What is a Method of Offering Securities to a Limited Number of Investors?

by David Carnes

To offer corporate shares to the general public, you must register with the Securities and Exchange Commission -- a burdensome process that could cost several hundred thousand dollars in legal fees. However, a corporation may offer shares to "accredited investors," as defined by the SEC's Regulation D, with relatively little expense and paperwork.

Regulation D

Regulation D requires that corporations that do not qualify to offer shares to the public sell shares only to "accredited investors." The definition of accredited investors is designed to ensure that only financially sophisticated parties will be able to purchase the corporation's shares. Accredited investors include directors and executives of the corporation; institutional investors such as banks, investment companies and insurance companies; and individuals with a net worth of more than $1 million. The corporation must file Form D with the SEC after the sale. Form D is simple and easy to complete.

Private Placement Memorandum

The corporation issuing the shares must prepare a private placement memorandum and provide it to potential investors. The private placement memorandum is an offer to sell shares that provides detailed information about the corporation's financial position, market position, competition and future prospects. The SEC requires that private placement memorandums objectively assess the risks involved in purchasing the shares -- a memorandum that reads like sales copy can trigger civil and even criminal liability.

Offering Rules

The corporation may retain a licensed securities broker to help it sell its shares, and almost always does. The corporation must comply with any reasonable request for further information before it may sell shares to a potential investor. It must comply with applicable state laws even if they are more restrictive than SEC regulations. Once the shares are sold to the investor, he may not re-sell them without again complying with SEC regulations regarding the private placement of shares -- for example, he may sell only to accredited investors.

Solicitation Restrictions

Neither the corporation nor its broker may contact potential investors through "cold calling." Advertisements cannot be placed in any media available to the general public, such as radio or television. No seminars may be held unless admission is restricted to invitees and the participants have been qualified as accredited investors in advance. When explaining the offer to a potential investor, the corporate representative may not make oral representations that differ in any significant way from the printed material provided to the investor, such as the private placement memorandum.

About the Author

David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.

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