Disclosure Requirements of Regulation D - Explained
General Information Disclosures
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Disclosure Requirements for Reg. D Registration Exemptions?
The perfection of an exemption does not completely relieve an issuers disclosure requirements. The disclosure document that is generally used by businesses perfecting a registration exemption is the private placement memorandum (PPM). The issuer must disclose to potential investors at the time of the offer or prior to the business accepting any offer of investment funds. The PPM is very similar to the prospectus and is similarly demanding in its disclosure requirement. The PPM requirement requires extensive work and effort to prepare, but it is far less burdensome to the business than registering the issuance.
Next Article: Regulation D - Form D Filing Requirement Back to: SECURITIES LAW
What are the Types of Reg. D Disclosure?
Securities law breaks down the disclosure requirements for issuers of securities based upon the type of investor or purchaser of the securities. The relevant disclosure provision governing issuances is Rule 502(b)(2). It requires that issuers provide both financial and non-financial information. The company is required to provide the equivalent information as is required under SEC Form 1-A. It is important to note that the information disclosure or delivery requirements set forth in Rule 502(b) are only applicable to offerings under certain exemptions. Offerings to accredited investors do not require furnishing information.
Example: Offerings under Rules 505 and 506 have to provide extensive information to non-accredited investors, while offerings under Rule 504 do not. Note: The issuer must always comply with state and federal anti-fraud laws, such as section 11(a), 12(a) and (b), and 10(b) under the 33 Act. Information that is factually untrue or misleading in any form runs the risk of violating one of these provisions. Generally, if the issuer is not a company that routinely provides reports to the SEC under Sections 13 or 15(d) of the Securities Exchange Act of 1934, it must furnish the following information to the purchaser of the securities.
Non-financial information required by Rule 502(b) includes: the management team; the industry; the type and characteristics of the securities offered; any third-party facilitators in the offering process; and the risks involved in the type of security being offered. More precisely, the required information is listed in Part 1 of the registration statement that the business would be required to use, absent the applicable exemption. This information is deemed necessary to allow the investor to make an informed decision about whether to undertake the investment.
Note: There is some flexibility in this disclosure requirement, as the introductory language in Rule 502(b)(2)(i) requires the issuer to furnish the specified information "to the extent material to an understanding of the issuer, its business, and the securities being offered.
Financial information about the business must be disclosed via the financial statements of the business. The extent of disclosure, which can be extremely detailed, depends on the size of the offering. The greater the dollar value the more extensive the disclosure requirements. The amount of required financial information varies between issuances below $2 million, between $2 million and $7.5 million, and above $7.5 million. Generally, the variation is the amount of financial data of the company and whether that information must be audited and certified by the company executives. The information requirement serves to provide the investor with information that may not be available because the business is not required to register the information with the SEC.
Why do you think the information disclosure requirements vary between accredited and non-accredited investors? Why do you think the rules separate the requirements for financial and non-financial disclosures? Why do you think the amount of issuance matters with regards to the amount of information required to be disclosed to investors?
ABC Corp is attempting to sell securities pursuant to an exemption under Rule 506(c). ABC Corp wonders what actions it should take to remain within the confines of Rule 506(c). Can you explain the types of disclosures that ABC Corp must make?
- Securities Law (Intro)
- What are Securities Laws?
- What is a Security?
- What qualifies as an Investment contract?
- What are the primary federal securities laws?
- What are the regulatory goals of security laws?
- What is the Securities and Exchange Commission?
- What is an Initial Public Offering?
- What is a Direct Public Offering?
- What is Crowdfunding?
- Securities Act of 1933
- What is an Offer to Sell securities?
- Who are the parties regulated in an offer to sell securities?
- What are the primary disclosure documents required in an offer to sell securities?
- Forward Looking
- Red Herring Prospectus (Securities) Definition
- Registration of Securities
- What is an issuer allowed to do at each stage of the registration process?
- How are issuers classified for purposes of the registration and offering process?
- What is an issuer allowed to do during the Pre-filing Period?
- What are the limitations on the issuer during the Post-filing, Waiting Period?
- What is an issuer allowed to do during the Post-Effective Period?
- What is an Emerging-Growth Company?
- What type of information must an issuer disclose?
- What laws govern the mechanics of disclosure in a securities offering?
- Deficiency Letter (Securities Law)
- Registration Exemptions Securities Act of 1933
- What are Exempt Securities and Exempt Transactions?
- What are Restricted Securities?
- Section 3(a)?
- Section 3(b)?
- What is a Rule 147 Exemption?
- What is a Section 4(a) Exemption?
- Section 4(a)(5)?
- What is a Regulation A Exemption?
- What are Regulation D Exemptions?
- What is a Rule 504 Exemption?
- What is a Rule 505 Exemption?
- What is a Rule 506(b) Exemption?
- What is a Rule 506(c) Exemption?
- What is Rule 502(d) and the Rule 144 Safe Harbor?
- Rule 144a
- What are the disclosure requirements for companies employing an exemption?
- What is the requirement to file Form D?
- What is the effect of failing to register an offering under Section 5?
- Liability Under the Securities and Exchange Act of 1933
- What is civil liability under Section 11 of the 33 Act?
- What is civil liability under Section 12 of the 33 Act?
- What are defenses available to charges under Sections 11 and 12?
- What is civil liability under Section 17 of the 33 Act?
- What is potential criminal liability under the 33 Act?
- The Security Exchange Act of 1934
- When must an issuer register pursuant to the 34 Act?
- What disclosures are required of reporting companies under the 34 Act?
- What is liability under Section 10(b) and Rule 10(b)(5)?
- What is insider trading under Rule 10(b)(5)?
- What damages are available under Section 10 and Rule 10(b)(5)?
- What is insider trading under Section 14 of the 34 Act?
- What is liability under Section 16 of the 34 Act?
- What is liability under Section 18 of the 34 Act?
- What is criminal liability under the 34 Act?
- Liability under the Securities Enforcement Remedies Act?
- Blue Sky Laws State Securities Laws
- What are Blue Sky Laws?
- When is an issuer required to comply with state securities laws?
- What are the registration requirements under state law?
- What is Coordinated Registration under state law?