Exemptions in US
In the U.S., there are several exemptions that allow companies to raise money without going through the full regulatory process. As mentioned above, one way is by targeting only accredited investors and professional investors, which can exempt you from many regulations. However, there are also other exemptions like Regulation A, Regulation Crowdfunding (Reg CF), Regulation D etc. each with its own rules and limitations:
Regulation A
Here are the key requirements:
Tier 1:
Fundraising Limit: Companies can raise up to $20 million over a 12-month period.
Disclosure Requirements: Basic disclosure is required, but there are no ongoing financial reporting obligations.
Blue Sky Laws: Companies must comply with state Blue Sky Laws in each state where they are raising funds.
No SEC Reporting: There are no ongoing SEC reporting requirements under Tier 1.
Tier 2:
Fundraising Limit: Companies can raise up to $75 million over a 12-month period.
Disclosure and Reporting Requirements: Companies must provide audited financial statements and file ongoing reports with the SEC.
Blue Sky Law Exemptions: Companies are exempt from state Blue Sky Laws, simplifying the process for multistate offerings.
Investor Limitations: There are limits on how much non-accredited investors can invest, based on their income or net worth.
Basic Requirements for Both Tiers:
Company Eligibility Requirements: Only companies that meet certain eligibility criteria can use Regulation A.
Bad Actor Disqualification Provisions: Companies or relevant persons who have been previously convicted, subject to court orders, or have violated the law are disqualified from using Regulation A.
Disclosure: All companies must meet basic disclosure requirements to inform investors about the offering.
There are no resale restrictions under Reg A, but you might need to hold your investment for a long time. If the securities aren’t listed on an exchange, you won’t be able to trade them easily and will need to find a buyer yourself when you want to sell.
Regulation D Rule 504
Here are the key requirements:
Business Plan and Purpose: The company must have a clear business plan and a defined purpose for raising funds.
No Public Solicitation: Public solicitation or advertising is not allowed. Companies must approach potential investors individually.
Filing Form D: The company is required to file Form D within 15 days of starting its fundraising efforts. This filing serves as a public notification that the company is raising money.
Compliance with Blue Sky Laws: The company must comply with state Blue Sky Laws in each state where it is raising funds, which are designed to protect investors from fraudulent practices.
Non-Accredited Investors: The exemption allows the participation of non-accredited investors, making it more accessible for a broader range of investors.
Fundraising Limit: Companies can raise up to $10 million over a 12-month period under Rule 504, providing flexibility for smaller fundraising needs.
Securities issued under Rule 504 are considered "restricted securities," meaning they cannot be freely resold unless certain conditions are met. Securities bought through a Regulation D offering can be resold by either: Registering them with the SEC (a formal process), or finding an exemption from registration, such as under Rule 144.
Regulation D Rule 506(b)
Here are the key requirements:
Accredited Investors: Companies can accept investments from accredited investors who are allowed to self-certify their status. Up to 35 non-accredited investors are also permitted, provided they are financially sophisticated.
No Public Solicitation: Public solicitation or advertising is generally not allowed under Rule 506(b). However, an exception is made for "demo days," where companies can showcase their products or services to potential investors.
Filing Form D: Companies must file Form D within 15 days of beginning their fundraising efforts. This filing serves as a public notification that the company is moving ahead to raise money.
Disclosure Requirements: If all investors are accredited, there are no specific disclosure requirements. However, if non-accredited investors are involved, the company must provide them with information similar to what is required in a registered offering.
Exemption from Blue Sky Laws: Rule 506(b) offerings are exempt from state Blue Sky Laws, which are designed to protect investors from fraudulent practices.
Unlimited Fundraising: Companies can raise an unlimited amount of money under Rule 506(b), making it a flexible option for larger fundraising efforts.
Investors in a Rule 506 offering receive restricted securities, which means investors cannot freely resell their securities. To resell their securities, investors must file a registration statement or resell under an exemption. Rule 144 provides a common exemption to reselling restricted securities, most importantly by allowing resale if the investor holds the security for a certain duration of time.
Regulation D Rule 506(c)
Here are the key requirements:
Accredited Investors Only: Companies are allowed to accept investments only from accredited investors.
Filing Form D: The company must file Form D within 15 days of beginning the fundraising process. This serves as a public notification that the company is raising money.
Investor Verification: Unlike Rule 506(b), under Rule 506(c), the company must take reasonable steps to verify that all investors are accredited, rather than relying on self-certification.
No Disclosure Requirements: There are no specific disclosure requirements, regardless of the number of accredited investors involved.
Exemption from Blue Sky Laws: Offerings under Rule 506(c) are exempt from state Blue Sky Laws, which are designed to protect investors from fraudulent practices.
Unlimited Fundraising: Companies can raise an unlimited amount of money under Rule 506(c), offering significant flexibility.
Public Solicitation Allowed: Unlike Rule 506(b), public solicitation and advertising are permitted under Rule 506(c), allowing companies to broadly market their fundraising efforts.
As mentioned above, investors in a Rule 506 offering receive restricted securities, which means investors cannot freely resell their securities. To resell their securities, investors must file a registration statement or resell under an exemption.
Regulation Crowdfunding
Here are the key requirements:
Third-Party Solicitation & Sale: All solicitation and sale of securities must be conducted through a third-party platform, typically a registered crowdfunding portal or broker-dealer.
Disclosures: For financial rounds of less than $107,000, a CPA review is not required, and the financials can remain unreviewed. However, for amounts exceeding $107,000, a CPA review is mandatory.
Filing Form C: The company must file Form C within 15 days of starting the fundraising. This form serves as a public notification that the company is raising funds.
Fundraising Limit: The amount that can be raised is capped at $5 million in a 12-month period.
Public Solicitation: Public solicitation is allowed, enabling the company to promote its fundraising efforts broadly.
Investor Eligibility: Both accredited and non-accredited investors are allowed to participate, making it accessible to a wider audience.
Exemption from Blue Sky Laws: Offerings under Regulation Crowdfunding are exempt from state Blue Sky Laws, which are designed to protect investors from fraudulent practices.
Securities purchased in a crowdfunding transaction typically cannot be resold for one year.
Regulation S
Regulation S is designed for U.S. startups that want to raise funds exclusively from non-U.S. investors. Here are the key requirements:
Non-U.S. Investors Only: This exemption is specifically for U.S. companies offering securities to investors outside the United States. It cannot be used for raising funds from U.S. investors.
Exemption from SEC Filing: Companies utilizing Regulation S are exempt from filing with the SEC and are not required to conduct an investor status verification under U.S. regulations.
Compliance with Local Regulations: While exempt from U.S. regulations, companies must comply with the local and national regulations of the countries where the securities are being offered. This includes meeting any legal requirements and investor protections in those jurisdictions.
Reselling securities under Regulation S provides safe harbors for resales of securities outside the U.S. to avoid registration under the Securities Act of 1933:
Rule 903: For resales outside the U.S. by distributors, affiliates, and others acting on their behalf, ensuring no directed selling efforts into the U.S. and that the transaction occurs offshore.
Rule 904: For resales outside the U.S. by any non-issuer, non-distributor, or non-affiliate person, also ensuring offshore transactions and no directed selling efforts into the U.S.
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