The vast majority of private companies raising capital use Rule 506 of Regulation D, which, if complied with, ensures the securities being sold are exempt from registration with the Securities and Exchange Commission (SEC) because the offering of these securities does not involve “any public offering.” One of the primary advantages of a Rule 506 offering is that it is considered an offering of “covered securities,” which means that individual states cannot require issuers who meet the conditions of Rule 506 to register their offerings at the state level. By granting covered security status to Rule 506 offerings, Congress greatly reduced the compliance costs of companies raising private capital who would otherwise have to comply with the unique registration or exemption requirements of each state where one of their investors happened to live.
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Traditionally, when raising capital, an overwhelming majority of businesses have used Rule 506 of Regulation D, also often known as the “private placement exemption” as their exemption from securities registration requirements. In recent years, Congress, the SEC, and state regulators have enacted a number of alternative exemptions designed to make capital formation easier for growing businesses, such as equity crowdfunding and “mini-IPOs,” as well as made refinements to existing exemptions, such as Rule 147 (intrastate offerings) and Rule 504. In this post, I’ll provide an overview of these newer options.