In today’s financial environment, many Issuers are choosing to self underwrite their public offerings, commonly referred to as a Direct Public Offering (DPO). Moreover, as almost all potential investors have computers, many Issuers are choosing to utilize the Internet for such DPO’s. The Securities and Exchange Commission (SEC) has published rules for utilizing the Internet for an offering.

To comply with the SEC rules for electronic use, an Issuer must comply with the following minimum rules, among others:

• An electronic prospectus must provide the same information as a paper written prospectus;
• The Investor must elect to receive electronic delivery of the prospectus and must be provided with personal access codes to access electronic materials over the Internet;
• The Investor must pre-qualify to receive the offering materials (such as being in a particular state, being accredited, etc.) prior to receiving access codes;
• The Investor must be immediately notified of any amendments or changes in the offering documents; and
• The Issuer must have a system for evidencing delivery of materials and maintaining copies of any correspondence and communications by and between the Issuer and Investor through electronic means;

State and Federal Securities Laws

The National Securities Markets Improvement Act of 1996 preempts state registration requirements of certain federally covered securities including most registered offerings and offerings exempt under Rule 506 of Regulation D of the Securities Act of 1933. However, for offerings that are not preempted by the 1996 Act, state securities laws must be reviewed and abided by.

Practically all states have adopted statutes, rules, orders or policies exempting Internet offerings and governing their mechanics. Compliance with the various state securities law requirements may be daunting, however, an Issuer can utilize disclaimers to mitigate the risks of violations. The disclaimers can be general, focusing on the state(s) where the securities are being offered and indicating that the offering is not made to persons elsewhere, or more specific disclaiming an offering in a particular state. Again, an Issuer must maintain control over the potential investors that review its offering documents through access procedures and other internal controls.

Silence is Golden

As with all offerings, Issuers should be careful not to condition the market or discuss the offering on their website with access to offering information being given only to prequalified potential investors.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

Although Regulation A is legally an exemption from the registration requirements contained in Section 5 of the Securities Act of 1933, as a practical matter it is more analogous to registration than any other exemption. In particular, Regulation A provides for the filing of an offering prospectus which closely resembles a registration statement, with the Securities and Exchange Commission (“SEC”). The SEC then can, and often does, comment on the filing. Practitioners often refer to Regulation A as a short form registration.

Moreover, although the Regulation A offering prospectus does not go “effective” the regulation calls for “qualification” of the offering prospectus under circumstances that mirror those for effectiveness of a registration statement. For example, Rule 252(g) provides for the technical possibility of automatic qualification twenty days after filing the offering prospectus much the same as Section 8(a) for registration statements. Rule 252(g) also provides for a procedure to delay such effectiveness until the SEC declares the offering “qualified” much the same way as a registration statement’s automatic effectiveness can be delayed until the SEC declares it “effective”.

Regulation A and 134 Registration Statements

Regulation A mirrors registration in many other ways. For example, oral offers may be made after the offering prospectus is filed, just as with registration statements. Written offers must be accompanied by a preliminary offering prospectus, just as for registration statements, and advertising may be made on a limited basis in rules that match Rule 134 for registration statements.

Although Regulation A offerings have many things in common with registered offerings, they differ in many respects as well. One of the most important differences is that, in Regulation A offerings, an issuer may formally “test the waters” before the filing of an offering prospectus, by oral and written communications to potential buyers, designed to gauge interest in the offering. The written documents that may be used to “test the waters” are limited in content and must be filed with the SEC. Though a failure to file the document will not destroy the exemption if the document otherwise meets the Regulation A requirements.

Regulation A and Rule 504 Similarities

The limitations on the availability to use Regulation A are similar to Rule 504. In particular Regulation A is only available to US or Canadian companies. In addition, the issuer cannot be an Exchange Act reporting company or an investment company, and neither the Company nor is officers and directors can have had previous regulatory problems (the so called “bad boy” exclusion). The maximum dollar amount of securities that may be sold under Regulation A is $5 million in a twelve month period, of which $1.5 million can be sold by security holders.

Regulation A offerings generally require the same effort and cost as registered offerings.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

Section 4(6) provides a registration exemption for offerings to accredited investors, if the aggregate offering amounts up to the dollar limit of Section 3(b) (currently $5,000,000), if there is no advertising or public solicitation in connection with the transaction by the Issuer or anyone acting on the Issuer’s behalf.

The term accredited investor is defined in section 2(a)(15) and generally includes:

• Banks, insurance companies and pension plans;
• Corporations, partnerships and business entities with over $5 million in assets;
• Directors, executive officers and general partners of the issuer;
• Natural persons with over $1 million net worth or over $200,000 in annual income for two years; and
• Entities, all of whose equity owners are accredited.

In addition, the SEC has the power to define as an accredited investor any person, who, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial matters, or amount of assets under management qualifies as an accredited investor.

Section 4(6) and Regulation D

Section 4(6) is rarely used as a free standing exemption; rather it is thought that Section 4(6) falls under the mandate of Regulation D although none of the three enumerated exemptions under Regulation D (Rules 504, 505 and 506) are strictly limited to accredited investors.

Practitioners seeking to rely on Section 4(6) should be aware that such securities are not considered federally covered under Section 18 of the Securities Act of 1933 and accordingly, in addition to abiding by the federal securities regulations, individual state securities laws must be considered.

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

Section 3(b) of the Securities Act gives the SEC authority to exempt from registration certain offerings where the securities to be offered involve relatively small dollar amounts. Under this provision, the SEC has adopted Regulation A, a conditional ex-emption for certain public offerings not exceeding $5 million in any 12-month period. An offering statement (consisting of a notification, offering circular, and exhibits) must be filed with the SEC Regional Office in the region where the company’s principal business activities are conducted. Although Regulation A is technically an exemption from the registration requirements of the Securities Act, it is often referred to as a “short form” of registration since the offering circular (similar in content to a prospectus) must be sup-plied to each purchaser and the securities issued are freely tradeable in an aftermarket.

The principal advantages of Regulation A offerings, as opposed to full registration on Form S-1, SB-1 or SB-2, are:

1. Required financial statements are simpler and need not be audited; and
2. There are no periodic SEC reporting requirements (other than sales reports fol-lowing the sale of the securities) unless the issuer has more than $10 million in total assets and more than 500 shareholders.

Regulation A and Offering Circulars

There are three permitted offering circular formats under Regulation A, one of which is a simplified question-and answer document. This style of disclosure is useful to potential investors and may offer significant benefits to the issuer in the time expended and the costs of preparation.

All types of companies which are not reporting under the Exchange Act may use Regu-lation A, except “blank check” companies and investment companies registered or re-quired to be registered under the Investment Company Act of 1940.

In most cases, Regulation A may also be used by shareholders for the resale of up to $1.5 million of securities.

“Test The Waters” Provision

Regulation A includes a provision which allows an issuer to “test the waters” to deter-mine whether or not there is any investor interest in its securities before the filing of a complete offering document. Thus, an issuer may publish factual information about its business or proposed business before incurring a full range of legal, accounting and other costs, in order to gauge potential investor interest in a possible securities offering; however, the provision specifically provides that no money may be solicited or accepted until an offering statement has been qualified by the Commission, and prescribed offer-ing materials have been delivered to potential investors.

Rule 504

Rule 504 of Regulation D provides an exemption for the offer and sale of up to $1,000,000 of securities in a 12-month period. The issuer may use this exemption so long as it is not a blank check company and is not subject to Exchange Act reporting re-quirements. Like the other Regulation D exemptions, in general the issuer may not use public solicitation or advertising to market the securities and purchasers receive “re-stricted” securities. However, an issuer can use this exemption for a public offering of its securities and investors will receive freely tradable securities under certain specific cir-cumstances.

Filing of Form D

There are no periodic SEC reporting requirements (other than filing Form D) unless the Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels pri-vate and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!