exempt offering under Regulation D which generally contemplates a smaller business operation. 

Financial Statement Information –

Offerings up to $20,000,000 – The financial statement information, prepared in accordance with generally accepted accounting principles, required by paragraph (b) of Part F/S of Form 1-A, which need not be audited, generally, yet if not audited must be labeled, “Unaudited”.  Specifically includable are consolidated balance sheet, statements of comprehensive income, cash flows and changes in stockholders’ equity. Certain other prescribed financial statements are required in contexts such as where interim period financial statements are presented, where there are oil and gas producing activities, and regarding financial statements of and disclosure about other entities such as guarantors and issuers of guaranteed securities, affiliates whose securities collateralize an issuance and those of a business acquired or to be acquired. 

Offerings over $20,000,000. —

The financial statement information required by paragraph (c) of Part F/S of Form 1-A , which are the same financial statements required for offerings up to $20,000,000 (i.e., those referred to above for offerings up to $20M  as prescribed by paragraph (b) of Part F/S of Form 1-A), except they must be audited and must otherwise comply with Article 8 of Regulation S-X as if they were conducting a registered offering on Form S-1.

The specific non-financial statement information required in the Offering Circular is annotated below from Form 1-A, Part II. 

Annotated Requirements of Part II, Form 1-A, Offering Circular, Regarding Non-Financial Statement Information: 

Item 1. Cover Page of Offering Circular – The cover page of the offering circular must be limited to one page and must include the information specified in this item.

  1. Name of the issuer.
  2. Mailing address of the issuer’s principal executive offices and the issuer’s telephone number (including the area code) and, if applicable, website address.
  3. Date of the offering circular.
  4. Title and amount of securities offered. Separately stated amount of securities offered by selling security holders, if any, with a cross-reference to the section where the disclosure required by Item 14 of Part II of Form 1-A has been provided (see Item 14 below).
  5. The information called for by the applicable table [in Form 1-A, Part II, this Item 1 (e)] as to all the securities being offered, in substantially the tabular format described below. If necessary, any underwriting discounts and commissions and the proceeds to the issuer or other persons may be estimated. The table’s four (4) column headings are to be: “Price to the Public”, “Underwriting Discounts and Commissions”, Proceeds to Issuer” and “Proceeds to Other Persons”; the same table’s rows are: “Per share/unit” and “Total.” If the offering is on a “best efforts” basis, the cover page must set forth the termination date, if any, of the offering, any minimum required sale and any arrangements to place the funds received in an escrow, trust, or similar arrangement. The best efforts table utilizes the same four (4) column heading format described above, but the rows are modified such that the “Total” row is bifurcated into two (2) rows, one captioned, “Total Minimum” and “Total Maximum.” 
  6. The name of the underwriter or underwriters.
  7. Any legend or information required by the law of any state in which the securities are to be offered.
  8. A cross-reference to the risk factors section, including the page number where it appears in the offering circular. Highlight this cross-reference by prominent type or in another manner.
  9. Approximate date of commencement of proposed sale to the public.
  10. If the issuer plans to price later, bona fide estimate of price range.
  11. Cover page legend, highlighted by prominent type or in another manner: “The United States Securities and Exchange Commission does not pass upon the merits of or give its approval to any securities offered or the terms of the offering, nor does it pass upon the accuracy or completeness of any offering circular or other solicitation materials. These securities are offered pursuant to an exemption from registration with the Commission; however, the Commission has not made an independent determination that the securities offered are exempt from registration.”

Item 2. Table of Contents– On the page immediately following the cover page of the offering circular, provide a reasonably detailed table of contents. It must show the page numbers of the various sections or subdivisions of the offering circular. Include a specific listing of the risk factors section required by Item 3, below (i.e., Item 3 of Part II of Form 1-A).

Item 3. Summary and Risk Factors

An issuer may provide a summary of the information in the offering circular where the length or complexity of the offering circular makes a summary useful. Immediately following the Table of Contents required by Item 2 or the Summary, there must be set forth under an appropriate caption, a carefully organized series of short, concise paragraphs, summarizing the most significant factors that make the offering speculative or substantially risky.

Item 4. Dilution

Where there is a material disparity between the public offering price and the effective cash cost to officers, directors, promoters and affiliated persons for shares acquired by them in a transaction during the past year, or that they have a right to acquire, there must be included a comparison of the public contribution under the proposed public offering and the average effective cash contribution of such persons.

Item 5. Plan of Distribution and Selling Securityholders 

If the securities are to be offered through underwriters, give the names of the principal underwriters, and state the respective amounts underwritten, disclosing any  having a material relationship to the issuer, and the nature of the underwriters’ obligation to take the securities, the discounts and commissions to be allowed or paid to dealers, outlining the plan of distribution of any securities being issued that are to be offered through the selling efforts of brokers or dealers or otherwise than through underwriters.

If any of the securities are to be offered for the account of securityholders, identify each selling securityholder, state the amount owned by the securityholder prior to the offering, the amount offered for his or her account and the amount to be owned after the offering. Describe any arrangements for the return of funds to subscribers if all of the securities to be offered are not sold. If there are no such arrangements, so state.

Item 6. Use of Proceeds to Issuer

Statement of principal purposes for which the net proceeds to the issuer from the securities to be offered are intended to be used and the approximate amount intended to be used for each such purpose. 

Items 7. Description of Business. Narrative description of business, including business done and intended to be done, the principal products and services and principal market and distribution methods, the status of product or service, number of employees, bankruptcy or receivership proceedings or legal proceedings The issuer must also describe those distinctive or special characteristics of the issuer’s operation or industry that are reasonably likely to have a material impact upon the issuer’s future financial performance.  Any Securities Act Industry Guides must be followed. Offerings of limited partnership or limited liability company interests must comply with the Securities and Exchange Commission’s interpretive views on substantive disclosure requirements contained in Securities Act Release No. 6899, June 17, 2019, whose aim is to improve the readability and otherwise clarity technical legal and deal point issues arising in connection with transactions in which such non-corporate entities are involved for the investor candidate audience .

Item 8. Description of Property.

Description of the location and general character of any principal plants or other material physical properties. 

Item 9. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Narrative of issuer’s financial condition, changes in financial condition and results of operations for each year and interim period for which financial statements are required, including the causes of material changes from year to year or period to period in financial statement line items, to the extent necessary for an understanding of the issuer’s business as a whole.

Item 10. Directors, Executive Officers and Significant Employees. Presentation in tabular format of the identities, ages, terms of office and hours per week of directors, officers and significant employees and their business experience.

Item 11. Compensation of Directors and Executive Officers. Presentation in the prescribed tabular format of the annual compensation of directors and executive officers. For Tier 1 offerings, compensation data for the three highest paid directors and officers and the aggregate annual compensation of the directors as a group. 

Item 12. Security Ownership of Management and Certain Securityholders. Disclosure in the prescribed tabular format of the beneficial ownership interest of all directors and executive officers as a group, individually identifying thereon any who beneficially owns more than 10% of any class of the issuers voting securities.

Item 13. Interest of Management and Others in Certain Transactions. Description of transactions during issuer’s last two years to which the issuer or any of its subsidiaries was or is a participant and the amount involved exceeds $50,000  for Tier 1 or the lesser of $120,000 and one percent of the average of the issuer’s total assets as of the end of each of the last two fiscal years for Tier 2 and in which any [director, executive officer, nominee for election as director, any promoter, or immediate family member of any of the foregoing] had or is to have a direct or indirect material interest, naming the person and stating his or her relationship to the issuer, the nature of the person’s interest in the transaction and, where practicable, the amount of such interest.

Item 14. Securities Being Offered. Where capital stock is being issued, the title of the class and as to all classes of capital stock outstanding, and brief outline of (i) dividend rights; (ii) voting rights; (iii) liquidation rights; (iv) preemptive rights; (v) conversion rights; (vi) redemption provisions; (vii) sinking fund provisions; (viii) liability to further calls or to assessment by the issuer; (ix) any classification of the Board of Directors, and the impact of classification where cumulative voting is permitted or required; (x) restrictions on alienability of the securities being offered; (xi) any provision discriminating against any existing or prospective holder of such securities as a result of such securityholder owning a substantial amount of securities; and (xii) any rights of holders that may be modified otherwise than by a vote of a majority or more of the shares outstanding, voting as a class. 

Where preferred stock is being offered or is outstanding, a brief description of any restriction on the repurchase or redemption of shares by the issuer while there is any arrearage in the payment of dividends or sinking fund installments. If there is no such restriction, so state.

Where debt securities are being offered, an outline of the provisions relating to interest, conversion, maturity, redemption, amortization, sinking fund or retirement, and any provisions regarding the kind and priority of any lien securing the issue, along with description of property so subject to lien.


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