SOS Enterprise
Raising Capital Rules
Regulation A+
Regulation A+ is an exemption from registration for public offerings; although offerings made pursuant to this exemption share many characteristics with registered offerings. Regulation A+ created two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $50 million in a 12-month period. Regulation A+ presents new opportunities for investors to participate in early stage and smaller companies and businesses.
There are certain basic requirements applicable to both Tier 1 and Tier 2 offerings, including company eligibility requirements, bad actor disqualification provisions, disclosure, and other matters. Additional requirements apply to Tier 2 offerings, including limitations on the amount of money a non-accredited investor may invest in a Tier 2 offering, requirements for audited financial statements, and the filing of ongoing reports.
Securities in a Regulation A+ offering can be offered publicly, using general solicitation and advertising, and sold to purchasers irrespective of their status as accredited investors. Securities sold in a Regulation A+ offering are not considered “restricted securities” for purposes of aftermarket resales.
Private Placements
Section 4(a)(2) of the Securities Act exempts from registration "transactions by an issuer not involving any public offering." To qualify for this exemption, referred to as the “private placement” exemption, the purchasers of the securities must:
- Be “sophisticated investors” (able to evaluate the risks and merits of the investment), or be able to bear the investment's economic risk;
- Have access to the type of information normally provided in a prospectus for a registered securities offering; and
- Agree not to resell or distribute the securities to the public.
Rule 504
Rule 504, sometimes referred to as the “seed capital” exemption, provides an exemption for the offer and sale of up to $1,000,000 of securities in a 12-month period as long as it is not a blank check company and is not subject to Exchange Act reporting requirements. In general, you may not use general solicitation or advertising to market the securities, and purchasers generally receive “restricted securities.” Purchasers of restricted securities may not sell them without SEC registration or using another exemption and investors should be informed that they may not be able to sell securities of a non-reporting company for at least a year without the issuer registering the transaction with the SEC.
You may use the Rule 504 exemption for a public offering with general solicitation and advertising, and investors will receive non-restricted securities, under one of the following circumstances:
- It sells in accordance with a state law that requires the public filing and delivery to investors of a substantive disclosure document.
- It sells in accordance with a state law that requires registration and disclosure document delivery and also sells in a state without those requirements, so long as your company delivers to all purchasers the disclosure documents mandated by a state in which it registered.
- It sells exclusively according to state law exemptions that permit general solicitation and advertising, so long as sales are made only to "accredited investors" (we describe the term “accredited investor” in more detail below in connection with our description of Rule 506 offerings).
Rule 505
Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period. Under this exemption, you may sell to an unlimited number of “accredited investors” and up to 35 persons that are not accredited investors. Purchasers must buy for investment purposes only, and not for the purpose of reselling the securities. The issued securities are “restricted securities,” meaning purchasers may not resell them without registration or an applicable exemption. If your company is not an SEC reporting company, investors should be informed that they may not be able to sell securities for at least a year without the company registering the transaction with the SEC. Your company may not use general solicitation or advertising to sell the securities.
Under Rule 505, if your offering involves any purchasers that are not accredited investors, you must give these purchasers disclosure documents that generally contain the same information as those included in a registration statement for a registered offering.
There are also financial statement requirements that apply to Rule 505 offerings involving purchasers that are not accredited investors. If financial statements are required, they must be audited by a certified public accountant. You must also be available to answer questions from prospective purchasers who are not accredited investors.
Rule 506b
Rule 506(b) is a "safe harbor" for the non-public offering exemption which means it provides specific requirements that, if followed, establish that your transaction falls within the Section 4(a)(2) exemption.
Rule 506 does not limit the amount of money your company can raise or the number of accredited investors it can sell securities to, but to qualify for the safe harbor, your company must:
- Not use general solicitation or advertising to market the securities
- Not sell securities to more than 35 non-accredited investors
- Give non-accredited investors specified disclosure documents that generally contain the same information as provided in registered offerings be available to answer questions from prospective purchasers who are non-accredited investors; and --Provide the same financial statement information as required under Rule 505.
Rule 506c
To implement Section 201(a) of the JOBS Act, the SEC promulgated Rule 506(c) to eliminate the prohibition on using general solicitation under Rule 506 where all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that the purchasers are accredited investors.
Under Rule 506(c), issuers may offer securities through means of general solicitation, provided that all purchasers in the offering are accredited investors, the issuer takes reasonable steps to verify their accredited investor status, and certain other conditions in Regulation D are satisfied.
Purchasers receive “restricted securities” in a Rule 506 offering. Therefore, they may not freely trade the securities after the offering Section 18 of the Securities Act provides a federal preemption or exemption from state registration and review of private offerings that are exempt under Rule 506. The states still have authority, however, to investigate and bring enforcement actions for fraud, impose state notice filing requirements and collect state fees.
IPO
A small business can raise capital in a number of different ways, including borrowing money from banks, other financial institutions or friends/family and by selling securities. If a small business is offering and selling securities, even if to just one person, the offer and sale of the securities must either be registered with the SEC or conducted in accordance with one of the many registration exemptions under the Securities Act. Registering an offering with the SEC would make your company a public company. An offering registered with the SEC is often referred to as an” IPO”
Before a company may offer its securities for sale to the public, the SEC must declare the registration statement "effective." The registration statement has two principal parts; the prospectus, offering document or "selling" document must include important facts about business operations, financial condition, results of operations, risk factors, and management. It must also include audited financial statements. The prospectus must be delivered to everyone who buys the securities, as well as anyone who is made an offer to purchase the securities. Part II contains additional information that the company does not have to deliver to investors but must file with the SEC, such as copies of material contracts.
All companies may use form S-1 to prepare a registration statement for a securities offering.