A Brief Look at the Dynamics of a Private Offering

A company can conduct a private offering through a non-public limited offering, either under Section 4(2) of the Securities Act of 1933 or Regulation D (under either Rule 505 or Rule 506). To ensure that an offering is "non-public" and can therefore qualify for Section 4(2) or Regulation D, a company may not engage in any "general solicitation or advertising."

An offering document in a private offering is called a "private placement memorandum" or an "offering circular" - not a "prospectus." A broker who brings the issuer and buyers together in a private placement is called the "placement agent" - not an underwriter. Private offerings are conducted on a "best efforts," rather than on a "firm commitment" basis.

Under Rule 505 up to $5 million worth of securities can be sold to an unlimited number of "accredited investors" as well as 35 other investors as long as the investment is suitable for these other investors. Audited financial statements are required if non-accredited investors are included in the offering.

Under Rule 506 an unlimited amount of securities can be sold to an unlimited number of "accredited investors" and 35 sophisticated investors - audited financial statements are required if sophisticated investors are included in the offering. Federal securities laws preempt the ability of states to require registration of Rule 506 offerings. The preemption has made Rule 506 offerings more popular it was enacted by Congress in 1996.

General solicitation or advertising can be defined as any information generally available or widely distributed to promote the sale of a security. The SEC has provided guidance as to what activities a company or its placement agent can undertake in connection with an online private offering without violating the general solicitation restrictions.

An "accredited investor" is an investor with a net worth of $1 million - or income of $200K (or $300K for couples, if one spouse cannot meet the $200k threshold) in each of the last two years. Whereas a „sophisticated investor‰ is an investor whom a company reasonably believes has adequate knowledge and experience in financial and business matters.