There are a number of “safe harbors” available under Regulation D, that when followed, enable the issuer of securities to achieve compliance with Rule 4(a)(2) of the Securities Act of 1933 which relieves issuers of securities offerings from the need to comply with the standard SEC registration requirements. Under these safe harbors, businesses seeking to raise money from investors have a level of certainty and clarity while keeping investors protected from various financial abuses, including fraud.
Under Regulation D, three important safe harbors to understand include:
Rule 506(b)
This safe harbor permits businesses to offer securities for sale to a limitless number of accredited investors and a maximum of 35 non-accredited investors. The issuer of securities must perform reasonable steps to verify that the investors have accredited status. The company must also supply investors with required disclosure documents. Additional rules are applicable. Some security laws at the state level may be preempted under Section 506(b).
Rule 506(c)
This safe harbor permits businesses to perform general solicitation and advertising in an attempt to acquire accredited investors. The business must perform reasonable steps to verify the status of investors as accredited. Issuers of securities under Regulation D, Rule 506(c) must also file a Form with the SEC. Additional rules are part of the process. Again, as with Rule 506(b), some offerings under Section 506(c) may take precedence over certain state-level security laws.
Rule 504
This safe harbor permits businesses to raise capital during a 12-month period of up to $10 million by selling securities to a limitless number of investors (accredited and non-accredited). Businesses are required to adhere to state security laws and give disclosure documents to investors.
By depending on these safe harbors, businesses reduce noncompliance risk with federal and some state security laws in certain cases when offering and selling securities to qualified investors in the U.S. Operating under these safe harbors can also help companies bypass the complexities, high expense, and delays often associated with public offerings and security registration requirements.
As always, companies should utilize professional assistance as needed (accounting, legal, and financial) when determining the best Regulation D safe harbor to operate under for their particular needs.
