Which Public Offering Exemption Allows Selling Shares to Non-Accredited Investors in the USA?

Question from Jimmy3, Which Public Offering Exemption Allows Selling Shares to Non-Accredited Investors in the USA?

Answer from AI:

When it comes to raising capital for your business in the United States, navigating the complex landscape of securities laws is crucial. The Securities Act of 1933 requires that all offerings of securities (which includes shares in a company) be registered with the SEC unless an exemption applies. For many startups and small businesses, finding an exemption that allows them to sell shares to both accredited and non-accredited investors without the burdensome process of a full SEC registration is key.

Understanding Accredited vs. Non-Accredited Investors

Before diving into the exemptions, it’s important to understand the difference between accredited and non-accredited investors. An accredited investor is someone who meets certain financial criteria set by the SEC, such as having an annual income over a certain threshold or a net worth exceeding a specific amount, excluding the value of their primary residence. Non-accredited investors, on the other hand, do not meet these criteria and are generally considered to be less financially savvy, warranting greater protections under securities laws.

Regulation D: Rule 506(b) and Rule 506(c)

Regulation D offers two popular exemptions that are often considered by companies looking to raise capital:

1. Rule 506(b): This rule allows companies to raise an unlimited amount of money from both accredited and up to 35 non-accredited investors. However, it prohibits general solicitation or advertising to market the securities. Companies must also provide non-accredited investors with disclosure documents that are generally the same as those used in registered offerings. The company must have a pre-existing relationship with the investors and must reasonably believe that the investors are capable of evaluating the investment’s risks and merits.
2. Rule 506(c): Under this rule, companies can also raise an unlimited amount of money, but they can only sell securities to accredited investors. The advantage of Rule 506(c) is that it allows companies to broadly solicit and advertise the offering. Since this exemption is limited to accredited investors, it does not directly answer the question but is relevant for comparison.

Regulation A (Reg A+)

Regulation A, often referred to as Reg A+, is another exemption that is particularly friendly to non-accredited investors. It is divided into two tiers:

• Tier 1 allows companies to raise up to $20 million in a 12-month period from both accredited and non-accredited investors.
• Tier 2 allows companies to raise up to $75 million in a 12-month period. While both accredited and non-accredited investors can participate, there are certain limitations on the amount non-accredited investors can invest, typically capped at 10% of the investor’s annual income or net worth.

Reg A+ offerings require companies to file an offering statement with the SEC, which is subject to SEC review and qualification. Although this process is less burdensome than a full registration, it still requires significant disclosure and ongoing reporting obligations.

Regulation Crowdfunding (Reg CF)

Regulation Crowdfunding (Reg CF) is another exemption designed to facilitate capital raising from both accredited and non-accredited investors. Under Reg CF, companies can raise up to $5 million in a 12-month period. There are investment limits for non-accredited investors based on their net worth and annual income, but the platform allows for a wide range of investors to participate in early-stage investing. Offerings must be conducted through an SEC-registered intermediary, either a broker-dealer or a funding portal.

Conclusion

Choosing the right public offering exemption depends on your company’s specific needs, including how much capital you’re looking to raise, the types of investors you wish to attract, and your willingness to deal with regulatory requirements. While Regulation D (Rule 506(b)), Regulation A (Reg A+), and Regulation Crowdfunding (Reg CF) offer pathways to include non-accredited investors, each comes with its own set of rules and limitations.

It’s crucial to consult with a legal professional who can provide advice tailored to your situation and help navigate the complexities of securities laws. For more detailed information on these exemptions, visit the SEC’s guide on exempt offerings.

Remember, the choice of exemption not only affects your ability to raise funds but also your obligations to investors and the SEC. Careful planning and legal guidance are essential to ensure compliance and the successful growth of your business.