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Private Placement and Exempt Offering

The Securities Act of 1933 (the “Securities Act”) requires that all securities be offered and sold either by registration with the Securities and Exchange Commission (SEC) or under exemption from registration.

Exemption provisions regarding public offerings are stipulated in Articles 3 and 4 of the Securities Law.

  • Article 3: Exemption from certain types of securities (e.g., government-guaranteed securities, short-term bonds) and certain transactions (e.g., securities exchange under Article 3(a)(9))
  • Section 4: All other transaction exemptions, including exemptions under Regulation D and Sections 4(a)(2) and 506(c).

Requirements for Applying Exemptions

The requirements for applying exemptions vary depending on the following conditions:

  • Types of companies being recruited (unlisted/public, whether it is a U.S. company, whether it is an investment company)
  • Fundraising amount
  • Recruitment method (eligibility for recruitment)
  • Bad Actor Rules
  • Types of investors (whether they are accredited investors)
  • Amount and type of information to be disclosed

Generally, the higher the sales ability to non-accredited investors, the more requirements are imposed.

Changes in Exemption Provisions

In recent years, exemption provisions have been expanded with the enactment of the JOBS Act of 2012.

  • Splitting Rule 506 into two parts: 506(b) and 506(c)
  • Established Regulation A/A+ and Regulation Crowdfunding

The 2015 FAST Act added Rule 4(a)(7) regarding resale to qualified investors.

The 2018 Economic Growth Act states:

  • Allowing SEC-reported companies to use Regulation A
  • Changed to Rule 701 (Employee Stock Option Plan for Private Companies)

Additionally, the SEC stated:

  • Repeal of unused Rule 505
  • Expansion of Rule 504 provision restrictions
  • Changing the in-state delivery structure

Rule 506

The most commonly used exempt offers are Regulation D’s Rules 506(b) and 506(c).

Rule 506(b)

  • Allows recruitment and sales to unlimited accredited investors and up to 35 non-accredited investors.
  • If non-accredited investors are included, detailed disclosures such as audited financial statements are required.
  • General solicitation and advertising are not allowed.

Rule 506(c)

  • General solicitation and advertising are possible.
  • All investors must be accredited investors.
  • Companies are required to verify their status as accredited investors.
  • Simple checkboxes are not enough.

Features of Rule 506

One advantage of Rule 506 is that it takes precedence over state law. By complying with the requirements, you only need to submit notifications in each state, helping to keep capital costs increasing.

Legal Risks

Failure to comply with exemption provisions may result in the following risks:

  • State and Federal Regulatory Measures
  • Shareholder lawsuit
  • Request to terminate the offering contract from existing shareholders
  • Fine
  • Damage to reputation
  • Restrictions on future exemption recruitment
  • Criminal liability

Overcoming Complex Requirements

Exempt recruitment is subject to complex and stringent regulatory standards. It is essential for companies to work with experienced lawyers.

Contact Us

For an initial consultation, please call 877-541-3263 or make a reservation by email through the inquiry form.