Regulation D provides an exemption from the registration requirements of the Securities Act. Regulation D, adopted in 1982, was designed to facilitate capital formation while protecting investors by simplifying and clarifying existing exemptions for private or limited offerings, expanding their availability, and providing more uniformity between federal and state exemptions. Although Regulation D originated as an effort to assist small business capital formation and continues to play an important role in that arena, all sizes of companies use the registration exemptions in Regulation D.
The SEC recently proposed changes to Regulation D. The SEC’s objective in this effort is to clarify and modernize its rules to bring them into line with the realities of modern market practice and communications technologies without compromising investor protection.
Limited Advertising Permitted to Large Accredited Investors. The SEC proposes to create a new exemption to the registration requirements of the Securities Act for offers and sales of securities to a new category of investors called “large accredited investors.” The exemption would permit limited advertising of these offerings. The announcement would be required to state prominently that sales will be made to large accredited investors only, that no money or other consideration is being solicited or will be accepted through the announcement, and that the securities have not been registered with, or approved by, the SEC and are being offered and sold pursuant to an exemption. At the issuer’s option, the announcement also could contain the following additional information:
- The name and address of the issuer;
- A brief description of the business of the issuer in 25 or fewer words;
- The name, type, number, price, and aggregate amount of securities being offered and a brief description of the securities;
- A description of what “large accredited investor” means;
- Any suitability standards and minimum investment requirements for prospective purchasers in the offering; and
- The name, postal or e-mail address and the telephone number of a person to contact for additional information.
Large accredited investors would consist of the same categories of entities and individuals that qualify for accredited investor status under existing Rule 506, but with significantly higher dollar-amount thresholds for investors subject to such. Legal entities that are considered accredited investors if their assets exceed $5 million would be required to have $10 million in investments to qualify as large accredited investors. Individuals generally would be required to own $2.5 million in investments or have annual income of $400,000 (or $600,000 with one’s spouse) to qualify as large accredited investors, as compared to the current accredited investor standard of $1 million in net worth or annual income of $200,000 (or $300,000 with one’s spouse). Legal entities that are not subject to dollar-amount thresholds to qualify as accredited investors—generally government-regulated entities—would not be subject to dollar-amount thresholds to qualify as large accredited investors.
Changes to the Definition of Accredited Investor. The SEC also proposes to update the “accredited investor” definition. Among other things, the SEC proposes a mechanism to adjust the dollar-amount thresholds in the definition of “accredited investor” to reflect future inflation. Specifically, the SEC proposes to adjust for inflation all dollar-amount thresholds set forth in Rule 501 of Regulation D on a going-forward basis—starting on July 1, 2012, and every five years thereafter—to reflect any changes in the value of the Personal Consumption Expenditures Chain-Type Price Index (or any successor index thereto). The inflation-based adjustments would be rounded to the nearest multiple of $10,000. By adjusting the thresholds for inflation in the future, the SEC intends to retain the income, assets and investments requirements in real terms so that the accredited investor standards will not erode over time.
Changes to Integration Safe Harbor. Finally, the SEC proposes to shorten the time frame for the integration safe harbor for Regulation D offerings from six months to 90 days to help provide flexibility to issuers. The integration doctrine seeks to prevent an issuer from improperly avoiding registration by artificially dividing a single offering into multiple offerings such that Securities Act exemptions would apply to the multiple offerings that would not be available for the combined offering.