The U.S. Securities and Exchange Commission (SEC) has set forth disclosure requirements for private placements, including financial statements and other information. Individual states may also have additional disclosure requirements for private placements. Most private placement offerings are made pursuant to the exemptions of Regulation D. Regulation D allows companies to raise capital by selling securities without having to comply with more stringent SEC requirements. Still, Regulation D does contain a number of disclosure requirements. The main provisions regulating private placements are located in Rules 504 and 506.
Rule 504 requires that a company provide a substantive disclosure document to investors. The disclosure should allow the investor to make an informed investment decision. This generally includes the business of the company, its financial condition, the result of operations, property and management.
This rule governs private placements made to accredited investors. There are no disclosure requirements contained in this rule. Accredited investors have a higher net worth, and the SEC assumes they have sufficient bargaining power to obtain relevant information from the company. Companies still have to comply with the requirements of SEC Rule 10b-5, which prohibits any act or omission resulting in fraud or deceit in the purchase or sale of securities.
Rule 506 also allows sales of securities to non-accredited investors. Companies must provide non-accredited investors with non-financial and specific types of financial statements. These disclosures must be generally the same as those provided in registered offerings. Companies do not gain any substantial relief if they offer securities to non-accredited investors under Rule 506.