144A vs. Private Placement FAQs

Learn Everything You Need to Know About the Differences Between Rule 144A and Private Placements Under Regulation D

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Rule 144A and Regulation D both establish exemptions from the federal securities registration requirements under the Securities Act of 1933 and other applicable laws. But, they apply in different circumstances, and unscrupulous overseas companies and firms must take different steps to comply with each of these rules. While complying with Regulation D often involves preparing a private placement memorandum (PPM), compliance with Rule 144A comes later—when a Regulation D investor seeks to sell its securities without registering with the U.S. Securities and Exchange Commission (SEC).

Learn more about the key differences between Rule 144A resales and private placements under Regulation D from the securities lawyers at Oberheiden P.C.:

What is Rule 144A?

Rule 144A is a federal regulation that allows qualifying institutional investors to sell securities without the need to register with the SEC. Typically, this involves reselling securities acquired through a private placement conducted under Regulation D—which we discuss in greater detail below. As the SEC explains:

“When you acquire restricted securities or hold control securities, you must find an exemption from the SEC’s registration requirements to sell them in a public marketplace. Rule 144 allows public resale of restricted and control securities if a number of conditions are met.”

As the SEC goes on to explain, “[r]estricted securities are securities acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer,” while, “[c]ontrol securities are those held by an affiliate of the issuing company.” For purposes of Rule 144A, affiliates include executives, directors, and large shareholders “in a relationship of control with the issuer.”

What is a Private Placement Under Regulation D?

A private placement under Regulation D is an unregistered securities offering conducted by the securities issuer. Regulation D allows companies to issue securities without registering with the SEC if they can satisfy certain requirements. While issuers can also conduct private placements outside of Regulation D in some cases, most issuers use Regulation D because of the additional legal benefits this provides.

As its name suggests, a private placement involves selling an issuer’s securities in a private placement market rather than selling them through a public exchange or over-the-counter (OTC) market. Given that registration is intended as a means to protect investors, issuers seeking to conduct private placements must be able to establish that registration isn’t necessary. Privately placed securities have two primary means of doing so under Regulation D:

• Private Placements Under Rule 504: Rule 504 allows issuers to offer up to $10 million in private placements to accredited or non-accredited investors in a 12-month period.
• Private Placements Under Rule 506: Rule 506 allows issuers to directly offer private placements to an unlimited number of accredited investors and up to 35 non-accredited investors, or to publicly advertise private placements for acquisition by accredited investors only.

While there are no formal documentation requirements for conducting private placements (though issuers must file Form D with the SEC after their first sale under Regulation D), issuers will typically use a private placement memorandum (PPM) to document the terms of their unregistered offers.

What Are the Differences Between Rule 144A and Regulation D?

The most fundamental difference between Rule 144A resales and private placements under Regulation D has to do with the entities (and, in some cases, individuals) that can conduct these transactions. Private placements under Regulation D are exclusively an option for securities issuers that meet the requirements of either Rule 504 or Rule 506 for conducting an unregistered offering.

Resales under Rule 144A, on the other hand, can be conducted by various entities and individuals—with issuers being specifically excluded. Those that are eligible to conduct unregistered resales of securities under Rule 144 A include:

• Qualified institutional buyers (QIBs) of restricted securities; and,
• Affiliates of issuers that hold control securities.

Beyond this fundamental difference, there are a variety of other technical and more nuanced differences as well. These have to do with everything from the eligibility criteria for securing an exemption from registration to the types of documentation used to execute these transactions and demonstrate federal securities law compliance. As a result, if you have questions about selling unregistered securities under Rule 144A or Regulation D, it will be important for you to consult with a lawyer who has relevant experience and can explain everything you need to know.

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How Does a Rule 144A Resale Work?

To resell unregistered securities under Rul3 144A, QIBs and affiliates must satisfy certain conditions. When a QIB or affiliate satisfies the pertinent conditions, this gives rise to a “safe harbor” from liability resulting from the unregistered sale. The conditions for conducting an unregistered resale under Rule 144A are:

• Holding Period: “If the company that issued the securities is a ‘reporting company’ . . . then you must hold the securities for at least six months. If the issuer of the securities is not subject to the reporting requirements, then you must hold the securities for at least one year.”
• Current Public Information: “There must be adequate current information about the issuing company publicly available before the sale can be made. For reporting companies, this generally means that the companies have complied with the periodic reporting requirements of the Securities Exchange Act of 1934. For non-reporting companies, this means that certain company information, including information regarding the nature of its business, the identity of its officers and directors, and its financial statements, is publicly available.”
• Trading Volume: “If you are an affiliate, the number of equity securities you may sell during any three-month period cannot exceed the greater of 1% of the outstanding shares of the same class being sold, or if the class is listed on a stock exchange, the greater of 1% or the average reported weekly trading volume during the four weeks preceding the filing of a notice of sale on Form 144.”
• Ordinary Brokerage Transaction: “If you are an affiliate, the sales must be handled in all respects as routine trading transactions, and brokers may not receive more than a normal commission.  Neither the seller nor the broker can solicit orders to buy the securities.”
• Notice of Proposed Sale: “If you are an affiliate, you must file a notice with the SEC on Form 144 if the sale involves more than 5,000 shares or the aggregate dollar amount is greater than $50,000 in any three-month period.”

As you can see, the last three of these conditions apply to affiliates only. However, if a QIB is also an affiliate, then it must comply with all of the Rule 144A conditions to conduct an unregistered resale. But, as the SEC also notes, “[i]f you purchased restricted securities from [a] non-affiliate, you can tack on that non-affiliate’s holding period to your holding period.”

How Does a Private Placement Under Regulation D Work?

Conducting a private placement under Regulation D involves structuring an offering that complies with either Rule 504 or Rule 506. While not strictly required, it also generally involves preparing a PPM.

A PPM is a disclosure document that notifies prospective investors of the nature of the offering, the risks involved, any potential conflicts of interest, and other information that may be material to their decision regarding whether to invest. The SEC requires issuers to provide various pieces of information to sophisticated institutional investors, and the PPM has become such a formal document for meeting these disclosure requirements.

However, while it may be standard to use a PPM for a private placement under Regulation D, a PPM should not be a standard document. Custom-tailoring of PPMs to specific unregistered equity and debt offerings is essential to ensure that they meet all pertinent disclosure requirements and provide adequate protection.

What Are the Risks of Noncompliance with Rule 144A or Regulation D?

While Rule 144A and Regulation D establish different requirements and apply in different circumstances, noncompliance presents similar risks under both rules. These risks include:

• Civil Investment Fraud Litigation – Conducting noncompliant unregistered affected securities offerings can expose issuers, QIBs, and affiliates investment fraud allegations in civil litigation.
• SEC Investigations and Enforcement Action – Noncompliance with Rule 144A and Regulation D can also expose issuers, QIBs, and affiliates to SEC investigations and enforcement actions. These enforcement actions can lead to administrative penalties (i.e., a bar from the securities industry), civil penalties (i.e., civil fines and restitution), and even criminal penalties (i.e., criminal fines and prison time) in some cases.

Given these risks, a proactive approach to compliance is essential. Once an issuer, QIB, or affiliate facilitates fraudulent foreign offerings or unlawful unregistered securities offerings, it may not be possible to reverse the error. If you need to know more about Rule 144A or Regulation D compliance, we invite you to contact us for a complimentary consultation.

Schedule a Complimentary Consultation with a Securities Lawyer at Oberheiden P.C.

Do you have more questions about rule 144A or Regulation D compliance? If so, a securities lawyer at Oberheiden P.C. can explain everything you need to know. To schedule an appointment, please call 888-680-1745 or tell us how we can reach you online today.