Hey, welcome to VoraPrep Audio. If you’re studying for the Series 79, you’ve probably seen questions about a private company that wants to raise a bunch of money—say, $50 million—but they really want to avoid the massive headache of a full-blown public registration with the SEC. It’s expensive, it’s slow, it takes a ton of work. So how do they do it legally? That’s what this is all about: the key exemptions that let companies raise capital without going through that whole process. This is a huge topic on the exam, so let's get it straight.
Think of it like this. A full SEC registration is like getting a commercial driver's license. It’s an intense process that lets you drive anything, anywhere. But most people don't need that. Most people just need a regular license to drive a car, or maybe a special permit for a motorcycle. These exemptions are like those special permits. They let a company raise money, but with specific rules for specific situations. Our job is to know which permit to use and when.
The big one you need to know is Regulation D, which covers private placements. This is the go-to for many companies. It’s got a few different flavors, or rules.
First, there's Rule 504. This is for small raises. Tiny. It’s capped at $10 million in a 12-month period. The nice thing is, there aren't a lot of restrictions on who can invest. It's pretty flexible for a small offering.
But for that $50 million dollar deal, Rule 504 is obviously out. So we look at the heavy hitters: Rule 506(b) and Rule 506(c). Both of these have no limit on the amount of money you can raise. None. The real difference between them comes down to one question: do you want to advertise the offering?
Let's start with Rule 506(b). The 'b' might as well stand for 'be quiet'. With 506(b), there is absolutely no general solicitation. You can't put up a website, you can't blast it out on social media, you can't run an ad. You have to rely on your pre-existing relationships. You can sell to an unlimited number of 'accredited investors', plus up to 35 non-accredited investors, as long as they're 'sophisticated'—meaning they know their way around a balance sheet. The securities they buy are 'restricted', which we'll get to in a minute.
Now, what if the company needs to find new investors? They need to advertise. That’s where Rule 506(c) comes in. The 'c' could stand for 'call everyone'. Under 506(c), general solicitation is totally fine. But there's a huge trade-off. You can *only* sell to accredited investors. No exceptions. And you, the issuer, have to take reasonable steps to actually *verify* that every single investor is accredited. You can't just take their word for it.
So, what is an 'accredited investor'? This definition is critical. You have to know it cold. An individual can qualify in one of a few ways. First, the money tests. They need a net worth of over one million dollars, and that's *excluding* the value of their main home. Or, they need an individual income over $200,000—or joint income with a spouse over $300,000—for the last two years, with the expectation of it continuing.
But there's another way in now, and this is a big exam point. If you hold a Series 7, a Series 65, or a Series 82 license, and you're in good standing... you qualify. You're an accredited investor, period. It doesn't matter what your income or net worth is. So remember, it’s money OR license.
Okay, so an investor buys shares in a Reg D offering. These are called 'restricted securities'. They can't just turn around and sell them on the stock market the next day. That brings us to our next big rule: Rule 144. This rule isn't about raising money; it's about *reselling* those restricted securities to the public.
Rule 144 sets up a waiting period, or a 'holding period'. For a company that's already public and reports to the SEC, the holding period is 6 months. If it’s a private, non-reporting company, you have to hold those shares for 12 months. After that holding period, if you're just a regular investor—a 'non-affiliate'—you can generally sell your shares freely.
But it's different if you're an 'affiliate'. An affiliate is an insider—think directors, officers, or anyone who owns more than 10% of the company. These are 'control' securities. Affiliates have to deal with the holding period just like everyone else, but they also face volume limits. Over any 90-day period, an affiliate can only sell a certain amount. The limit is the GREATER of two numbers: either 1% of the company's total outstanding shares, OR the average weekly trading volume from the last four weeks. They have to calculate both and take the bigger number. And if the sale is pretty big—more than 5,000 shares or over $50,000—they have to file a notice with the SEC, called a Form 144.
Now, what if you're a giant insurance company or a mutual fund and you buy restricted stock? Waiting 6 or 12 months is a pain. That's why we have Rule 144A. This creates a special marketplace just for big institutions. It allows these institutions to resell restricted securities to other big institutions without any holding period. The buyers are called 'Qualified Institutional Buyers', or QIBs. A QIB is an institution, not a person, that owns and invests at least $100 million in securities. So Rule 144A creates a private, liquid market where these QIBs can trade unregistered securities among themselves.
Let’s switch gears to a different kind of offering. What about a smaller company that wants to raise money from the general public, but an IPO is just too much? That’s where Regulation A+ comes in. Think of it as an 'IPO-lite'. It has two tiers.
Tier 1 lets a company raise up to $20 million in 12 months. It's a bit more involved than a private placement and requires SEC and state review, but it's simpler than a full IPO.
Tier 2 is more powerful. It lets a company raise up to $75 million. The big advantage here is that it's exempt from state registration—what we call 'blue sky' laws. But it has more rules. It requires audited financial statements. And for any non-accredited investors, there's a limit on how much they can invest—no more than 10% of their annual income or net worth, whichever is greater.
Finally, what if a company wants to raise money entirely outside the U.S.? That's Regulation S. The 'S' could stand for 'seashore', as in offshore. The rule is simple: if you offer and sell securities in an 'offshore transaction' to 'non-U.S. persons', you don't have to register with the SEC. The key is that there can be no 'directed selling efforts' in the United States. You can't advertise it to Americans. It's a way to keep U.S. rules from applying to purely international transactions.
So, let's go back to that company trying to raise $50 million. How do you advise them? First, Rule 504 is too small. Reg A+ Tier 2 could work, since it goes up to $75 million. But if they want to keep things private, Reg D is the way to go. Rule 506 has no dollar limit. The choice between 506(b) and 506(c) comes down to their investor base. If they have a list of VCs and angel investors, they can use 506(b) and do it quietly. If they need to go out and find investors through advertising, they must use 506(c), which means they can only accept accredited investors and have to verify their status.
One of the biggest traps on the exam is that accredited investor definition. They'll give you a scenario with someone who meets the income test but not the net worth test, and also holds a Series 7. Remember, any one of those is enough. The professional license is a standalone qualification.
Another trap is the Rule 144 volume limit for affiliates. Always remember it’s the GREATER of 1% of outstanding shares or the 4-week average trading volume. The exam will try to trick you into picking the lesser number or just one of the two. Calculate both, pick the bigger one.
If you’re finding these audio lessons helpful, you should know that VoraPrep is a full exam-prep app. We have lessons, thousands of practice questions, and an AI tutor all in one place. You can get started and try it out for free. Just go to Vora Prep dot com.
Let’s try a quick question. An individual has a net worth of $950,000, an income of $220,000 for the last two years, and holds a Series 7 license. Can they invest in a Rule 506(c) offering? Yes. They actually qualify in two ways. Their income of $220,000 exceeds the $200,000 individual threshold. But even if it didn't, their Series 7 license makes them an accredited investor. So the best answer is that they qualify because of the license.
How about this one? An affiliate of a public company wants to sell restricted stock they’ve held for two years. The company has 1 million shares outstanding, and the average weekly trading volume is 8,000 shares. What’s the max they can sell in 90 days? Okay, let's do the math. 1% of 1 million shares is 10,000 shares. The average weekly volume is 8,000 shares. Under Rule 144, they can sell the GREATER of the two. So, the answer is 10,000 shares.
So, to wrap it up, here's the mental checklist. When you see a question about raising capital privately, think Regulation D. When you see a question about an insider or someone reselling restricted stock, think Rule 144. If it's big institutions trading amongst themselves, that’s Rule 144A. For a mini-IPO, think Regulation A+. And for an offering outside the U.S., that's Regulation S.
Keep practicing these scenarios. You'll start to see the patterns, and the right exemption for each situation will become second nature. You've got this. Keep up the great work, and I'll catch you in the next lesson.