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The Rule 505 Exemption from Registration Requirements for Small Securities Offerings

Before selling shares of stock to the public, a company normally must file a detailed registration statement with the Securities and Exchange Commission. The usual registration statement must contain a prospectus with audited financial statements and other information required for review by Commission staff. However, several exemptions from registration requirements are available for stock offerings that are of lesser value or sold to restricted categories of purchasers.

One such exemption is found in Rule 505, issued pursuant to Regulation D by the Commission. Rule 505 provides an exemption from registration requirements under the Securities Act of 1933 for the offer and sale of securities up to $5 million within a 12-month period. The persons to whom such an offer or sale may be made are restricted to “accredited investors” and up to 35 other persons. Those other persons do not need to satisfy criteria for sophisticated or wealthy investors that are required by other exemptions. However, the offer or sale of securities under the Rule 505 exemption may not be made to such non-accredited investors unless they are given disclosure documents that generally are the same as documents that they would be provided in a registered offering.

Buyers of the stock sold pursuant to a Rule 505 exemption must buy the stock for investment purposes only and not for resale. Thus, the stock is “restricted” and the investors may not sell the stock for a least one year without registering the transaction. General solicitation or advertising may not be used to sell the stock.

“Accredited investors” under Rule 505 include:

  • Banks, insurance companies, registered investment companies, business development companies, or small business investment companies;
  • Employee benefit plans;
  • Charitable organizations with assets over $5 million;
  • Directors and officers of the company issuing the stock;
  • Persons with a net worth of at least $1 million or with income over $200,000 (if considered with a spouse, $300,000) in the last two years; or
  • Trusts with assets above $5 million so long as the trusts were not formed to buy the securities in the exempt offering.

Purchasers of stock in a Rule 505 offering must be provided with financial statements certified by an independent public accountant. While Rule 505 provides an exemption from normal registration requirements, no exemption is available from requirements not to engage in fraudulent conduct or in the use of misleading information.

June 20, 2014

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