The offer and sale of securities in the United States is typically prohibited unless they have been registered under the Securities Act of 1933 and the state’s “Blue Sky” laws under which they are offered. Unregistered securities, on the other hand, may be sold if they meet the requirements of a Regulation D explicit exemption from registration.
Exemptions for private placements allow a firm to raise funds without having to solicit investors publicly. The business’s Private Placement Memorandum provides information on the company and the securities that are being sold. Without using general solicitation terms or advertising, the business may provide this material to “Accredited Investors” who meet specific eligibility criteria.
A privately owned firm can raise up to $1 million in a 12-month period under Rule 504. To meet the exemption, the securities may be issued to an unlimited number of investors, and no specified sort of disclosure material is necessary. Rule 504 offers may be conducted through public solicitations in some cases, and the securities sold are not subject to resale limitations or investor accreditation requirements. While there is no requirement for federal registration, state governments do control offers. Companies can only raise up to $500,000 by selling shares to residents of Alaska and Montana, for example, because those jurisdictions have no disclosure rules that apply to the offering. While a private placement memorandum isn’t needed, it is usually a good idea to have one in place to reduce the chances of legal risk.