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  • Rule 505

    by Nick

    Rule 505 of Regulation D allows some companies offering their securities to have those securities exempted from the registration requirements of the federal securities laws.

    To qualify for this exemption, a company:

    • Can only offer and sell up to $5 million of its securities in any 12-month period;
    • May sell to an unlimited number of “accredited investors” and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions;
    • Must inform purchasers that they receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them; and
    • Cannot use general solicitation or advertising to sell the securities.

    Rule 505 allows companies to decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that generally are the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well. The company must also be available to answer questions by prospective purchasers.

    Here are some specifics about the financial statement requirements applicable to this type of offering:

    • Financial statements need to be certified by an independent public accountant;
    • If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company’s balance sheet (to be dated within 120 days of the start of the offering) must be audited; and
    • Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under the federal income tax laws.

    While companies using the Rule 505 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as 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 owners and stock promoters, but contains little other information about the company.

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