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Rule 506 – Regulation D
Under the Securities Act of 1933, an issuer's offer to sell securities must be registered with the U.S. Securities and Exchange Commission unless the offering exempts the registration by meeting certain qualifications under Regulation D. Rule 506 is the most commonly used exemption under this regulation as it allows companies to offer their securities for sale without having to report with the SEC throughout the year as long as they file a Form D in compliance with the requirements for this rule.
Background on Form D
Companies that intend to offer and sell securities without having to register an S-1 with the SEC are required to submit a notice of an exempt offering of securities, also known as Form D, whereby certain information is made available to the public including the size of the offering, the names and addresses of the executive officers and directors, the identity of any broker-dealer or individual receiving a compensation for the sale of the offering and other basic information about the issuer. Form D filers must comply with either Rule 506(c), which allows them to sale their securities to an unlimited number of accredited investors, or Rule 506 (b) which meets the same criteria as the previous rule and in addition allows up to 35 unaccredited investors who meet particular sophistication requirements.
In order to complete a Private Placement under Regulation D, an executed Form D must be filed with the SEC no later than 15 calendar days after a company's first sale of securities in an offering, which translates into the date an investor is contractually committed to invest. Companies are highly recommended to file their Form D prior to capital-raising in order to prevent timing issues. Form Ds are currently filed online through the Electronic Data Gathering, Analysis, and Retrieval system and are freely available for review on the SEC's filings database.
Issuers may be required to file an amendment to a previously filed Form D under any of the following circumstances:
- In order to correct a material mistake of fact or error in a previously filed notice
- In order to reflect a change or update specific information in a previously filed notice (unless the change occurs after the end of the offering)
- If an offering extends over the first year, an amendment must be filed on the 12 month anniversary of the last notice filed with the SEC