/private-placements

name: private-placements
description: "Analyze private placement and exempt offering compliance under Regulation D, the Investment Company Act fund exclusions, and FINRA private placement rules. Owns the accredited investor definition (Rule 501(a)), the '506(b) vs 506(c)' distinction, 'general solicitation' analysis, 'Form D' filing mechanics, the 'qualified purchaser' standard for 3(c)(7) funds, bad-actor disqualification, integration, and Rule 144 resale restrictions. Use when the user asks 'can my client invest in this private fund', whether an investor is an 'accredited investor' or qualified purchaser, how to verify accredited status in a 'Reg D offering', 506(c) verification steps, FINRA 5122/5123 filing obligations, or the Reg BI/fiduciary overlay when recommending private placements. Also trigger on 'exempt offering', 'private fund exemption', '3(c)(1) vs 3(c)(7)', or 'restricted securities holding period'."

Private Placements and Exempt Offerings

Regulatory status current as of June 2026 — verify effective dates, dollar thresholds, and pending rulemakings against current SEC/FINRA/FinCEN sources before advising.

Core Concepts

The Registration Baseline and the Exemption Architecture

Securities Act §5 prohibits offering or selling a security without an effective registration statement. Every private placement rests on an exemption from that requirement. The statutory exemption is §4(a)(2) — "transactions by an issuer not involving any public offering" — a facts-and-circumstances standard shaped by *SEC v. Ralston Purina* (investors must be able to "fend for themselves"). Because §4(a)(2) alone is uncertain, most issuers rely on Regulation D (17 CFR 230.500-508), a non-exclusive safe harbor. Losing the safe harbor does not automatically mean a §5 violation, but the issuer must then defend the offering under raw §4(a)(2), a materially weaker position. State blue-sky registration is preempted for Rule 506 offerings because they are "covered securities" under Securities Act §18(b)(4)(F), though states retain notice-filing and antifraud authority.

Rule 506(b) — The Traditional Private Placement (17 CFR 230.506(b))

• **No general solicitation or general advertising** (Rule 502(c)). The issuer (and anyone acting on its behalf, including a placement agent) must have a pre-existing, substantive relationship with offerees, or use another means that does not constitute general solicitation.
• **Unlimited accredited investors** plus up to **35 non-accredited purchasers** (per offering, counted under Rule 501(e)), each of whom must be "sophisticated" — alone or with a purchaser representative, capable of evaluating the merits and risks (Rule 506(b)(2)(ii)).
• **If any non-accredited investor purchases**, the issuer must furnish the disclosure specified in Rule 502(b) — financial statements and information comparable to a registered offering — which is why most 506(b) offerings in practice are accredited-only.
• **Self-certification is acceptable**: the issuer needs a reasonable belief that investors are accredited (Rule 501(a) preamble), typically documented through an investor questionnaire. No verification procedures are mandated.

Rule 506(c) — General Solicitation with Verification (17 CFR 230.506(c))

Added by the JOBS Act (2012, effective September 2013):

• **General solicitation is permitted** — public websites, mass email, advertising, demo days.
• **All purchasers must be accredited**, and the issuer must take **reasonable steps to verify** accredited status. Self-certification alone is not sufficient. The verification requirement is a separate condition — an issuer can fail 506(c) even if every purchaser was in fact accredited.
• **Non-exclusive verification methods** (Rule 506(c)(2)(ii)): review of tax forms (W-2, 1099, K-1) for the two most recent years plus a written representation for the current year (income test); review of bank/brokerage statements and a credit report within the prior three months plus a liabilities representation (net worth test); written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA who has verified status within the prior three months.
• **Minimum-investment-based verification (SEC staff no-action guidance, March 2025)**: an issuer may reasonably rely on high minimum investment amounts (at least $200,000 for natural persons, $1,000,000 for entities) combined with written representations of accredited status and that the investment is not financed by third parties, absent contrary knowledge. Where those conditions are not met, apply the principles-based standard: the reasonableness of steps depends on the nature of the purchaser, the information the issuer has, and the terms of the offering (minimum investment, manner of solicitation).
• An offering that begins under 506(b) may convert to 506(c) prospectively (SEC C&DI 256.34), but not the reverse — once general solicitation has occurred, 506(b) is unavailable for that offering.

Accredited Investor — Rule 501(a) (17 CFR 230.501(a))

Natural persons qualify by:

• **Income**: individual income over $200,000, or joint income with a spouse or spousal equivalent over $300,000, in each of the two most recent years with a reasonable expectation of the same in the current year (Rule 501(a)(6)).
• **Net worth**: over $1,000,000, individually or jointly, **excluding the primary residence** (and excluding mortgage debt up to the home's value; underwater mortgage excess counts as a liability) (Rule 501(a)(5), as amended by Dodd-Frank §413(a)).
• **Professional certifications** (2020 amendments, effective December 2020): holders in good standing of FINRA Series 7, Series 65, or Series 82 licenses (Rule 501(a)(10) and the SEC's designating order).
• **Knowledgeable employees** of a private fund, for investments in that fund (Rule 501(a)(11), cross-referencing Investment Company Act Rule 3c-5).

Entities qualify as, among others: