U.S Securities laws generally prohibit the offer and sale of securities unless they have been registered under the Securities Act of 1933 and under the state’s Blue Sky laws in which they are offered. However, unregistered securities may be sold as long as it complies with an express exemption from registration under Regulation D.
Private Placement exemptions allow a company to raise money privately, without publicly soliciting investors. The Private Placement Memorandum prepared by the company contains information about the company and the securities being offered. The company may offer this document to “Accredited Investors” who satisfy certain suitability standards, without using general solicitation or advertising.
Rule 504 allows a privately held company to raise up to $1 million within a 12-month period. The securities may be offered to an unlimited number of investors, and no specific type of disclosure material is required to satisfy the exemption. In some instances, Rule 504 offerings may be made through public solicitations and the securities sold are not subject to resale restrictions and investor accreditation standards. While no federal registration is required, state governments also regulate offerings. In Alaska and Montana, for example, companies may raise up to only $500,000 by the sale of securities to investors residing in those states because they have no disclosure laws applicable to the offering. And while a private placement memorandum is not required, it is probably a good idea to create one to minimize legal liability.