Private Placements, Regulation D and Integration

I’m going to start again with a series of more “educational” blog posts.  I’ve done some posting in the past about Regulation D and private placements but I want to explore some more issues in greater detail with you.

First, we’re going to explore the concept of Integration of Multiple Private Placements

If you conduct multiple private placements, you run the risk that the SEC will say that what you thought were multiple, separate Private Placements was really one big Private Placement. The SEC integrates, or combines, the multiple Private Placements.

Why is this a problem? Each of the Regulation D Rules 504, 504 and 506 have various limitations, such as the limitation on the number of Non-Accredited investors. If you cannot have more than 35 Non-Accredited investors, and in your first Private Placement you had 30 and in your second Private Placement you had another 30, and the SEC integrated these two Placements, you would have busted the Reg. D exemption and broken federal securities laws.

The SEC provides you with a very subjective test for integration, as follows:

  • Whether the sales are part of a single plan of financing.
  • Whether the sales involve issuance of the same class of securities.
  • Whether the sales have been made at or about the same time.
  • Whether the same type of consideration is being received.
  • Whether the sales are made for the same general purpose.

Do not rely on these factors, as they almost never work. Instead, rely on the following “bright line” test in Regulation D:

Offers and sales that are made more than six months before the start of a Regulation D offering or are made more than six months after completion of a Regulation D offering will not be considered part of that Regulation D offering, so long as during those six month periods there are no offers or sales of securities by or for the issuer that are of the same or a similar class as those offered or sold under Regulation D, other than those offers or sales of securities under an employee benefit plan.

To avoid an inadvertent violation of Section 5 by failing to meet the requirements for non-integration in the Reg. D exemption, make sure the last sale in your first Private Placement is more than six months before your first offer to sell in your second Private Placement.

Contact me  if you’d like more information.

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