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Seeking Investors

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We are targeting to raise about $3 million from a few accredited investors – Reg D Offering under Rule 505 or 506. I want to make sure I understand the process and legalities. Our plan is to finish writing a thorough business plan, complete with 3 year pro forma projections. We know we want to include a thorough Risk Factors section and wrap it with a Subscription Agreement and Accredited Investors questionnaire and information sheet. Can you confirm the above?

 
Answer:   Investor solicitation laws and paperwork. It appears Reg D Rules 505 or 506 would be applicable to a $3 million securities offering. A comprehensive business plan is always a good starting point; however, large investor solicitations have investment risks, other purchaser disclosure, and financial information requirements. For consideration with your lawyer, you can review the following SEC, state, and other business information regarding securities laws, investor paperwork, and related topics:
 
Sec Reg D Rules 505 and 506:
 
Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period. Under this exemption, your company may sell to an unlimited number of “accredited investors” and up to 35 persons that are not accredited investors. Purchasers must buy for investment purposes only, not for the purpose of reselling the securities. The issued securities are “restricted securities,” meaning purchasers may not resell them without registration or an applicable exemption, as explained below under the heading “Resale of restricted securities.” If your company is not an SEC reporting company, investors should be informed that they may not be able to sell securities for at least a year without the company registering the transaction with the SEC. Your company may not use general solicitation or advertising to sell the securities.
 
Under Rule 505, if your offering involves any purchasers that are not accredited investors, you must give these purchasers disclosure documents that generally contain the same information as those included in a registration statement for a registered offering. There are also financial statement requirements that apply to Rule 505 offerings involving purchasers that are not accredited investors. For instance, if financial statements are required, they must be audited by a certified public accountant. You must also be available to answer questions from prospective purchasers who are not accredited investors.
 
You may decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. If your company provides information to accredited investors, it must make this information available to the non-accredited investors as well.
 
Rule 506: As discussed earlier, Rule 506 is a “safe harbor” for the non-public offering exemption in Section 4(a)(2) of the Securities Act, which means it provides specific requirements that, if followed, establish that your transaction falls within the Section 4(a)(2) exemption. Rule 506 does not limit the amount of money your company can raise or the number of accredited investors it can sell securities to, but to qualify for the safe harbor, your company must:
 

  • not use general solicitation or advertising to market the securities;
  • not sell securities to more than 35 non-accredited investors (unlike Rule 505, 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);
  • give non-accredited investors specified disclosure documents that generally contain the same information as provided in registered 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);
  • be available to answer questions from prospective purchasers who are non-accredited investors; and
  • provide the same financial statement information as required under Rule 505:

 
Small Business and the SEC: sec.gov
 
Accredited investors/Disclosure Documents/Financial Statement:
 

 
Example Private Placement Memorandum information:
 

 
Links and references to sample and template documents have been provided pursuant to your request. Templates and sample documents can be very useful but businesses should exercise caution in the use of such documents.

 
Understand that not all templates are created equal, with many being created for a narrow set of requirements. A particular template will not be warranted to cover every provision that may be required by a particular set of business circumstances. Studying the language included in various samples and templates will improve your level of understanding related to the subject of your particular agreement and may help you articulate your business objectives related to an agreement. But be aware. Many agreements should be prepared by your lawyer for greater assurance that your interests have been protected.

Published: August 15, 2013
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Matt Tarkenton

Matt Tarkenton is Executive Vice President at Tarkenton Companies. He was part of a group that started Renova Partners, a boutique investment bank, and was recognized as a “40 Under 40: Up and Comer” by the Atlanta Business Chronicle in 2009. Matt performs business planning and marketing training for hundreds of professionals across the country, and co-hosts a weekly coaching program on entrepreneurial education. Matt graduated from Princeton University, where he was a member of the 1989 Ivy League Championship Football Team, and received an MBA from Harvard Business School.

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