Rule 506

Background
Companies raise capital to start or expand operations by selling
equity or
debt securities. Offerings are regulated by Federal and state securities
laws
which require registration. Since registration is costly and timeconsuming,
most offerings are made pursuant to exemptions to registrations,
using
private placements.
Use of 506
Real estate investors and developers commonly rely on the exemption
found
in Rule 506 of Regulation D under the federal Securities Act of 1933,
and on
corresponding exemptions under state securities laws, for a safe
harbor from
registration. The new Rule 506 (c allows you to make
general solicitations
of private sales of securities for the first time in 80 years. And Rule
506(c puts
no limit on the amount of funds you can raise from friends, family, and
strangers.
The SEC added provisions to restrict those with a history of regulatory
issues. The "bad actor" provisions preclude general partners,
managing
members, executive officers, promoters or other representatives
participating in a 506 offering (as well as anyone who owns 20% of the
company) who have been convicted of any felony or misdemeanor
involving securities or who is guilty of certain SEC regulatory matters.

Finding Investors

Under Rule 506 (c, you can now advertise an offering using general
solicitation, including websites and online advertising; electronic mail;
social media, such as Facebook and Twitter; all other online activities;
plus
press releases; television; radio; direct mail marketing; and other
media
including craigslist.org.
You should have a process in place to communicate with possible
investors. It may be helpful to say in your initial response that an
intermediary will be
engaged to assist with distributing and collecting investor
questionnaires
and determining whether potential investors are qualified.
Who May Be an Investor?
If you are offering securities pursuant to a general solicitation, you can
sell them to "accredited investors." Individual investors are
accredited investors if they have either: net worth of at least $1
million,
excluding the value of primary residence, or income of at least
$200,000
in each of the last two years (or $300,000 with a spouse) and have the
expectation to earn at least the same amount in the current year.
Other, less common types of accredited investors include: a corporation,
business trust, trust or partnership, not formed for the specific purpose of
purchasing your company's stock or other securities, with total assets in
excess of $5,000,000; an investment company registered under, or a
business development company as defined in, the U.S.Investment
Company Act of 1940; a Small Business Investment Company licensed by
the U.S. Small Business Administration under Section 301(c) or (d) of the
U.S. Small Business Investment Act of 1958; a private business
development company as defined in the U.S. Investment Advisers Act of
1940; an entity in which all of the equity owners are accredited investors;
an ERISA employee benefit plan if the plan has total assets in excess of
$5,000,000 or if the investment decision is made by a plan fiduciary that is
a bank, savings and loan, insurance company or registered investment
advisor; or self-directed employee-benefit plans that are controlled by an

accredited investor.

Selling securities to non-accredited investors in a 506(c offering can

result in an automatic right of rescission, a permanent future status as
a "bad actor, and other penalties. You must take reasonable steps to
verify that each purchaser is an accredited investor. Issuers should
initially respond to inquiries with a form letter that identifies the
various
categories of accredited investor and suggests a time and opportunity
for a telephone conversation. A subsequent letter should describe the
services of the verification and intermediary service you have chosen.

Which verification tests should you select?

The certifications required by the SEC depend on the status of each
investor. An investor often qualifies under more than one test. The
verification tests below appear in order of ease of effort under most
circumstances. Many investors qualify under more than one test;
always
choose the least intrusive and most expeditious test(s) whether or not
you
use a verification service.
Income Verification
Individual earns more than $200,000 a year or $300,000 with spouse
Net Worth Verification
Investor is an individual with more than $1 million in net worth,
excluding
residence
Asset Verification
Investor is an entity with more than $5 million in good will or assets
Look-Through Verification
Investor is a member of an entity all of whose members are accredited
investors
Entity Verification

Investor is a member of a special type of qualifying regulated entity

Affiliate Verification
Investor is a director, executive officer or general partner of a qualified
issuer
Whichever certification services you select, you should have policies in
place
to protect confidential information of potential investors and ensure
compliance with all applicable privacy laws and regulations.
Alternatively,
you can use an accredited investor verification service that has these
policies in place, such as Private Placement Advisors, LLC.

Documents
You should use professionally prepared offering documents that
describe:
the type of security your company is offering (limited partnership
interests, limited liability company interests, promissory notes,
common stock, or preferred debt); the price of the security;
terms and economic rights such as dividends or interest
payments, anti-dilution protections, and grounds for exemption from
registration; and representations about the investors' accredited
investors
status.

You must provide investors with annual reports or financial statements

(or
reasons not to have such documents) as well as a private placement
memorandum, describing your company and its business operations
and
setting forth risk factors such as your limited operating history; risks
related to the real estate industry; risks specific to your company's
products, technologies or services; and, finally, state that investors
may
lose their entire investment. You also need to make sure to tell
investors
that because the securities were sold under the exemption in SEC Rule
506(c,

they are "restricted securities" and therefore re-sales are not permitted
for
six months.

Completing the sale

The closing will occur when the investor delivers the purchase price
and
you issue the securities to the investor pursuant to the terms of the
subscription agreement. You may decide to hold one closing or you
may
hold multiple closings throughout a pre-determined period of time.

Post-closing filings
You will need to make informational filings with the SEC and also with
one
or more state regulators shortly after the closing (usually 15
days). Although the securities sold under Rule 506(c may be "covered
securities -- meaning state securities registration requirements are
preempted by federal laws you will need to make periodical,
informational filings with each state's regulatory authority in all states
where
investors have a primary residence. Since each state has different
filing
requirements and some states have pre-filing requirements, it
is advisable
to know where each investor resides before any securities are sold.

Offering Documents
Once you have prepared an executive summary, a business plan and
financial projections, you need offering documents. These include:
1) Private Placement Memorandum
A private placement memorandum is a document that discloses all
relevant
and material information that a reasonable investor would want to
know

before deciding whether or not to engage in a proposed transaction.

A PPM is different from a prospectus. The term "prospectus" is used
when
referring to an offering document for registered securities whereas the
term "private placement memorandum" is used in reference to
securities
that are exempt from registration under Regulation D.
Checklist of what can be in a PPM:
Securities Legends
Suitability Standards for Investors
Summary of the Securities Offering
Risk Factors
Capitalization of the Company
Use of Proceeds from the Securities Offering
Dilution
Plan of Distribution of the Securities
Selected Financial Data
Analysis of Financial Condition and Results of Operation
The Business of the Company
Management and Compensation
Certain Transactions (transactions between the Company and its
shareholders, officers, directors or affiliates)
Principal Shareholders
Terms of the Securities Offered
Description of Capital Stock of the Company
Tax Matters
Legal Matters
Experts
Documents Available for Inspection
Financial Statements
Projections
Exhibits
2) Investor Questionnaire
The Investor Questionnaire is crucial for private placement offerings.
Each
type of offering has its own requirements for investors. A company
must

have a reasonable belief that its potential investors meet those

requirements. That determination should be made before the
potential
investor is given offering documents or specifics regarding the
offering.
3) Subscription Agreement
The Subscription Agreement is the "investment contract" for
purchasing
the securities. Typically an investor will complete this document with a
signed copy of the Investment Questionnaire before writing a check.
Doing either an equity or debt raise under Rule 506, you need
to:

Reduce to writing executive summary, business plan, and financial

projections

Form a limited liability company or other entity

Prepare a private placement memorandum, investor questionnaire,
operating agreement, subscription agreement, and pitch deck.
File exemption documents with the necessary regulators
Identify and present your business to investors
Prepare term sheet, or not
Have an expert verify to the SEC that money is only coming from
accredited investors
Execute investor documents and receive funding
Summary
An equity offering occurs when a company sells partial ownership in
a

company, usually using corporate stock or LLC membership units.

A debt offering occurs when a company sells one or more promissory
notes to investors. A debt offering is similar to a business loan; instead
of a bank providing the financing, investors lend funds to the firm.
Determine structure
The first step in an offering is properly setting the structure.
Structuring includes
determining how much of the company to sell (in equity transactions),
setting
the maturity date and rate of return for the promissory notes (in debt
offerings),
electing which Reg D program to use, and establishing minimum
and maximum
offering amounts.

Offering documents
The private placement memorandum (PPM) is the document that
discloses all
required information to the investors about the company, proposed
operations,
the transaction structure and the terms of the investment offered.
Promissory Note

The promissory note outlines the terms of the loan arrangement with
the investor.
The note is the loan contract between the company and the investor.

Form D
A Form D is filed with the SEC in Washington, DC. It notifies the SEC
that
you are using the Regulation D exemption and provides them basic
information about

the company and the offering. This is not a document seeking

approval or
registration. This is a filing that notifies the SEC that you have a
Regulation
D offering underway.

States
"Blue Sky" laws require a specific form to be filed along with a copy of
the SEC
Form D. States charge a small fee. This filing form does not need to be
filed until
capital has been received from an investor in that
state, typically within 15 days.
Copyright (C) 2015 Private Placement Advisors, LLC