Private Placements: Selling Stock without SEC Filing

Private Placements allow you to sell stock without SEC filing

This month we’ll begin a series of blogs about Private Placements: Selling Your Stock without Filing a Registration Statement with the SEC.

If you are contemplating a GoPublicDirect transaction as opposed to a reverse merger with a public shell, this is important for two reasons:

  1. It gets you the necessary number of shareholders to obtain a Ticker Symbol.
  2. It gives you the opportunity to raise funds prior to filing a registration statement on Form S-1 with the SEC by selling some of your authorized and unissued stock.

Private Placements Origins

If you are going to sell your stock in the U.S. without filing a registration statement with the SEC, you will do so in a transaction commonly called a Private Placement. The Securities Act of 1933, the “Selling Stock Act,” provides the statutory framework for Private Placements, describing them in Section 4(2) of the 1933 Act as “transactions by an issuer not involving a public offering.” Thus the origin of the term “Private Placement,” in that it is a non-public, or private offering.

Private Placements in the U.S. are most often done under and SEC regulation called Regulation D. Private Placements outside the U.S. are done under and SEC regulation called Regulation S. Although it is true that you can do a Private Placement without complying with Regulation D and Regulation S and still comply with federal securities laws, it is a risky proposition to do so.

Why?  Because these Regulations provide “safe harbors,” specific guidelines which, if followed, mean that you know for certain that your offering is a “transaction by an issuer not involving a public offering” and are thus certain not to run afoul of federal securities laws. The guidelines for Private Placements done outside of these regulatory safe harbors, relying on the 1933 Act statutory provision alone, are much less clear and much less certain, and thus much more risky.

Regulation D Private Placements

The SEC promulgated Regulation D to tell you how you can conduct an unregistered offering without violating federal securities laws. Regulation D is divided into nine parts, as follows:

  • Preliminary Notes
  • Rule 501 — Definitions and Terms Used in Regulation D
  • Rule 502 — General Conditions to Be Met
  • Rule 503 — Filing of Notice of Sales
  • Rule 504 — Exemption for Limited Offers and Sales of Securities Not Exceeding $1,000,000
  • Rule 505 — Exemption for Limited Offers and Sales of Securities Not Exceeding $5,000,000
  • Rule 506 — Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering
  • Rule 507 — Disqualifying Provision Relating to Exemptions Under Rule 504, Rule 505 and Rule 506
  • Rule 508 — Insignificant Deviations from a Term, Condition or Requirement of Regulation D

The three types of private placements are done under Rules 504, 505 and 506. Your initial task is to select which of the rules, 504, 505 or 506, you want to utilize for your placement. In order to do that, you must first understand how Regulation D works.

What you can and cannot do in a Regulation D offering is set forth Rule 502, the guts of Regulation D. It tells you:

  • The information you must include in your Private Placement Memorandum, the equivalent of a GoPublicDirect registration statement/prospectus for a private placement
  • The number of investors you may have in your Private Placement
  • The limitations on the way you can locate investors and offer and sell your stock in a Private Placement
  • How two private placements that you think are separate offerings can be combined leading you to bust the exemption
  • Resale limitations on shares sold in your Private Placement

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