1. Regulation D and Private Offering
September 16, 2014
Todd Kerr Partner, Perkins Coie LLP
and
Raj Gangadean Partner, Perkins Coie LLP

2. Presentation Outline
General Overview of Private Offerings and Regulation D (Raj)
Comparison of Rule 506(b) and 506(c) Offerings (Todd)
Accredited Investor: Definition and Verification (Raj)
Going Forward: Observations and Outlook (Todd)
Questions

3. Overview of Private Offerings and Regulation D
Prohibition of Unregistered Offers and Sales of Securities
Exception for Registration Exemptions
Most Commonly Relied Upon Federal Exemption – “transactions by an issuer not involving any public offering”

4. Overview of Private Offerings and Regulation D (cont.)
Regulation D: Four Exemptions
Rule 504
Rule 505
Rule 506(b)
Rule 506(c)

5. Comparison of Rule 506(b) and 506(c) Offerings

6. Rule 506(b) – The “New Old Rule”
Unlimited amounts of capital
Unlimited number of accredited investors and up to 35 unaccredited investors who meet the sophistication standard
Typically “accredited only”
“Check the box” verification
No solicitation or advertising (pre-existing, substantive relationship showing)
Form D filing within 15 days after first sale

7. Rule 506(c) – New Rule Allowing General Solicitation
Offers may be made to anyone, but sales may be made only to accredited investors
Purchaser must meet two separate criteria:
Either the purchaser must be an accredited investor or the issuer must reasonably believe the purchaser falls within an accredited investor category (same criterion as 506(b)); and
The issuer must take reasonable steps to verify that purchaser is an accredited investor (new criterion)

8. Rule 506(c) – New Rule Allowing General Solicitation (cont.)
Bad Actor Disqualification
No Rule 506(b) Fall-Back

9. Accredited Investor: Definition and Verification

10. Accredited Investor: Definition
Entities:
various institutional investors
entities with assets exceeding $5M
entities whose equity owners are accredited investors

11. Accredited Investor: Definition (cont.)
Individuals:
the issuer’s directors, executive officers and general partners
high net worth individuals
high income individuals

12. Accredited Investor: Verification
Two Paths:
SEC-Approved Methods for Individuals
Income Test – IRS Forms
Net Worth Test – Assets and Liabilities
Written Representations from Certain 3rd Parties
Existing Investor Exception

13. Accredited Investor: Verification (cont.)
Two Paths:
Principles-Based Verification
Nature of Purchaser
Amount and Type of Information the Issuer has about the Purchaser
Nature of the Offering
SEC will not Pre-approve, but gives Deference to “Good Faith” Efforts

14. Going Forward: Observations and Outlook

15. Observations: 506(b) and (c) Filings Through March 31, 2014:
900 new 506(c) offerings raising $10B in capital
9, (b) offerings raised $233B in capital

16. Observations (cont.)
Filer Profiles for 506(c) Filings (through February 1, 2014):
California led states with 139 filings
Texas, New York and Florida followed, with 7, 65 and 35, respectively
Average reported corporate age of filers was 2 years, with a majority of less than 1 year old
75% of filers reported fund raising goals of less than $10M, with 40% targeting amounts of $1.5M or less
35 companies reported fund raising objectives over $100M

17. Outlook: Best Practices for “Reasonable Steps”

18. Reg. D Proposal Overhang – Ability to Measure, Adapt
New Form D, including closing amendment
Must file before offering, forcing 506(c) or 506(b) election
Legends and selected disclosures for solicitation materials
Submission of solicitation materials to SEC for two years
Disqualifications – 1 year for noncompliance in previous 5 years

19. On the Horizon? Electronic Form D Database Bad Actor Database
Heighten State Pre-Sale Review

20. SEC's 10 Red Flags That Offering May Be a Scam
Promises of High Returns With No/Little Risks
Unregistered Investment Professionals
Aggressive Sales Tactics
Problems with Sales Documents
No Net Worth or Income Requirements
Solo Sales Pitches
Sham or Virtual Offices
Not in Good Standing
Unsolicited Investment Offers
Suspicious or Unverifiable Backgrounds