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this $230.504 until December 1, 1988. Until then the issuer must count the December 1, 1987 sale towards the
$1,000,000 limit within the preceding twelve months. Note 2: If a transaction under this $230.504 fails to meet the limitation on the aggregate offering price, it does not affect the availability of this $230.504 for the other transactions considered in applying such limitation. For example, if the issuer sold $1,000,000 worth of its securities pursuant to state registration on January 1, 1988 under this $230.504 and an additional $500,000 worth on July 1, 1988, this $230.504 would not be available for the later sale, but would still be applicable to the January 1, 1988 sale. Note 3: In addition to the aggregation principles, issuers should be aware of the applicability of the integration principles set forth in $230.502(a).
Exemption for Limited Offers and Sales of Securities Not Exceeding $5,000,000
Reg. 8230.505. (a) Exemption. Offers and sales of securities that satisfy the conditions in paragraph (b) of this $230.505 by an issuer that
is not an investment company shall be exempt from the provisions of section 5 of the Act under section 3(b) of the Act. (b) Conditions to be met. (1) General Conditions. To qualify for exemption under this $230.505, offers and sales must satisfy the terms and condi
tions of $8230.501 through 230.503. (2) Specific conditions.
(i) Limitation on aggregate offering price. The aggregate offering price for an offering of securities under this $230.505,
as defined in $230.501(c), shall not exceed $5,000,000, less the aggregate offering price for all securities sold with-
Example 1: If an issuer sold $2,000,000 of its securities on June 1, 1982 under this $230.505 and an additional
this $230.505 until June 1, 1983. At that time it could sell an additional $500,000 of its securities.
of securities from the issuer in any offering under this $230.505.
not constitute an offering under this section.
in $230.252(c), (d), (e), or (f) of Regulation A, except that for purposes of this $230.505 only:
the first sale of securities under this $230.505;
directly or indirectly remuneration for solicitation of purchasers in connection with sales of securities under
this $230.505; and (C) Paragraph (b)(2)(iii) of this $230.505 shall not apply to any issuer if the Commission determines, upon a
showing of good cause, that it is not necessary under the circumstances that the exemption be denied. Any such determination shall be without prejudice to any other action by the Commission in any other proceeding or matter with respect to the issuer or any other person.
Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering
Reg. 8230.506. (a) Exemption. Offers and sales of securities by an issuer that satisfy the conditions in paragraph (b) of this $230.506. Il
be deemed to be transactions not involving any public offering within the meaning of section 4(2) of the Act.
(b) Conditions to be met. (1) General conditions. To qualify for exemption under this $230.506, offers and sales must satisfy all the terms and con
ditions of $8230.501 through 230.503. (2) Specific conditions.
(i) Limitation on number of purchasers. The issuer shall reasonably believe that there are no more than 35 purchasers
of securities from the issuer in any offering under this $230.506.
not constitute an offering under this section 230.506.
chaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 231
(Release No. 33-6455)
SUMMARY: The Commission has authorized the issuance of this release setting forth the views of its Division of Corporation Finance on various interpretive questions regarding the rules contained in Regulation D under the Securities Act of 1933. These views are being published to answer frequently raised questions with respect to the regulation.
FOR FURTHER INFORMATION, CONTACT: David B. H. Martin, Jr., Office of Chief Counsel, Division of Corporation Finance, Securities and Exchange Commission, Washington, D.C. 20549, (202) 272-2573.
SUPPLEMENTARY INFORMATION: In Release No. 33-6389 (March 8, 1982) (47 FR 11251), the Commission adopted Regulation D (17 CFR 230.501-.506) which provides three exemptions from the registration requirements of the Securities Act of 1933 (the “Securities Act" or the “Act”) (15 U.S.C. 77a-77bbbb (1976 & Supp. IV 1980), as amended by the Bus Regulatory Reform Act of 1982, Pub. L. No. 97-261 $19(d), 96 Stat. 1121 (1982)).' Regulation D became effective on April 15, 1982.
In the course of administering the regulation, the staff of the Division of Corporation Finance has answered numerous oral and written requests for interpretation of the new provisions. This release is intended to assist those persons who wish to make offerings in reliance on the exemptions in Regulation D by presenting the staff's views on frequently raised questions. As indicated in Preliminary Note 3 to the regulation, Regulation D is intended to be a basic element in a uniform system of federal-state exemptions. As such, aspects of Regulation D have been incorporated in many state statutes and regulations. The interpretations set forth in this release relate only to the federal provisions.
Regulation D is composed of six rules, Rules 501-506. The first three rules set forth general terms and conditions that apply in whole or in part to the exemptions. The questions arising under Rules 501-503 fall into four general categories: definitions, disclosure requirements, operational conditions, and notice of sale requirements. The exemptions of Regulation D are set forth in Rules 504-506. Questions concerning those rules usually raise issues pertaining 10 more than one exemption. This release, an outline of which follows, is organized so as to reflect this pattern of inquiries.
A. Accredited Investor Rule 501(a) (Questions 1-30)
a. $150,000 Purchase
b. 20 Percent of Net Worth Limitation
B. Aggregate Offering Price Rule 501(c) (Questions 31-36)
II. Disclosure Requirements
A. When Required (Questions 40-41)
1. Non-reporting Issuers Rule 502(b)(2)(i)
2. Reporting Issuers Rule 502(b)(2)(ii) C. General (Question 52)
III. Operational Conditions
A. Integration Rule S02(a) (Question 53)
D. Limitations on Resale
Rule 502(d) (Question 61)
A. Rule 504 (Questions 62-65)
Prior releases leading to the adoption of Regulation D included Release No. 33-6274 (December 23, 1980) (46 FR 2631) in which the Commission considered and requested comments on various exemptions under the Securities Act and Release No. 33-6339 (August 7, 1981) (46 FR 41791) in which the Commission published proposed Regulation
Defined in Rule 501(a), the term “accredited investor" is significant to the operation of Regulation D.? Under Rule 501(e), for instance, accredited investors are not included in computing the number of purchasers in offerings conducted in reliance on Rules 505 and 506. Also, if accredited investors are the only purchasers in offerings under Rules 505 and 506, Regulation D does not require delivery of specific disclosure as a condition of the exemptions. Finally, in an offering under Rule 506, the issuer's obligation to ensure the sophistication of purchasers applies to investors that are not accredited. See Rule 506(b)(2)(ii).
The definition sets forth eight categories of investor that may be accredited. The following questions and answers cover certain issues under various of those categories. Given the frequency of questions regarding the application of the definition to trusts, however, there is a separate section addressing that area.
The definition of “accredited investor” includes any person who comes within or “who the issuer reasonably believes” comes within one of the enumerated categories at the time of the sale of the securities to that person." What constitutes “reasonable" belief will depend on the facts of each particular case. For this reason, the staff generally will not be in a position to express views or otherwise endorse any one method for ascertaining whether an investor is accredited. (1) Question: A director of a corporate issuer purchases securities offered under Rule 505. Two weeks after the purchase, and prior to completion of the offering, the director resigns due to a sudden illness. Is the former director an accredited investor? Answer: Yes. The preliminary language to Rule 501(a) provides that an investor is accredited if he falls into one of the enumerated categories at the time of the sale of securities to that person.” One such category includes directors of the issuer. See Rule 501(a)(4). The investor in this case had that status at the time of the sale to him.'
2. Certain Institutional Investors Rules 501(a)(1)-(3) (2) Question: A national bank purchases $100,000 of securities from a Regulation D issuer and distributes the securities equally among ten trust accounts for which it acts as trustee. Is the bank an accredited investor? Answer: Yes. Rule 501(a)(1) accredits a bank acting in a fiduciary capacity.“ (3) Question: An ERISA employee benefit plan will purchase $200,000 of the securities being offered. The plan has less than $5,000,000 in total assets and its investment decisions are made by a plan trustee who is not a bank, insurance company, or registered investment adviser. Does the plan qualify as an accredited investor? Answer: Not under Rule 501(a)(1). Rule 501(a)(1) accredits an ERISA plan that has a plan fiduciary which is a bank, insurance company, or registered investment adviser or that has total assets in excess of $5,000,000. The plan, however, may be an accredited investor under Rule 501(a)(5), which accredits certain persons who purchase at least $150,000 of the securities being offered. (4) Question: A state run, not-for-profit hospital has total assets in excess of $5,000,000. Because it is a state agency, the hospital is exempt from federal income taxation. Rule 501(a)(3) accredits any organization described in section 501(c)(3) of the Internal Revenue Code that has total assets in excess of $5,000,000. Is the hospital accredited under Rule 501(a)(3)? Answer: Yes. This category does not require that the investor have received a ruling on tax status under section 501(c)(3) of the Internal Revenue Code. Rather, Rule 501(a)(3) accredits an investor that falls within the substantive description in that section." (5) Question: A not-for-profit, tax exempt hospital with total assets of $3,000,000 is purchasing $100,000 of securities in a Regulation D offering. The hospital controls a subsidiary with total assets of $3,000,000. Under generally accepted accounting principles, the hospital may combine its financial statements with that of its subsidiary. Is the hospital accredited? Answer: Yes, under Rule 501(a)(3). Where the financial statements of the subsidiary may be combined with those of the investor, the assets of the subsidiary may be added to those of the investor in computing total assets for purposes of Rule 501(a)(3).
(6) Question: The executive officer of a parent of the corporate general partner of the issuer is investing in the Regulation D offering. Is that individual an accredited investor? Answer: Rule 501(a)(4) accredits only the directors and executive officers of the general partner itself. Unless the executive officer of the parent can be deemed an executive officer of the subsidiary,' that individual is not an accredited investor.
The term also is essential to the operation of section 4(6) of the Securities Act which exempis certain transactions involving sales solely to accredited investors. The definition of accredited investor for section 4(6) is found at section 2(15) of the Securities Act and Rule 215 (17 CFR 230.321). Rule sol(a) combines and repeats those provisions. As a result, interpretations regarding the definition of “accredited investor" in Regulation D also apply to the definition of that term under section 4(6).
Preliminary Note 6 10 Regulation D would support a different analysis is it could be shown that the director's appointment or resignation was “part of a plan or scheme 10 evade the registration provisions of the Aci."
Rule 501(a)(1) refers 10 "(a)ny bank as defined in section 3(a)(2) of the Acl." Section 3(a)(2) provides that the term "bank" includes “any national bank." Section 3(a)(2) also provides that where a common or collective trust fund is involved, the term “bank" has the same meaning as in the investment Company Act of 1940 (the "Investment Company Act") (15 U.S.C. 80-1-80a-65 (1976 & Supp. IV 1980)). Section 2(a)(5) of the Investment Company Act defines "bank."
4. $150,000 Purchasers Rule 501(a)(5)
This provision accredits any person who satisfies two separate tests. To be accredited under Rule 501(a)(5), an investor must purchase at least $150,000 of the securities being offered, by one or a combination of four specific methods: cash, marketable securities, an unconditional obligation to pay cash or marketable securities over not more than five years, and cancellation of indebtedness. The rule also requires that “the total purchase price” may not exceed 20 percent of the purchaser's net worth. The two tests under Rule 501(a)(5) must be considered separately. Thus, for instance, in computing the “total purchase price” for the 20 percent of net worth limitation, the investor may have to include amounts that could not be included towards the $150,000 purchase test.
a. $150,000 Purchase (7) Question: Two issuers, a general partner and its limited partnership, are selling their securities simultaneously as units consisting of common stock and limited partnership interests. The issues are part of a plan of financing made for the same general purpose. If an investor purchases $150,000 of these units, would it satisfy the $150,000 purchase element of Rule 501(a)(5)? Answer: Yes. The issuers are affiliated and the simultaneous sale of their separate securities as units for a single plan of financing would be deemed one integrated offering. Rule 501(a)(5) applies to a purchase “of the securities being offered.” The rule thus applies not to the securities of a particular issuer, but to the securities of a particular offering." (8) Question: An investor will purchase securities in cash installments. Each installment payment will include amounts due on the principal as well as interest. If the total of all payments is $150,000, will the investor have purchased at least $150,000 of the securities being offered" for purposes of Rule 501(a)(5)? Answer: No. Under Rule 501(a)(5), any amount constituting interest due on the unpaid purchase price is not payment for the securities being offered.” (9) Question: The installment payments for interests in a limited partnership that will develop commercial real estate will be conditioned under completion of certain phases of the project. Will the obligation to make those payments be deemed “an unconditional obligation to pay" for purposes of Rule 501(a)(5)? Answer: Yes, as long as the only conditions relate to completion of successive stages of the development project. (10) Question: An investor will purchase securities in a Regulation D offering by delivering $75,000 in cash and a letter of credit for $75,000. Will such a purchase satisfy the $150,000 element of Rule 501(a)(5)? Answer: No. Because there is no assurance that the letter of credit will ever be drawn against, the staff does not deem it to be an unconditional obligation to pay. (11) Question: In connection with the sale of limited partnership interests in an oil and gas drilling program, an investor in a Regulation D offering commits to pay subsequent assessments that are mandatory, non-contingent, and for which the investor will be personally liable. Will the commitment to pay the assessments constitute an “unconditional obligation to pay" under Rule 501(a)(5)? Answer: Yes. The assessments are essentially installment payments for which the investor makes the investment decision at the time the limited partnership interest originally is purchased.'' (12) Question: If the assessments in Question 11 are voluntary, contingent and non-recourse, can they be included in determining whether or not the investor has purchased $150,000 of the securities being offered? Answer: No. Voluntary assessments of this nature are not deemed to constitute an unconditional obligation to pay." (13) Question: A purchaser of interests in a limited partnership makes a partial down payment and commits unconditionally to pay the balance over five years. Formation of the partnership is conditioned upon the sale of a specified number of interests. Under Rule 501(a)(5), when must the five year period for installment payments begin to run? Answer: Rule 501(a)(5) provides that the unconditional obligation is to be discharged “within five years of the sale of the securities to the purchaser." For ease in the administration of an offering that is conditioned on a certain minimum level of sales, the staff believes it is reasonable to compute the length of installment obligations from the same date for the investors involved in reaching that minimum. Therefore, without any bearing on when the sale of the security actually occurs, the five-year time period of the investor's obligation may be measured from the date such minimum level of sales has been reached."
b. 20 Percent of Net Worth Limitation (14) Question: Where an investor makes installment payments composed of principal and interest, must the interest payments be included in computing the “total purchase price" for purposes of meeting the 20 percent of net worth limitation? Answer: No. The interest is not part of the total purchase price but rather is an expense associated with financing the total purchase price. (15) Question: A corporate investor will purchase $200,000 of the securities being offered for cash. Additionally, the investor will deliver an irrevocable letter of credit for $50,000 which the issuer will use as collateral in connection with a line of credit it will establish with a lending institution. Must the issuer include the $50,000 letter of credit when determining whether or not the purchaser's total purchase price exceeds 20 percent of its net worth under Rule 501(a)(5)? Answer: Yes. Since the investor has committed to pay the $50,000 at the election of the issuer, that amount must be included with other forms of consideration in order to measure what percentage of the investor's net worth has been committed in the investment." (16) Question: As part of the purchase of an interest in a sale and lease-back program, the purchaser will deliver “non-recourse” debt where the source of payment for the debt is limited exclusively to the income generated by the security being purchased or the assets of the entity in which the security is being purchased. Must the non-recourse debt be included in the total purchase price for purposes of the 20 percent of net worth limitation under Rule 501(a)(5)? Answer: No. Because the investor has no personal liability for the non-recourse debt, and because no part of the investor's assets at the time of purchase is available as a source of payment for the debt, the debt should not be included as part of the purchase price."
onditional obligation to pay" and cannot be included in calculating whether or not the investor meets the $150,000 purchase