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Release No. 33-6389 March 8, 1982
Regulation D--Revision of Certain Exemptions from Registration under the Securities Act of 1933 for Transactions Involving Limited Offers and SalesACTION: Adoption of final rules, rule amendments, and form, and rescission of rules and forms.SUMMARY: The Commission announces the adoption of a new regulation governing certain offers and sales of securities without registration under the Securities Act of 1933 and a uniform notice of sales form to be used for all offerings under the regulation. The regulation replaces three exemptions and four forms, all of which are being rescinded. The new regulation is designed to simplify and clarify existing exemptions, to expand their availability, and to achieve uniformity between federal and state exemptions in order to facilitate capital formation consistent with the protection of investors. EFFECTIVE DATE: Regulation D, Rule 215, Form D and amendments to Rules 144 and 148 will be effective and Form 4(6) will be rescinded on April 15, 1982. Rules 146, 240, and 242, and Forms 146, 240, and 242 will be rescinded on June 30, 1982. For those offerings made in compliance with the terms of Rules 146, 240 and 242 which commence prior to the effective date of Regulation D (April 15, 1982) and which continue past June 30, 1982, the Commission takes the administrative position that no registration is required under the Securities Act of 1933. FOR FURTHER INFORMATION CONTACT: Prior to effective date, Paul A. Belvin (202) 272-2644, Office of Small Business Policy, and after effective date, David B. H. Martin, Jr. (202) 272-2573, Office of Chief Counsel, Division of Corporation Finance, Securities and Exchange Commission, 500 North Capitol Street, Washington, D.C. 20549. SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission is adopting Regulation D 17 CFR 230.501-230.506, Rule 215 17 CFR 230.215, Form D 17 CFR 239.500, and conforming amendments to Rule 144 17 CFR 230.144 and Rule 148 17 CFR 230.148 under the Securities Act of 1933 (the "Securities Act") 15 U.S.C. 77a et seq., as amended. The Commission is rescinding Rules 146, 240 and 242 17 CFR 230.146, 230.240, and 230.242 and Forms 146, 240, 242, and 4(6) 17 CFR 239.146, 239.240, 239.242, and 239.246. The Commission published proposed Regulation D for comment in Release No. 33-6339 (August 7, 1981) 46 FR 41791. Commentators generally supported the proposal. Many letters contained helpful analysis of and comment on specific sections in the proposed regulation. As adopted, Regulation D is substantially similar to the proposal with certain changes made in response to comments received. This release contains a general background of Regulation D, an overview of its provisions, a discussion of the uniform federal-state exemptive framework, and a section-by-section synopsis of the final regulation.
I. BackgroundRegulation D is the product of the Commissions evaluation of the impact of its rules and regulations on the ability of small businesses to raise capital. 1 This study has revealed a particular concern that the registration requirements and the exemptive scheme of the Securities Act impose disproportionate restraints on small issuers. In response to this concern, the Commission has taken a number of actions, including a relaxation of certain aspects of Regulation A 17 CFR 230.251-230.264, the adoption of Rule 242, and the introduction of Form S-18 17 CFR 239.28, a simplified registration statement for certain first time issuers. 2 Coincident with the Commissions small business program, Congress enacted the Small Business Investment Incentive Act of 1980 (the "Incentive Act") 94 Stat. 2275 (codified in scattered sections of 15 U.S.C.). The Incentive Act included three changes to the Securities Act; the addition of an exemption in Section 4(6) for offers and sales solely to accredited investors, 3 the increase in the ceiling of Section 3(b) from $2,000,000 to $5,000,000, and the addition of Section 19(c) which, among other things, authorized "the development of a uniform exemption from registration for small issuers which can be agreed upon among several States or between the States and the Federal Government." As a result of the Commissions reevaluation of the impact that its rules and regulations have on small businesses and the provisions of the Incentive Act, the Commission undertook a general examination of the exemptive scheme under the Securities Act. In December 1980, it announced that it was considering the relationship among certain exemptions from the registration provisions of the Securities Act and the efficacy of those exemptions as they relate to the capital formation needs of small businesses. 4 The Commission requested comments on the interrelationships between Section 4(6) and Rules 146 and 242, as well as on the adequacy of the ceiling limitations in exemptions under Section 3(b). Commentary to the Commission criticized the complexity of the exemptive scheme as it relates to all issuers. Recommendations for solutions varied considerably. Based on certain recommendations and its own analysis, the Commission issued proposed Regulation D, which provides exemptions for certain offerings by small and other businesses. 5 The Commission received 88 letters of comment on proposed Regulation D. 6 Commentators generally supported adoption of the regulation but offered detailed and constructive suggestions as to specific provisions in the rules. 7 II. DiscussionA. OverviewRegulation D is a series of six rules, designated Rules 501-506, that establishes three exemptions from the registration requirements of the Securities Act and replaces exemptions that currently exist under Rules 146, 240, and 242. The regulation is designed to simplify existing rules and regulations, to eliminate any unnecessary restrictions that those rules and regulations place on issuers, particularly small businesses, and to achieve uniformity between state and federal exemptions in order to facilitate capital formation consistent with the protection of investors. Rules 501-503 set forth definitions, terms, and conditions that apply generally throughout the regulation. The exemptions of Regulation D are contained in Rules 504-506. Rules 504 and 505 replace Rules 240 and 242, respectively, and provide exemptions from registration under Section 3(b) of the Securities 506 succeeds Rule 146 and relates to transactions that are deemed to be exempt from registration under Section 4(2) of the Securities Act. Rule 504 generally expands Rule 240 by increasing the amount of securities sold in a 12 month period from $100,000 to $500,000, eliminating the ceiling on the number of investors, and removing the prohibition on payment of commissions or similar remuneration. Rule 504 also removes restrictions on the manner of offering and on resale if an offering is conducted exclusively in states where it is registered and where a disclosure document is delivered under the applicable state law. Like Rule 240, Rule 504 does not prescribe specific disclosure requirements. Rule 504 is an effort by the Commission to set aside a clear and workable exemption for small offerings by small issuers to be regulated by state "Blue Sky" requirements and to be subject to federal antifraud provisions and civil liability provisions such as Section 12(2). Therefore, the exemption is not available to issuers that are subject to the reporting obligations of the Securities Exchange Act of 1934 (the "Exchange Act") 15 U.S.C. 78a et seq. or are investment companies as defined under the Investment Company Act of 1940 (the "Investment Company Act") 15 U.S.C. 80a-1 et seq.. Rule 505 replaces Rule 242. Its offering limit is $5,000,000 in a 12-month period, an increase from the $2,000,000 in six months ceiling in Rule 242. Like its predecessor, Rule 505 permits sales to 35 purchasers that are not accredited investors and to an unlimited number of accredited investors. However, the class of accredited investors has now been expanded. The exemption is available to all non-investment company issurers, 8 an expansion of the restriction in Rule 242 that limited the exemptions availability to certain corporate entities. An issuer under Rule 505 may not use any general solicitation or general advertising. The informational requirements under Rule 505 are substantially similar to those in Rule 242. Rule 506 takes the place of Rule 146. As under its predecessor, Rule 506 is available to all issuers for offerings sold to not more than 35 purchasers. Accredited investors, however, do not count towards that limit. Rule 506 requires an issuer to make a subjective determination that each purchaser meets certain sophistication standards, a provision that narrows a similar requirement as to all offerees under Rule 146. The new exemption retains the concept of the purchaser representative so that unsophisticated purchasers may participate in the offering if a purchaser representative is present. Like Rule 146, Rule 506 prohibits any general solicitation or general advertising. B. Uniform Federal-State Limited Offering ExemptionsIn conjunction with the proposal and adoption of Regulation D, the Commission, through its Division of Corporation Finance, has coordinated with the North American Securities Administrators Association ("NASAA"), 9 through its Subcommittee on Small Business Financing ("NASAA Subcommittee"), under the authorization of Section 19(c)(3) of the Securities Act. The objective of this process has been to develop a basic framework of limited offering exemptions that can apply uniformly at the federal and state levels. Regulation D is intended to be the principal element of this framework. Under Rule 504, offerings below $500,000 by a non-reporting company will not be required to be registered at the federal level. Moreover, if such offerings are registered in states requiring the delivery of a disclosure document, the manner of offering limitations and the restrictions on resale will not apply. Because of the small amount of the offering and the likelihood that sales will occur in a limited geographic area, the Commission and NASAA believe that greater reliance on state securities laws is appropriate. Rules 505 and 506, and applicable definitions, terms and conditions in Rules 501-503, are intended to be uniform federal-state exemptions. In October 1981, NASAA formally adopted a uniform limited offering exemption as an official policy guideline. 10 This exemption, which had two alternatives, was based on proposed Rule 505 of Regulation D but differed from that provision in certain respects. Subsequent to the endorsement of the uniform exemption and considering the public comment received, the NASAA Subcommittee and the Division of Corporation Finance coordinated to minimize differences in the NASAA policy guideline and Regulation D. The Commission understands that, following its adoption of Regulation D, the NASAA Subcommittee will recommend adoption by NASAA of modifications to its uniform limited offering exemption to provide for a uniform form exemptive system. This system will endorse Rule 505 with certain additional terms as one option, and Rules 505 and 506 with no changes as a second option. The additional terms that NASAA is expected to consider involve the following: (1) restriction on transaction related remuneration; (2) disqualification of issuers and other persons associated with offerings on the basis of state administrative orders or judgments; (3) qualification of investors based on the suitability of the investment; and (4) requirements for filing of the notices of sales. The Commission and NASAA do not believe that these additional terms detract from the goal of increased federal-state uniformity. Because of differences between federal and state securities regulation, complete uniformity may not be an attainable objective. Certain additional terms, for instance, relate to valid state interests of jurisdiction which are not appropriately addressed in a federal regulation. Similarly, certain additional terms relate to the mechanics of regulating limited offering exemptions at the state level which cannot be included effectively in a federal rule. The Commission commends NASAA and the members of the NASAA Subcommittee for their cooperation and effort in the development of Regulation D and anticipates continued coordination to achieve a uniform system of federal-state limited offering exemptions that facilitates capital formation consistent with the protection of investors. III. SynopsisThe following section-by-section discussion of the provisions of Regulation D, the significant commentary on the proposals, and the revisions made to the proposed regulation is included to assist in understanding the regulation as adopted. Attention is directed to the text of Regulation D for a more complete understanding. Attention is also directed to the chart following the synopsis which compares the provisions of Regulation D exemptions to those of predecessor exemptions. A. Preliminary NotesRegulation D contains six preliminary notes. The first preliminary note reminds issuers that Regulation D offerings, although exempt from Section 5 of the Securities Act, are not exempt from antifraud or civil liability provisions of the federal securities laws. The note also reminds issuers conducting Regulation D offerings of their obligation to furnish whatever material information may be needed to make the required disclosure not misleading. Note 2 underscores an issuers obligation to comply with applicable state law and highlights certain areas of anticipated differences between Regulation D at the federal and state levels. (See Section II.B. of this release for further discussion of these differences.) Note 3 makes clear that reliance on any particular exemption in Regulation D does not act as an election. An issuer may always claim the availability of any other applicable exemption. Several commentators believed this note should address specifically the availability of an exemption under Section 4(2) of the Securities Act. The Commission has reworded the note by including language that appeared in proposed Rule 506(a) and clarified the specific availability of Section 4(2). The fourth note specifies that Regulation D is available only to the issuer of the securities and not to its affiliates or others for resales of the issuers securities. The note further provides that Regulation D exemptions are only transactional. Several commentators pointed out that the proposed note in some respects duplicated Rule 502(d), the provision governing resale limitations. That redundancy has been eliminated. Preliminary Note 5, which confirms the availability of Regulation D for business combinations, clarifies a question raised by commentators. The sixth note provides that the regulation is not available for use in a plan or scheme to evade the registration requirements of the Securities Act. B. Rule 501--Definitions and Terms Used in Regulation DRule 501 sets forth, alphabetically, definitions that apply to the entire regulation. The definitions generally represent distillations of concepts in Rules 146, 240, and 242. The definition of "accredited investor," however, is an expansion of the term "accredited person" in Rule 242. The Commission has deleted two definitions, predecessor" and "securities of the issuer," that appeared in the proposed regulation. The effect of these definitions was principally to expand the measurement of proceeds which would be included in the aggregate offering price of an offering under Rules 504 and 505. The expansion would have required an issuer to add to the aggregate offering price of its Regulation D offering the proceeds of certain offerings by predecessors and affiliates. As commentators observed, this would thus have included, by virtue of the "predecessor" definition, sales of securities by a substantially larger issuer from which the Regulation D issuer had acquired the major portion of its assets. Further, by virtue of the "affiliate" definition, sales by limited partnerships with the same general partners as the Regulation D issuer would have been aggregated. Although there may be instances where such results would be appropriate, the Commission has determined to address those cases through general principles of integration, rather than through specific but overly inclusive rules in the regulation. Predecessor and affiliate relationships would be relevant to any consideration of whether prior offerings should be integrated with a proposed offering under Regulation D. 1. Accredited investor. In proposing the definition of accredited investor, 11 the Commission specifically requested comments regarding three of the seven categories included in the definition. Although commentators generally supported the concept, many suggested changes to particular aspects of the definition. The introductory language to the proposed definition provided that investors were accredited only if "the issuer and any person acting on the issuers behalf with respect to such investors have reasonable grounds to believe and do believe, after reasonable "inquiry" that the investors came within one of the categories in the definition. It was pointed out that this formulation appeared to bar from the definition some-one who actually was accredited but in whom the issuer did not have the requisite belief. The regulation as adopted permits accreditation for investors who are qualified in fact. The following subsections review the eight categories of accredited investor in Rule 501(a). a. Rule 501(a)(1) -- Institutional Investors. Rule 501(a)(1) repeats the listing of institutional investors included in Section 2(15)(i) of the Securities Act. One such investor is an employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA") codified in scattered sections of 26, 29 U.S.C., the investment decisions for which are made by a bank, insurance company, or registered investment adviser. The Commission recognizes, and several commentators, noted, that many plans have internalized the function of the plan fiduciary and thus could not qualify under the proposed category. For this reason the Commission believes it is appropriate to extend accredited investor status to any ERISA plan with total assets in excess of $5,000,000. b. Rule 501(a)(2)-- Private Business Development Companies. This category applies to private business development companies as defined in Section 202(a)(22) of the Investment Advisers Act of 1940 (the "Advisers Act") 15 U.S.C. 80b-1 et seq.. As proposed, the category referred to Sections 55(a)(1) through (3) and 2(a)(47) of the Investment Company Act. The proposal was intended to include business development companies that had not made an election under Section 2(a)(48)(C) of the Investment Company Act. Several commentators noted, however, that the intent of the category could be more accurately accomplished by referring to the definition of private business development company in Section 202(a)(22) of the Advisers Act. Although the new reference expands the class of private business development companies that may be qualified as accredited investors, it still delimits the class by the obligation of its members to provide "significant managerial assistance" as defined in Section 2(a)(47) of the Investment Company Act. 12 c. Rule 501(a)(3)-- Tax Exempt Organizations. Proposed Rule 501(a)(3) created a category of accredited investor for college or university endowment funds with assets in excess of $25 million. Upon further consideration and based on commentary the Commission has determined that this category can be expanded to all organizations that are described as exempt organizations in Section 501(c)(3) of the Internal Revenue Code 26 U.S.C. 501(c)(3). Additionally, the Commission has lowered the asset level to $5 million. d. Rule 501(a)(4)--Directors, Executive Officers and General Partners. Rule 501(a)(4) provides that certain insiders of the issuer are accredited investors. As proposed, the category pertained only to directors and executive officers. A number of comment letters recommended that the provision be modified to cover general partners of limited partnerships. The category thus has been revised to include general partners of issuers, as well as directors, executive officers and general partners of those general partners. e. Rule 501(a)(5)--$150,000 Purchasers. This category represents the combination of a similar category in Rule 242(a)(1)(ii), an analogous provision in Rule 146 (g)(2)(i)(d), and the recommendations of many commentators. Under this provision a person is an accredited investor upon the purchase of at least $150,000 of the securities if the total purchase price does not exceed 20 percent of the investors net worth at the time of sale. For natural persons, the joint net worth of the investor and the investors spouse may be used in measuring the ratio of purchase to net worth. The purchase may be made by one or a combination of four specified methods: cash; marketable securities; an unconditional obligation to pay cash or marketable securities within five years of sale; or a cancellation of indebtedness. Four significant changes were made to the proposed category: an increase of the purchase amount from $100,000 to $150,000; the addition of a 20 percent of net worth limitation on the total purchase price; the addition of marketable securities as a means of payment; and a modification of the installment provision to allow payments over five years with no specified collateral. Most commentary focused on the proposed installment provision which required an unconditional obligation to pay within two years of the first issuance of securities secured by a letter of credit. 13 Commentators pointed out that two years was too short a period for the economics of many business ventures, especially the tax shelter transactions that frequently utilize limited offering exemptions, e.g., real estate and oil and gas partnerships. Additionally, some commentators noted that the two year limitation would have put the investor in a weaker bargaining position if the venture did not proceed satisfactorily. Finally, commentators also viewed the requirement that the installment obligation be collateralized with a letter of credit as an administrative and financial burden for an investor. The basic premise of proposed Rule 501(a)(5) was that a person capable of investing a large amount of capital (i.e. $100,000 or more) in an offering ought to be considered an accredited investor. However, the Commission noted that, where the purchase price was spread over an extended period of time, the present value of the investment may have been reduced to a level where the investor was no longer investing sufficient amounts to merit accredited investor status. In addressing the concerns of commentators, the Commission revised the rule to permit a payment period of five years with no specified collateral. In view of the extension of the installment period and in order to ensure that the investor in this category is capable of investing a sufficiently large amount of capital to warrant accredited investor status, the Commission also has increased the purchase price to $150,000 and revised the rule to provide that the total purchase price be limited to no more than 20 percent of the investors net worth. The latter restriction does not, of course, require a commitment of 20 percent of the investors net worth in the offering. Lastly, in response to certain comments, the Commission has supplemented the available methods of payment with securities that have a readily available market quotation. Various aspects of this category may be demonstrated by the following examples. An investor whose net worth at the time of sale is $750,000 and who purchases $150,000 of the offering in cash on the day of sale is accredited. The same investor maintains that status if his payment is spread out over five years, so long as on the date of purchase he enters into an unconditional obligation to pay within that period. If, however, that investor agrees to purchase $200,000 of securities in installments, $150,000 to be paid on the date of sale and the balance in four years, he will not qualify under this category of accredited investor because his total purchase of $200,000 is more than 20 percent of his $750,000 net worth. A final case involves the investor with a net worth of $900,000 who agrees to purchase $180,000 of securities over six years, the first $150,000 of that purchase coming in the first five years. That investor is accredited because he is purchasing at least $150,000 within a five-year period and because the total purchase of $180,000 does not exceed 20 percent of his net worth. f. Rule 501(a)(6)--$1,000,000 Net Worth Test. This category extends accredited investor status to any natural person whose net worth at the time of purchase if $1,000,000. Net worth may be either the individual worth of the investor or the joint net worth of the investor and the investors spouse. 14 The Commission proposed a level of $750,000 for this test. Some commentators, however, recommended excluding certain assets such as principal residences and automobiles from the computation of net worth. For simplicity, the Commission has determined that it is appropriate to increase the level to $1,000,000 without exclusions. g. Rule 501(a)(7)--$200,000 Income Test. A natural person who has an income in excess of $200,000 in each of the last two years and who reasonably expects an income in excess of $200,000 in the current year is an accredited investor. As proposed, this category was based on individual adjusted gross income of $100,000 as reported for federal income tax purposes in the most recent tax year. Commentators objected to that formulation for three reasons. First, reliance on the federal income tax return presented several problems. Foreign investors may not be required to file or to report all income on a United States tax return. Also, individual adjusted gross income may not be a useful figure for an investor who files a joint tax return or who resides in a community property state. Second, in measuring income only in the most recent tax year, the category included investors who had a nonrecurring peak in income for that year. Thirdly, commentators expressed concern about the general concept of adjusted gross income which does not include certain deductions or exempt income and may thus exclude from accredited investor status many sophisticated investors who can reduce their gross income below $100,000 through legitimate tax planning measures. The category as adopted is intended to address these concerns. The test is no longer keyed to the federal income tax return. Further, the requisite income level must have been sustained over the two most recent years and the investor must reasonably expect continuation of an adequate level in the year of the investment. 15 Also, the term "adjusted gross income" has been changed to "income". Use of the term "income" will permit the inclusion of certain deductions and additional items of income which, as noted above, were excluded in the proposed concept of adjusted gross income. Accordingly, the appropriate income level has been raised to $200,000. The rule as adopted does not define the term "income". Rather than adopting a definition, the Commission has determined to utilize a flexible approach, thereby avoiding the issues raised by inclusion in the rule of federal tax law concepts. However, the Commission is concerned that the decision not to define "income" may be misconstrued. The determination of what is and is not "income" is important in establishing the type of investor intended to be included in this category of accredited investor. Note that the term "income", and not "revenues", has been selected as the appropriate term. For example, the revenues of a sole proprietorship would not give an accurate picture of the income of a self-employed person without deducting the operating expenses of the proprietorship. On the other hand, an employees salary could be a useful figure in determining whether the employee meets the requisite income level provided the employee has not incurred significant expenses in connection with earning that salary. One possible method of computing income is as follows: individual adjusted gross income (assuming that had been reported on a federal tax return) increased by any deduction for long term capital gains under section 1202 of the Internal Revenue Code (the "Code"), any deduction for depletion under section 611 et seq. of the Code, any exclusion for interest under section 103 of the Code, and any losses of a partnership allocated to the individual limited partner as reported on Schedule E of Form 1040 (or any successor report). h. Rule 501(a)(8)--Entities Made up of Certain accredited Investors. The proposed definition of accredited investor did not take into account an entity owned entirely by accredited investors. Rule 501(a)(8) of the final regulation extends accredited investor status to entities in which all the equity owners are accredited investors under Rule 501(a)(1), (2), (3), (4), (6), or (7). 2. Affiliate. The definition of affiliate in Rule 501(b) is the same as that contained in Rule 405 of Regulation C (17 CFR 230.405). 3. Aggregate offering price. Rule 501(c) defines the method for calculating the aggregate offering price. With the exception of certain changes to add clarity, the substance of this provision is similar to that in proposed Rule 501. 4. Business combination. The definition of business combination in Rule 501(d) has undergone only technical revision. 5. Calculation of number of purchasers. Rule 501 (e) sets forth principles that govern the calculation of the number of purchasers in offerings under Rules 505 and 506. These principles represent a consolidation of those in Rule 146(g)(2)(i) and Rule 242(e)(2) with some modifications. Only technical changes were made to the proposal. 16 6. Executive officer. The definition of executive officer in Rule 501(f) has been modified to conform with the definition of that term set forth in Rule 405 of Regulation C. 7. Issuer. The term "issuer", as set forth in Rule 501(g), has been revised to conform with the terminology in the Federal Bankruptcy Code 11 U.S.C. 101 et seq.. 8. Purchaser representative. In response to comments, the definition of purchaser representative in Rule 501(h) has been revised in three respects. First, the introductory language to the paragraph has been reformulated. As adopted, the definition includes any person who satisfies the conditions of the term in fact, as well as any person the issuer reasonably believes falls within the category. A second change incorporated the categories set forth in Rule 501(e)(1)(ii) and (iii) into subparagraphs (ii) and (iii). Thirdly, paragraph (2) was revised to permit the purchaser representative to make the requisite evaluation of the prospective investment "with the purchaser." C. Rule 502--General Conditions to be MetRule 502 sets forth general conditions that relate to all offerings under Rules 504 through 506. These cover guidelines for determining whether separate offers and sales constitute part of the same offering under principles of integration, requirements as to specific disclosure requirements in Regulation D offerings, and limitations on the manner of conducting the offering and on the resale of securities acquired in the offering. As proposed, Rule 502 contained a provision developed in conjunction with the NASAA Subcommittee that prohibited the payment of commissions or similar remuneration to other than registered broker-dealers. The Commission received significant adverse comment on the provision and upon reconsideration has deleted it from the final regulation. As indicated in section II.B. above, the Commission believes, based on variations in state law regarding registration of broker-dealers and other persons receiving transaction related remuneration, that the operation of a state registration provision in the federal regulation would create significant complications. Because of valid state jurisdictional concerns, it is likely that NASAA will recommend the addition of a provision similar to proposed Rule 502(e) in the uniform state exemptions. This is highlighted in Preliminary Note 2. 1. Integration. Rule 502(a) provides that all sales that are part of the same Regulation D offering must be integrated. 17 The rule provides a safe harbor for all offers and sales that take place at least six months before the start of or six months after the termination of the Regulation D offering, so long as there are no offers and sales, excluding those to employee benefit plans, of the same securities within either of these six-month period. 18 Along with several technical revisions, the Commission changed the word "issue" to "offering" throughout the provision. This change makes the language of the rule consistent with the principle of integration. 19 2. Information Requirements. Rule 502(b) provides when and what type of disclosure must be furnished in Regulation D offerings. If an issuer sells securities under Rule 504 or only to accredited investors, then Regulation D does not mandate any specific disclosure. 20 If securities are sold under Rule 505 or 506 to any investors that are not accredited, then Rule 502(b)(1)(ii) requires delivery of the information specified in Rule 502(b)(2) to all purchasers. The type of information to be furnished varies depending on the size of the offering and the nature of the issuer. As proposed, Rule 502(b)(1)(ii) contained a special rule for disclosure where 60 percent or more of the total offering was purchased by certain institutional accredited investors. Under the 60 percent test, an issuer was not required to furnish disclosure documents unless specifically asked by an investor that was not accredited. The concept of the test was that the accredited investors, negotiating in their own interest, could be relied upon to assure the fairness of the transaction to remaining investors and that for this reason a disclosure document need not be mandated. The Commission specifically requested comments on the 60 percent test and a number of commentators responded. Opinions varied but a majority of those commenting did not believe the test achieved any practical results. The test put the issuer in the position of having to speculate up until an offering was complete as to whether the 60 percent ratio would be met or as to whether an investor would make a demand for certain disclosure. According to commentators, an issuer faced with that uncertainty would prepare a full disclosure package for use from the beginning of the offering, thus negating any possible savings the rule may have provided. Finally, some commentators questioned whether the presence of institutional accredited investors would reduce the risk or the need for disclosure for other investors. Having considered these comments, the Commission has decided not to adopt the 60 percent test. The specific disclosure requirements are as follows. a. Non-reporting companies. Disclosure requirements for companies that are not subject to the reporting obligations of the Exchange Act are set forth in Rule 502(b)(2)(i). These requirements are keyed to the size of the offering. In offerings up to $5,000,000 an issuer must provide the same kind of information as required in Part I of Form S-18, or, for an issuer that is not qualified to use Form S-18, the same kind of information as required in Part I of a registration form available to the issuer. 21 The issuer need only provide two years of financial statements and only the most recent year need be audited. For issuers that are not limited partnerships, only a balance sheet dated within 120 days of the offering must be audited if obtaining an audit of the other financial statements would constitute an unreasonable effort or expense. Limited partnerships may furnish tax basis financial statements if the basic requirements are an unreasonable effort or expense. 22 For offerings over $5,000,000 issuers must furnish the same kind of information as specified in Part I of an available form of registration. Where the audited financials cannot be obtained without unreasonable effort or expense, the issuer is given options similar to those in offerings up to $5,000,000. In the proposed regulation, the Commission set forth another category of offerings, those up to $1,500,000, in which disclosure requirements related to Regulation A. Upon review, this category appeared to complicate the structure of tiered disclosure requirements with little significant benefit. Accordingly, that category was combined with offerings from $1,500,000 to $5,000,000. b. Reporting companies. Companies that are subject to Exchange Act reporting obligations must furnish the same kind of disclosure regardless of the size of the offering. These issuers, however, have an option as to the form that this disclosure may take. Under Rule 502 (b)(2)(ii)(A), a reporting company may provide its most recent annual report to shareholders, assuming it is in accordance with Rule 14a-3 or 14c-3 17 CFR 240.14a-3 or 240.14c-3 under the Exchange Act, the definitive proxy statement filed in connection with that annual report, and, if requested in writing, the most recent Form 10-K 17 CFR 249.310. Alternatively, those issuers may elect under Rule 502(b)(2)(ii)(B) to provide the information contained in the most recent of its Form 10-K or a Form S-1 17 CFR 239.11 registration statement under the Securities Act or a Form 10 17 CFR 249.10 registration statement under the Exchange Act. Although the requirement under subparagraph (B) refers to specific forms, it does not mandate delivery of the actual reference documents. An issuer, for instance, may choose to prepare and deliver a separate document that contains the necessary information. Regardless of the issuers choice of disclosure in subparagraph (A) or (B), Rule 502 (b)(2)(ii)(C) requires the basic information to be supplemented by information contained in certain Exchange Act reports filed after the distribution or filing of the report or registration statement in question. Further, the issuer must provide certain information regarding the offering and any material changes in the issuers affairs that are not disclosed in the basic documents. The disclosure requirements for reporting companies represent a modification of the proposal which would have required an issuer to furnish basic disclosure in the form of its annual report to shareholders along with the information contained in the associated definitive proxy statement. The only exception to the proposal applied to an issuer that did not have an annual report meeting the requirements of Rule 14a-3 or 14c-3. That issuer could provide the information contained in its Form 10-K or a registration statement. Commentators believed it was more appropriate to permit issuers the option of preparing a current composite document for the exempt offering. The Commission has reformulated the information requirements for reporting companies to address those concerns. c. Other information requirements. The balance of Rule 502(b)(2) provides for the treatment of exhibits, the right of purchasers that are not accredited to receive information which was furnished to accredited investors, and, in offerings involving nonaccredited investors, the right of all purchasers to ask questions of the issuer concerning the offering, and a specific obligation by the issuer to disclose all material differences in terms or arrangements as between security holders in a business combination or exchange offer. These provisions have undergone some technical revision and have been reformulated to accommodate the deletion of the 60 percent provision in Rule 502(b)(1)(ii). 3. Manner of offering. Rule 502(c) prohibits the use of general solicitation or general advertising in connection with Regulation D offerings, except in certain cases under Rule 504. The prohibition follows a similar restriction in Rule 146(c), except that both as proposed and as adopted the limitation in Regulation D alters those aspects of Rule 146(c) that related to qualified offerees. 23 4. Limitations on resale. Securities acquired in a Regulation D offering, with the exception of certain offerings under Rule 504, have the status of securities acquired in a transaction under Section 4(2) of the Securities Act. 24 As further provided in Rule 502(d), the issuer shall exercise reasonable care to assure that purchasers of securities are not underwriters, which reasonable care will include certain inquiry as to investment purpose, disclosure of resale limitations and placement of a legend on the certificate. Apart from technical drafting changes, the rule is similar to the proposal. D. Rule 503--Filings of Notice of SalesThe Commission is adopting a uniform notice of sales form for use in offerings under both Regulation D and Section 4(6) of the Securities Act. The form is an adaptation of Form 242 and Form 4(6) to the Regulation D context. 25 As with the predecessor forms, issuers will furnish information on Form D mainly by checking appropriate boxes. The form requires an indication of the exemptions being claimed. Rule 503 sets forth the filing requirements for Form D. The notice is due 15 days 26 after the first sale of securities in an offering under Regulation D. 27 Subsequent notices are due every six months after first sale and 30 days after the last sale. One copy of each notice must be manually signed by a person duly authorized by the issuer. 28 Rule 503(d) requires an undertaking in Form D to furnish the staff, upon its written request, with the information provided to purchasers that are not accredited in a Rule 505 offering. This is similar to the undertaking required by Rule 242(h)(2). In the proposed regulation, that undertaking was broader and covered similar requests by state authorities. The Commission has decided, however, not to include the state undertaking in the final regulation. Many states may elect to require such an undertaking and the Commission appreciates the interests that such an undertaking serves. The Commission, nevertheless, was concerned about the effects of including the state feature in the federal rule since this would have raised a question as to the meaning of the undertaking in states that had not adopted Regulation D. E. Rule 504--Exemption for Offers and Sales Not Exceeding $500,000Rule 504, which replaces Rule 240, provides an exemption under Section 3(b) of the Securities Act for certain offers and sales not exceeding an aggregate offering price of $500,000. Rule 240 permits sales up to $100,000 to 100 investors. Proceeds from securities sold within the preceding 12 months in all transactions exempt under Section 3(b) 29 or in violation of Section 5(a) of the Securities Act must be included in computing the aggregate offering price under Rule 504. 30 The exemption is not available to investment companies or issuers subject to Exchange Act reporting obligations. Commissions or similar transaction related remuneration may be paid. As under Rule 240, the exemption under Rule 504 does not mandate specific disclosure requirements. However, the issuer remains subject to the antifraud and civil liability provisions of the federal securities laws and must also comply with state requirements. Offers and sales under Rule 504 must be made in accordance with all the general terms and conditions in Rules 501 through 503. However, if the entire offering is made exclusively in states that require registration and the delivery of a disclosure document, and if the offering is in compliance with those requirements, then the general limitations on the manner of offering and on resale will not apply. With the exception of its format, which has been reorganized along with that of Rules 505 and 506 for purposes of clarity, Rule 504 is identical to the proposal. Most commentators supported the exemption. A few opposed the bar to reporting companies while others recommended retaining the exclusions from aggregation in Rule 240. In view of the overall support for the exemption, however, and noting the emphasis in this rule on state regulation and the increase in aggregate offering price from Rule 240, the Commission has concluded that the exemptions parameters are appropriate. F. Rule 505--Exemption for Offers and Sales Not Exceeding $5,000,000Rule 505 replaces Rule 242. The rule provides an exemption under Section 3(b) of the Securities Act for offers and sales to no more than 35 purchasers that are not accredited where the aggregate offering price over 12 months does not exceed $5,000,000. As with Rule 504, the aggregate offering price includes proceeds from offers and sales under Section 3(b) or in violation of Section 5(a) of the Securities Act. 31 Rule 242 permits up to $2,000,000 in sales, aggregated over six months, to no more than 35 purchasers that are not accredited. 32 Rule 505 is available to any issuer that is not an investment company. This is an expansion of the availability of Rule 242 which follows the eligibility criteria of Form S-18 and is currently not available to non-corporate issuers, to foreign issuers, and to issuers engaged in oil and gas activities. As proposed, Rule 505 barred from its use issuers that had been subject to Exchange Act reporting obligations for more than 36 months preceding the offering. Questioning that limitation, commentators observed that issuers that had been reporting for 36 months were not, in the context of a Rule 505 offering, necessarily more seasoned or substantial than non-reporting companies. The limitation, thus, did not presumptively work in favor of small businesses. Accordingly, the Commission has not retained any restrictions on the use of Rule 505 based on Exchange Act reporting obligations. Finally, Rule 505 is not available to issuers that are subject to any of the disqualification provisions contained in Rule 252(c), (d), (e) or (f) of Regulation A. The Commission has deleted proposed state related disabilities based on a false filing with a state, on a felony conviction for fraud or deceit, and on a state administrative cease and desist order for certain state securities violations. As discussed in Section II.B. of this release, these disqualifications are of valid concern to states. Their inclusion in the federal exemption, however, presented significant complications based on different degrees of state administrative actions and procedures required for review of waiver requests. G. Rule 506--Exemption for Offers and Sales Without Regard to Dollar Amount Rule 506 relates to transactions that are deemed to be exempt under Section 4(2) of the Securities Act. It modifies and replaces Rule 146. Like its predecessor, Rule 506 exempts offers and sales to no more than 35 purchasers. Whereas Rule 146 excludes certain purchasers from the count, Rule 506 excludes accredited investors in computing the number of purchasers. More significantly, Rule 506 modifies the offeree qualification principles of Rule 146 in two ways. First, Rule 506 requires that only purchasers meet the sophistication standard. Second, the rule eliminates the economic risk test. Commentators endorsed both modifications. The Commission has redrafted Rule 506 so that it parallels the form of Rules 504 and 505. In the process, two proposed provisions have been eliminated. One, regarding business combinations in proposed Rule 506(b)(2), has been removed on the ground that, in view of other general rules in the regulation, its principle does not require specific recitation. Another, regarding purchaser representatives in proposed Rule 506(c), has been eliminated because of overlapping coverage in the definition of purchaser representative in Rule 501(h)(4). 33 ____________________ Comparative Chart of Securities Act Limited Offering Exemptions Rule 240 Rule 242 Rule 146
Section 35 plus those Unlimited 35 plus
unlimited purchasing in excess of accredited Unlimited 35 plus unlimited accredited Offeree and purchaser must be sophisticated or wealthy (with representative) Purchaser must be sophisticated (alone or
with representative) Accredited or none None required required Permitted
Permitted No general solicitation unless registered in states that require delivery of a disclosure No general solicitation document. permitted Restricted unless registered in states that require delivery of a disclosure document Restricted No non-North American issuers, investment companies, oil and gas companies, or issuers No companies having more disqualified under than 100 shareholders at Regulation A No completion of offeringNO investment
companies or None Form 4(6) required as condition of exemption - 5 copies filed with Commission Form 242 required as a 10 days Form 240 required as a condition of rule- 5 Form 146 required as after first condition of rule except copies filed with condition of rule- 3 sale, every for first $100,000 under Commission 10 days copies filed in 6 months rule- 3 copies filed in after first sale, every Regional Office at time after first Regional Office within six months after first of first sale, except sale, 10 10 days after end of sale, 10 days
after for offerings below days after Form D required as a condition of exemption - 5 copies filed with Commission 15 days after first sale, every 6 months after first sale, 30 days after last sale Must furnish (unless offeree has access via. economic bargaining power) 1. Below $1,500,000 - 1. If purchased solely information may be by accredited no limited to Part II, information specified Form 1-A of Reg A 2. 2. If purchased by any Other offerings (a) non-accredited, must (non reporting) furnish (a) information in (non-reporting registration available companies) information to issuer - Unaudited in Part I of Form S-18 financials if audit with 1 year audited requirements financials (b) unreasonable effort or (reporting companies) expense (b)(reporting most recent annual companies) recent Form report, def.
proxy S-1 or Form 10, def. No No information No information specified specified 1. If purchased solely by accredited, no information specified 2. If purchased by non-accredited, a. non-reporting companies must furnish i. offerings up to $5,000,000-information in Part I of Form S-18 or available registration, 2 yr. financials, 1 year audited-if undue effort or expense, issuers other than limited partnerships only balance sheet as of 120 days before offering must be audited-if limited partnership and undue effort or expense, financials may be tax basis ii. offerings over $5,000,000-information in Part I of available registration-if undue effort or expense, issuers, other than limited partnerships only balance sheet as of 120 days before offering must be audited-if limited partnership and undue effort or expense, financials may be tax basis b. reporting companies must furnish i. Rule 14a-3 annual report to shareholders, definitive proxy statement and 10-K, if requested, plus subsequent reports and other updating information or ii. information in most recent Form S-1 or Form 10 or Form 10-K plus subsequent reports and other updating information c. Issuers must make available prior to sale i. exhibits ii. written information given to accredited investors iii. opportunity to ask questions and receive answers IV. Effective Date and Operation of Regulation DRegulation D, Rule 215, Form D, and related amendments to Rules 144 and 148 will be effective and Form 4(6) will be rescinded on April 15, 1982. Rules 146, 240, and 242 and Forms 146, 240, and 242 will be rescinded on June 30, 1982. For those offerings made in compliance with the terms of Rules 146, 240 and 242 which commence prior to the effective date of Regulation D (April 15, 1982) and which continue past June 30, 1982, the Commission takes the administrative position that no registration is required under the Securities Act. The staff will issue interpretive letters to assist persons in complying with Regulation D, but the staff will not issue no-action letters as to whether a transaction satisfies the requirements of the regulation. With respect to resales of securities, the staff will continue its present policy of not expressing an opinion on inquiries regarding the following: (1) hypothetical situations; (2) the removal of restrictive legends from securities; (3) whether a person is an affiliate; or (4) requests for no-action positions regarding securities acquired on or after April 15, 1972, as set forth in Release No. 33-6099 (August 2, 1979) 44 FR 46752. V. Final Regulatory Flexibility AnalysisThe Commission has prepared a Final Regulatory Flexibility Analysis regarding Regulation D, Form D and Rule 215 in accordance with 5 U.S.C. 604. A copy of this analysis may be obtained by contacting David B. H. Martin, Jr., Office of Chief Counsel, Division of Corporation Finance, Securities and Exchange Commission, 500 North Capitol Street, Washington, D.C. 20549, (202) 272-2573. ____________________ Text of Rules 17 CFR Chapter II is amended as follows: PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933 1. By revising paragraph (a)(3) of §230.144 as follows: §230.144 Persons deemed not to be engaged in a distribution and therefore not underwriters. * * * * * (a) * * * (3) The term "restricted securities" means securities that are acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering, or securities acquired from the issuer that are subject to the resale limitations of Regulation D under the Act, or securities that are subject to the resale limitations of Regulation D and are acquired in a transaction or chain of transactions not involving any public offering. * * * * * 2. By removing §230.146. 3. By revising paragraph (a)(5) of §230.148 as follows: §230.148 Persons deemed not to be underwriters of securities issued or sold in connection with bankruptcy proceedings. * * * * * (a) * * * (5) The term "restricted securities" means securities that are acquired directly or indirectly from the issuer, or from an affiliate of the issuer in a transaction or chain of transactions not involving any public offering, or securities acquired from the issuer that are subject to the resale limitations of Regulation D under the Securities Act of 1933, or securities that are subject to the resale limitations of Regulation D and are acquired in a transaction or chain of transactions not involving any public offering. * * * * * 4. By adding a new §230.215 to read as follows: §230.215 Accredited investor. The term "accredited investor" as used in section 2(15)(ii) of the Securities Act of 1933 15 U.S.C. 77b(15)(ii) shall include the following persons: (a) Any employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 with total assets in excess of $5,000,000; (b) Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940; (c) Any organization described in section 501(c)(3) of the Internal Revenue Code with total assets in excess of $5,000,000; (d) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; (e) Any person who purchases at least $150,000 of the securities being offered, where the purchasers total purchase price does not exceed 20 percent of the purchasers net worth at the time of sale, or joint net worth with that persons spouse, for one or any combination of the following: (1) cash, (2) securities for which market quotations are readily available, (3) an unconditional obligation to pay cash or securities for which market quotations are readily available which obligation is to be discharged within five years of the sale of the securities to the purchaser, or (4) the cancellation of any indebtedness owed by the issuer to the purchaser; (f) Any natural person whose individual net worth, or joint net worth with that persons spouse, at the time of his purchase exceeds $1,000,000; (g) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years and who reasonably expects an income in excess of $200,000 in the current year; and (h) Any entity in which all of the equity owners are accredited investors under paragraph (a), (b), (c), (d), (f) or (g) of this §230.215. 5. By removing §230.240. 6. By removing §230.242. 7. By adding a new Regulation D, §§230.501 through 230.506, to read as follows: REGULATION D--RULES GOVERNING THE LIMITED OFFER AND SALE OF SECURITIES WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933 Preliminary Notes 1. The following rules relate to transactions exempted from the registration requirements of section 5 of the Securities Act of 1933 the ("Act") 15 U.S.C. 77a et seq., as amended. Such transactions are not exempt from the anti-fraud, civil liability, or other provisions of the federal securities laws. Issuers are reminded of their obligation to provide such further material information, if any, as may be necessary to make the information required under this regulation, in light of the circumstances under which it is furnished, not misleading. 2. Nothing in these rules obviates the need to comply with any applicable state law relating to the offer and sale of securities. Regulation D is intended to be a basic element in a uniform system of federal-state limited offering exemptions consistent with the provisions of sections 18 and 19(c) of the Act. In those states that have adopted Regulation D, or any version of Regulation D, special attention should be directed to the applicable state laws and regulations, including those relating to registration of persons who receive remuneration in connection with the offer and sale of securities, to disqualification of issuers and other persons associated with offerings based on state administrative orders or judgments, and to requirements for filings of notices of sales. 3. Attempted compliance with any rule in Regulation D does not act as an exclusive election; the issuer can also claim the availability of any other applicable exemption. For instance, an issuers failure to satisfy all the terms and conditions of Rule 506 shall not raise any presumption that the exemption provided by section 4(2) of the Act is not available. 4. These rules are available only to the issuer of the issuer of the securities and not to any affiliate of that issuer or to any other person for resales of the issuers securities. The rules provide an exemption only for the transactions in which the securities are offered or sold by the issuer, not for the securities themselves. 5. These rules may be used for business combinations that involve sales by virtue of Rule 145(a) (17 CFR 230.145(a)) or otherwise. 6. In view of the objectives of these rules and the policies underlying the Act, Regulation D is not available to any issuer for any transaction or chain of transactions that, although in technical compliance with these rules, is part of a plan or scheme to evade the registration provisions of the Act. In such cases, registration under the Act is required. §230.501 Definitions and terms used in Regulation D. As used in Regulation D, the following terms shall have the meaning indicated: (a) Accredited investor. "Accredited investor" shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person: (1) Any bank as defined in section 3(a)(2) of the Act whether acting in its individual or fiduciary capacity; insurance company as defined in section 2(13) of the Act; investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such Act, which is either a bank, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000; (2) Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940; (3) Any organization described in Section 501(c)(3) of the Internal Revenue Code with total assets in excess of $5,000,000; (4) Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer; (5) Any person who purchases at least $150,000 of the securities being offered, where the purchasers total purchase price does not exceed 20 percent of the purchasers net worth at the time of sale, or joint net worth with that persons spouse, for one or any combination of the following: (i) cash, (ii) securities for which market quotations are readily available, (iii) an unconditional obligation to pay cash or securities for which market quotations are readily available which obligation is to be discharged within five years of the sale of the securities to the purchaser, or (iv) the cancellation of any indebtedness owed by the issuer to the purchaser; (6) Any natural person whose individual net worth, or joint net worth, or joint net worth with that persons spouse, at the time of his purchase exceeds $1,000,000; (7) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years and who reasonably expects an income in excess of $200,000 in the current year; and (8) Any entity in which all of the equity owners are accredited investors under paragraph (a)(1), (2), (3), (4), (6), or (7) of this §230.501. (b) Affiliate. An "affiliate" of, or person "affiliated" with, a specified person shall mean a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified. (c) Aggregate offering price. "Aggregate offering price" shall mean the sum of all cash, services, property, notes, cancellation of debt, or other consideration received by an issuer for issuance of its securities. Where securities are being offered for both cash and non-cash consideration, the aggregate offering price shall be based on the price at which the securities are offered for cash. If securities are not offered for cash, the aggregate offering price shall be based on the value of the consideration as established by bona fide sales of that consideration made within a reasonable time, or, in the absence of sales, on the fair value as determined by an accepted standard. (d) Business combination. "Business combination" shall mean any transaction of the type specified in paragraph (a) of Rule 145 under the Act (17 CFR 230.145) and any transaction involving the acquisition by one issuer, in exchange for all or a part of its own or its parents stock, of stock of another issuer if, immediately after the acquisition, the acquiring issuer has control of the other issuer (whether or not it had control before the acquisition). (e) Calculation of number of purchasers. For purposes of calculating the number of purchasers under §§ 230.505(b) and 230.506(b) only, the following shall apply: (1) The following purchasers shall be excluded: (i) Any relative, spouse or relative of the spouse of a purchaser who has the same principal residence as the purchaser; (ii) Any trust or estate in which a purchaser and any of the persons related to him as specified in paragraph (e)(1)(i) or (e)(1)(iii) of this §230.501 collectively have more than 50 percent of the beneficial interest (excluding contingent interests); (iii) Any corporation or other organization of which a purchaser and any of the persons related to him as specified in paragraph (e)(1)(i) or (e)(1)(ii) of this §230.501 collectively are beneficial owners of more than 50 percent of the equity securities (excluding directors qualifying shares) or equity interests; and (iv) Any accredited investor. (2) A corporation, partnership or other entity shall be counted as one purchaser. If, however, that entity is organized for the specific purpose of acquiring the securities offered and is not an accredited investor under paragraph (a)(8) of this §230.501, then each beneficial owner of equity securities or equity interests in the entity shall count as a separate purchaser for all provisions of Regulation D. Note: The issuer must satisfy all the other provisions of Regulation D for all purchasers whether or not they are included in calculating the number of purchasers. Clients of an investment adviser or customers of a broker or dealer shall be considered the "purchasers" under Regulation D regardless of the amount of discretion given to the investment adviser or broker or dealer to act on behalf of the client or customer. (f) Executive officer. "Executive officer" shall mean the president, any vice president in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy making function, or any other person who performs similar policy making functions for the issuer. Executive officers of subsidiaries may be deemed executive officers of the issuer if they perform such policy making functions for the issuer. (g) Issuer. The definition of the term "issuer" in section 2(4) of the Act shall apply, except that in the case of a proceeding under the Federal Bankruptcy Code 11 U.S.C. 101 et seq., the trustee or debtor in possession shall be considered the issuer in an offering under a plan or reorganization, if the securities are to be issued under the plan. (h) Purchaser representative. "Purchaser representative" shall mean any person who satisfies all of the following conditions or who the issuer reasonably believes satisfies all of the following conditions: (1) Is not an affiliate, director, officer or other employee of the issuer, or beneficial owner of 10 percent or more of any class of the equity securities or 10 percent or more of the equity interest in the issuer, except where the purchaser is: (i) A relative of the purchaser representative by blood, marriage or adoption and not more remote than a first cousin; (ii) A trust or estate in which the purchaser representative and any persons related to him as specified in paragraph (h)(1)(i) or (h)(1)(iii) of this §230.501 collectively have more than 50 percent of the beneficial interest (excluding contingent interest) or of which the purchaser representative serves as trustee, executor, or in any similar capacity; or (iii) A corporation or other organization of which the purchaser representative and any persons related to him as specified in paragraph (h)(1)(i) or (h)(1)(ii) of this §230.501 collectively are the beneficial owners of more than 50 percent of the equity securities (excluding directors qualifying shares) or equity interests; (2) Has such knowledge and experience in financial and business matters that he is capable of evaluating, alone, or together with other purchaser representatives of the purchaser, or together with the purchaser |
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