SEC Proposed Changes to Regulation D Private Placement Exemptions

The SEC has proposed a new exemption for sales of securities to a new category of investors called "large accredited investors."  The SEC has also proposed relaxing some of the general solicitation restrictions on private offerings to large accredited investors, permitting a new private offering that begins 90 days after the closing of a prior one to be considered a separate offering, and revising the current definition of accredited investor. 

Separately, the SEC has proposed mandating the electronic filing of Form D.  If this requirement is adopted,  private companies wishing to use one of the Regulation D exemptions would have to obtain an EDGAR filing code and file the Form D on the SEC's EDGAR system.

More information on the proposed changes follows.

Background: Regulation D

Sales of securities are not subject to the registration requirements of Section 5 of the Securities Act of 1933 if they qualify for one of the exemptions from registration in the Securities Act.  Regulation D, passed in 1982, provides a series of clarifying rules with respect to certain of those exemptions.  Offerings that comply with Regulation D are presumed to have complied with the applicable exemption.  In particular, offerings that comply with Rule 506 under Regulation D are presumed to meet the exemption in Section 4(2) of the Securities Act for "transactions that do not involve a public offering."

Although the use of Regulation D is not mandatory for private offerings, many private issuers find it advantageous to rely on Registration D because of the legal "safe harbor" provided.  In addition, securities issued under certain provisions of Regulation D, including Rule 506, are considered "covered securities," which means they are exempt from pre-sale qualification under state securities ("Blue Sky") laws.

Proposed New Exemption for Offerings to Large Accredited Investors

Many of the existing provisions in Regulation D rely on common definitions applicable to a number of different exemptions.  In particular, many of the private offering exemptions rely on the concept of  "accredited investors," who must meet certain income, net worth or relationship tests.

The SEC is proposing a new exemption in Regulation D for offerings in which sales are made exclusively to a new category of investors called "large accredited investors."  Offerings under the new exemption would be "covered securities," and would therefore be exempt from pre-sale qualification under the Blue Sky laws.

The new definition of "large accredited investors" would include:

• Individuals with (i) annual individual income of $400,000 in each of the last two years or aggregate annual income with a spouse of $600,000 in each of the last two years, with a reasonable expectation of reaching the same income level in the current year or (ii) more than $2.5 million in investments.  "Investments" for this purpose would include cash and cash equivalents, securities, and real estate or commodities held for investment purposes, but would exclude real estate used as the residence of the investor or certain specified family members, or in connection with the investor's trade or business, or securities that constitute a "controlling interest" in a closely-held business.  Only 50% of investments held jointly with a spouse can be counted towards the threshold, unless both spouses are investing.
• Banks, trusts, corporations, partnerships, LLCs or other specified entities with more than $10 million in investments.
• Private business development companies.
• Directors, executive officers, general partners or managing members of the issuer.
• Any entity in which all the equity owners are large accredited investors.

Note that the "investments owned" standard is different from the $1 million "net worth" standard in the current definition of accredited investor; that standard would not be changed by the proposed rules.

The new exemption for offerings to large accredited investors would permit an issuer to make a limited written announcement of the offering, which could include the name of the issuer, a description of the issuer's business (in 25 words or less), the type of securities being offered, a description of the investment suitability standards (including the definition of large accredited investor) and a person to contact for additional information.  The announcement could be published on the Internet. 

The limited advertising exception would generally not be available to pooled investment vehicles that rely on certain exemptions to the Investment Company Act to avoid being considered "investment companies."

Other Proposed Changes to Substantive Provisions of Regulation D

• The current accredited investor definition would be expanded to include a $750,000  "investments owned" test as an alternative to the $1 million net worth test.
• The current accredited investor definition would be clarified to codify the Staff interpretive position that the accredited investor test for self-directed plans (e.g., IRAs) is based on the net worth test for individuals ($1 million) instead of the higher $5 million standard for entities.
• The accredited investor and large accredited investor income, net worth and investments owned standards would be adjusted for inflation beginning in 2012, and every 5 years thereafter.

One of the most helpful provisions in the current version of Regulation D is the "integration safe harbor," which provides that offerings at least 6 months apart (measured from the last sale in the earlier offering until the first sale in the later one), will not be "integrated," or considered a single offering.  The SEC is proposing shortening this 6-month period to 90 days.

Electronic Filing and Simplification of Form D

In general, the use of an exemption in Regulation D requires filing a Form D with the SEC.  Currently, this filing is made on paper.

The SEC is proposing to mandate the electronic filing of Form D on the SEC's EDGAR system.   Companies could file their own Form D's online -- no special software would be required, and there is no filing fee.  The new rules would, however, require the issuer to obtain EDGAR filing codes in advance of filing the first Form D.

The SEC is proposing certain substantive changes to Form D itself, including the following:

• Eliminating the current requirement to identify 10% holders of a class of equity securities.
• Adding a question about the issuer's revenue range; the company could choose "decline to state" as an answer.
• Adding a question about whether the transaction was a business combination.
• Adding a question requiring a broker CRD number, if a broker was used in the transaction.
• Eliminating the current requirement to estimate the use of proceeds of the offering.

In addition, new rules would clarify when an amendment to Form D would be required.

You can access the full SEC releases on the proposed revisions to Regulation D, and the proposal to mandate the electronic filing of Form D, here.

Stephen Davis       +1 (212) 847-8798    stephen.davis@hellerehrman.com

Steven Tonsfeldt   +1 (650) 233-8475     steven.tonsfeldt@hellerehrman.com