Private Placements Without General Solicitation — A Comprehensive Guide for Issuers and Investors, including registered persons and FINRA obligations
By Asher Ang, Partner | Kelley Clarke, PC
I. Introduction: Heather Becomes Her Own Landlord
Private capital markets depend on a simple but powerful idea: not every securities offering needs to be registered with the SEC. Congress recognized that sophisticated and wealthy investors can protect themselves without the full disclosure machinery of a public offering, and that requiring registration for every private transaction would stifle capital formation for small and mid-sized businesses.
Rule 506(b) of Regulation D promulgated by the SEC under Section 4(a)(2) of the Securities Act of 1933 is one of the most widely used securities exemption in the United States, accounting for billions of dollars in capital raised each year. To understand how it works in practice, consider Heather.
Heather is a registered representative of a FINRA-registered broker-dealer holding a Series 7 license. She earns over $200,000 per year, has a net worth exceeding $1 million (exclusive of her primary residence), and has invested in stocks and bonds for years. She rents an apartment in a well-maintained residential complex owned by a local private equity firm, Judgement Proof, LLC (‘JPL’), whose principal Sue is Heather’s tennis partner. When Sue mentions that JPL is raising additional equity capital to expand the complex, Heather realizes she can become, in effect, her own landlord.
II. The Legal Foundation: Section 4(a)(2) and Rule 506(b)
Section 4(a)(2) of the Securities Act of 1933 exempts from registration ‘transactions by an issuer not involving any public offering.’ For decades, the outer boundaries of this exemption were uncertain. Regulation D, adopted by the SEC in 1982, created clear safe harbors including Rule 506(b) that provide issuers with certainty that their offering qualifies as a non-public offering under Section 4(a)(2).
Rule 506(b) is not a registration exemption in the narrow sense, it is more precisely defined as a safe harbor that, if properly satisfied, conclusively establishes that the offering does not involve a ‘public offering’ and is therefore exempt from SEC registration under the Securities Act.
Key Statute: Securities Act of 1933, Sec. 4(a)(2); 17 C.F.R. § 230.506(b) (Rule 506(b) of Regulation D); 17 C.F.R. § 230.501 (definitions of accredited investor and sophisticated investor).
III. The Core Conditions of Rule 506(b)
A. No General Solicitation or Advertising
The defining characteristic of Rule 506(b), and the feature that distinguishes it from Rule 506(c), is the absolute prohibition on general solicitation and general advertising. The issuer, its affiliates, and any person acting on its behalf may not:
- Advertise the offering in newspapers, magazines, television, radio, or online platforms (including social media);
- Conduct open seminars or meetings where attendees have been invited through general solicitation;
- Use cold calls or mass emails to solicit investors who have no pre-existing relationship with the issuer.
The no-solicitation condition reflects the foundational premise of Rule 506(b): the offering is confined to investors with whom the issuer has a substantive, pre-existing relationship. JPL can offer shares to Heather because Sue knows her personally from their tennis matches, not because JPL published an advertisement.
CAUTION: A single act of general solicitation, one social media post, one email blast to an unfamiliar mailing list, can defeat the Rule 506(b) exemption for the entire offering, exposing the issuer to rescission liability for all sales made in the offering.
B. Investor Eligibility: Accredited Investors — Unlimited Number
Subject to 2,000 beneficial owner limitation under the Securities Exchange Act of 1934 (“Exchange Act”), an unlimited number of accredited investors may participate in a Rule 506(b) offering. The accredited investor definition, set forth in Rule 501(a) of Regulation D, includes:
- Natural persons with income exceeding $200,000 (individually) or $300,000 (jointly with a spouse or spousal equivalent) in each of the two most recent years, with a reasonable expectation of reaching the same income level in the current year;
- Natural persons with net worth (individually or jointly with a spouse) exceeding $1,000,000, excluding the value of their primary residence;
- Holders of certain securities licenses in good standing: Series 7, Series 65, or Series 82;
- Directors, executive officers, or general partners of the issuer;
- Institutional accredited investors: banks, insurance companies, registered investment companies, business development companies, employee benefit plans with total assets exceeding $5 million, entities (including LLCs, corporations, partnerships, and trusts) with total assets exceeding $5 million not formed for the specific purpose of acquiring the securities, and entities in which all equity owners are accredited investors.
Heather qualifies as accredited under three independent bases: (1) income exceeding $200,000; (2) net worth exceeding $1 million; and (3) her active Series 7 license.
C. Investor Eligibility: Sophisticated Investors — Up to 35
In addition to allowing for accredited investors, Rule 506(b) uniquely permits up to 35 non-accredited investors to participate, provided each such investor is a ‘sophisticated investor.’ A sophisticated investor is one who ‘has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description.’
Brenda, Heather’s neighbor, does not qualify as an accredited investor, but her experience as a mid-level treasury executive at a publicly traded corporation, managing relationships with lawyers, accountants, and broker-dealers, may qualify her as sophisticated. Brenda must complete a suitability questionnaire confirming that she:
- (1) Has the knowledge and experience in financial and business matters to evaluate the merits and risks of the investment;
- (2) Has the financial ability to bear the economic risk of the investment; and
- (3) Is investing for her own account and understands the statutory holding period restrictions on resale.
CAUTION: If non-accredited (sophisticated) investors participate, the disclosure obligations increase significantly. See Section IV below. Most issuers elect to limit 506(b) offerings to accredited investors only to avoid these enhanced requirements.
D. Special Obligations for Registered Representatives: FINRA Rules 3280 and 3210
Heather’s status as a registered representative of a FINRA-registered broker-dealer creates a layer of regulatory obligation that goes beyond the issuer’s compliance with Rule 506(b). Before Heather can invest in JPL’s private placement, and certainly before she could discuss the opportunity with any of her clients or colleagues, she must satisfy two separate FINRA disclosure and approval requirements.
FINRA Rule 3280: Private Securities Transactions
FINRA Rule 3280 governs ‘private securities transactions’ by associated persons of broker-dealers. A ‘private securities transaction’ is defined as any securities transaction outside the regular course or scope of an associated person’s employment with their member firm, in other words, any securities deal that is not conducted through the registered rep’s employing broker-dealer. JPL’s Rule 506(b) offering is exactly this type of transaction.
Rule 3280 imposes the following requirements on Heather:
- Prior Written Notice: Before participating in any private securities transaction, whether as an investor, a finder, or in any other capacity, Heather must provide written notice to her employer. The notice must describe in detail the proposed transaction, Heather’s proposed role in it, and whether she expects to receive any selling compensation (including commissions, referral fees, profits, or other economic benefit beyond a return on her own investment).
- No Compensation: If Heather is investing solely for her own account and will receive no selling compensation for referring others or facilitating the offering, she must still provide notice to her employer.
- Selling Compensation Involved: If Heather were to receive any compensation connected to the sale of JPL’s securities to others, for example, a finder’s fee for bringing in other investors, Rule 3280 requires her to obtain prior written approval from her employer. If the employer approves, it must supervise Heather’s participation as if the transaction were conducted through the firm. Unapproved selling away exposes Heather to FINRA disciplinary action, termination, and potential civil liability.
CAUTION: Registered representatives who invest in private placements without notifying their employer, or who refer clients or colleagues to those investments without obtaining prior written approval, are engaging in ‘selling away’, one of the most common causes of FINRA disciplinary proceedings and customer arbitration claims. The disclosure requirement applies even when the rep is investing solely for personal account and receives no compensation.
FINRA Rule 3210: Accounts at Other Broker-Dealers and Financial Institutions
FINRA Rule 3210 requires registered representatives to disclose to their employer any account maintained at a broker-dealer or financial institution other than their employing firm in which securities transactions are conducted. If Heather holds her JPL restricted stock through any custodial account at a third-party institution, she must:
- Provide written notice to her employer prior to opening the account (or, for existing accounts, promptly upon becoming associated with a FINRA member firm);
- Obtain prior written approval from her employer before opening the account at the other institution; and
- Ensure that the other institution, upon request by Heather’s employer, provides duplicate confirmations and statements of all transactions in the account.
In practice, many broker-dealers maintain internal policies, often more restrictive than FINRA’s minimum requirements, governing employee investments in private placements. These policies may require pre-clearance of specific investments, impose holding period restrictions, or prohibit investment in certain categories of issuers (e.g., issuers in sectors covered by the firm’s research department). Heather must review her employer’s compliance manual and obtain whatever internal approvals are required before proceeding.
Key Rules: FINRA Rule 3280 (Private Securities Transactions of an Associated Person); FINRA Rule 3210 (Accounts at Other Broker-Dealers and Financial Institutions); FINRA Rule 3270 (Outside Business Activities of Registered Persons). See also FINRA Regulatory Notice 18-08 (guidance on outside business activities and private securities transactions).
E. No Limit on Offering Size
Unlike Regulation A (Tier 1: $20 million; Tier 2: $75 million) or Rule 504 ($10 million), Rule 506(b) imposes no cap on the size of the offering. JPL may raise $1 million or $1 billion under Rule 506(b), provided it satisfies the other conditions.
F. Restricted Securities and Resale Limitations
Securities sold under Rule 506(b) are ‘restricted securities’ as defined in Rule 144(a)(3) of the Securities Act. They may not be freely resold unless the resale is registered with the SEC or qualifies for an exemption. The most common resale pathway is Rule 144, which requires, for non-affiliates of the issuer, a holding period of at least six months (for reporting companies) or one year (for non-reporting companies) before resale. JPL’s stock is not exchange-listed and not expected to be, so Heather must be prepared to hold her investment for at least one year before any resale pathway opens.
IV. Disclosure Obligations
A. Accredited Investors Only — No Mandatory Federal Disclosure Form
Where all purchasers are accredited investors, Rule 506(b) does not necessarily mandate delivery of any specific disclosure document or the filing of any offering statement with the SEC prior to sale. This is one of the most significant practical advantages of Rule 506(b) over registered offerings and Regulation A offerings (discussed below). However, the antifraud provisions of the federal securities laws as articulated in Section 17(a) of the Securities Act and Rule 10b-5 under the Exchange Act apply to all offerings, registered or exempt. An issuer must not make any material misstatement or omission in connection with the sale. In practice, issuers should provide a comprehensive Private Placement Memorandum (PPM) covering the business, risk factors, use of proceeds, financial statements, and the terms of the offering.
B. Non-Accredited Sophisticated Investors — Mandatory Disclosure
If any non-accredited (sophisticated) investors participate, the issuer must provide all investors with the following disclosure documents prior to sale:
- Offerings under $20 million: GAAP or IFRS compliant unaudited financial statements.
- Offerings over $20 million: GAAP or IFRS compliant audited financial statements.
- Issuers would have to provide same kind of information as required under Part I or Part II of Form 1-A depending on circumstance.
- In all cases: a written description of any material written information provided to accredited investors must also be provided to non-accredited investors.
V. Form D Filing and State Notice Requirements
Within 15 days after the first sale of securities in the offering, the issuer must file a Form D electronically with the SEC via the EDGAR system. Form D is a brief notice disclosing the issuer’s identity, the type of securities offered, the total offering amount, and the exemption claimed. It is not a registration document, it is a notice filing.
In addition, most states require a ‘notice filing’ (sometimes called a Blue Sky notice filing) and a fee within a specified period of the first sale in that state.
VI. 506(b) vs. 506(c) vs. Regulation A: A Comparative Overview
| Feature | Rule 506(b) | Rule 506(c) | Regulation A (Tier 2) |
| General Solicitation | Prohibited | Permitted | Permitted (public advertising allowed) |
| Investor Eligibility | Accredited (unlimited) + up to 35 sophisticated | Accredited investors only | Any investor (non-accredited permitted) |
| Offering Size Cap | None | None | $75 million per 12-month period |
| SEC Filing Required | Form D (notice only; 15 days post-sale) | Form D (notice only) | Form 1-A (offering statement; pre-qualification required) |
| SEC Staff Review | None | None | Yes — offering circular reviewed before qualification |
| State Blue Sky | Notice filing only (preempted) | Notice filing only (preempted) | Preempted for Tier 2; state qualification required for Tier 1 |
| Ongoing SEC Reporting | None (non-reporting issuers) | None (non-reporting issuers) | Annual (1-K), Semiannual (1-SA), Current (1-U) for Tier 2 |
| Restricted Securities | Yes — Rule 144 applies | Yes — Rule 144 applies | No — freely tradeable (subject to conditions) |
| Verification of Accredited Status | Reasonable belief / self-certification | Affirmative reasonable steps required | N/A (open to all investors) |
| Bad Actor Disqualification | Yes | Yes | Yes |
VII. Conclusion
Rule 506(b) remains the cornerstone of the U.S. private capital markets. Its combination of unlimited offering size, no advertising requirement, permission for up to 35 sophisticated non-accredited investors, no SEC offering statement review, and no ongoing reporting obligations makes it the most efficient general-purpose private placement exemption available. For issuers like JPL who rely on existing relationships with investors like Heather, Rule 506(b) is the natural choice.
For issuers who wish to advertise broadly and accept only accredited investors, Rule 506(c) offers an alternative with a more demanding verification process.
At Kelley Clarke, PC, we guide issuers through the full Regulation D compliance process and help them select the optimal exempt offering pathway from investor eligibility determinations and PPM drafting to Form D filings, and state Blue Sky notices.
This article was authored by Asher Ang, Partner, Kelley Clarke, PC. It is intended for general educational purposes only and does not constitute legal advice. Please consult a qualified attorney before relying on any content herein.
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