Direct Public Offering: Types of Offerings
Description
This article is from the Investing Articles: Public Offerings: IPO and DPO series.
Direct Public Offering: Types of Offerings
Several alternatives exist for raising the capital:
Types of Offerings (not including SEC registered public offerings or Rule 147 offerings)
(1) Private Placement (Regulation D and Rule 505 and Rule 506. A private placement is generally limited to 35 "nonaccredited" investors, with an unlimited number of "accredited investors". Generaly, accredited investors must have a net worth of $1 million, or income of $200,000 per year or $300,000 per year together with a spouse. A "private placement memorandum" must be prepared, which requires extensive work and considerable expense. The private placement is conducted under Rules 505 or 506 of Regulation D. Under Rule 505, anyone may invest, subject to the limitation on the number f "nonaccredited" investors. Under Rule 506, only accredited or sophisticated investors may invest. Generally, there are state exemptions that correspond with this exemption. $5 million may be raised under Rule 505 and an unlimited amount under Rule 506. No general solicitation is permitted. The securities are "restricted", meaning that they may not be freely traded until registered with the SEC and until various state requirements are met.
(2) Rule 504 and State Exemption. A Rule 504 offering is exempt from federal registration, with no restriction on the number or type of investors and there may be public solicitation. This offering is limited to $1 million. However, the offering must comply with various state "blue sky" laws. These securities are not "restricted" under federal law, but generally are restricted under state law. Generally, these laws impose the same type of limitations as under a Private Placement. However, see Rule 504 and "Test the Waters" and 25102 (n) Offerings - "Test the Waters", below.
(3) Rule 504 and "Test the Waters". Massachusetts has a "test the waters" exemption. Under this exemption, an issuer may make a public solicitation for "indications of interest" to receive a prospectus for the purchase of a security. However, no sale may be made until the security is registered with the Massachusetts Securities Division. The advantage to this procedure is that it is relatively inexpensive to conduct the public solicitation to determine if there is interest in the offering. If there is sufficient interest, then the issuer registers the securities and completes the offering. Registering the offering and completing a disclosure document is the most expensive part of the process.
(4) Rule 504 and SCOR Offering. This offering is exempt from federal registration, but is limited to $1 million and must be "registered" or "qualified" under state law. Many states allow registra ion on Form U-7, a uniform form of registration. This document also requires extensive disclosure pursuant to Form U-7. The states might or might not impose other restrictions, such as who may invest and whether the securities may be subsequently freely tradeable.
Texas. Texas Securities Regulations Section 139.16 provides an exemption similar to California, but the Texas exemption requires purchasers to be Accredited Investors. Since there is no federal exemption available for the Texas exemption over $1 million, the Texas exemption must be combined with the California 25102(n) exemption. For offerings of $1 million and under, the Texas exemption would be available under Rule 504.
New York. Offerings of corporate stock through a public solicitation may generally be made in New York through a broker-dealer after the broker-dealer files two short forms and pays a nominal fee. The broker-dealer must file the State Notice and the Further State Notice.
SEC Regulation CE and Rule 1001. Under federal Regulation CE, Rule 1001, offerings that are exempt under California section 25102(n) are exempt from federal registration, but are Rule 144 restrict d securities.
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