286 ENTREPRENEURSHIP
that applies to large public offerings (see Chapter 7 on the IPO). These are called pri-
vate placements. The specific regulations should be consulted directly for complete
details. Experienced legal counsel should always be retained when interpreting these
rules. Minor rule infractions and small deviations from the regulations can cause the firm
selling unregistered securities to lose its safe harbor and be left without any protections.
These private financing regulations (found in regulations D and A of the SEC rules)
include:- Rule 504: Rule 504 is most useful when a venture is raising small amounts from
many investors. A venture can raise up to $1 million during any 12-month period
and up to $500,000 free from state registration as well. There is no limit on the
number or nature of the investors, no advertising is permitted, and there are quali-
fied limits on resale of these securities. Issuers cannot be investment companies. - Rule 505: Rule 505 permits sale of up to $5 million to no more than 35 investors
and an unlimited number of “accredited” investors. No general solicitation or ad-
vertising is permitted, and there are limits on resale. Issuers cannot be investment
companies. Disclosure is required to unsophisticated investors but not to “accredit-
ed” investors. - Rule 506: Rule 506 permits the sale to an unlimited amount of investors and an
unlimited number of qualified “accredited” investors. No solicitation or advertising
is permitted. There is no limit on the nature of the issuer. Unsophisticated investors
may be represented by purchasing representatives who can evaluate the prospectus.
There must be 35 or fewer investors. - Rule 147 (intrastate offering): Rule 147 applies to issues that meet the 80 percent
rule for assets, income, and use of proceeds. Investors must be residents of the same
state. There are no limits on the nature of the issuer, the number of purchasers, or
the amount of the issue. There is a nine-month holding period before resale. - Regulation A: Securities sold under this regulation must be less than $1.5 million
in any 12-month period and can be sold only to “accredited” investors. Advertising
is restricted, but there are no limits on the nature of the issuer or the number of
investors. There are no limits on resale, but an offering circular must be filed and
distributed. A “mini-registration” filing in the SEC regional office is required. - Rule 144: If shares are sold and not covered by regulation A, there are problems
with resale because the securities are not registered. This problem can be avoided if
they are sold under Rule 144, which requires a holding period and a filing registra-
tion before the shares can be resold. - Intrastate Offering Exemption: Section 3(a)(11) of the Securities Act is generally
known as the “intrastate offering exemption.” It facilitates the financing of local busi-
ness operations. To qualify for the intrastate offering exemption, a company must:
a. Be incorporated in the state where it is offering the securities
b. Carry out a significant amount of its business in that state
c. Make offers and sales only to residents of that state.
There is no fixed limit on the size of the offering or the number of purchasers. The
company must determine the residence of each purchaser. If any securities are offered or