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REGULATION D Regulation D and Rule 14-4-126 Private Placement Exemption R14-4-126 (Arizona equivalent to Regulation D) A.R.S. § 44-1843.02(C) (rule 506 offerings)_______________________________________________________________________________ Regulation D consists of Rules 501 through 508 promulgated by the SEC under the 1933 Act and includes exemptions from registration for three categories of offerings. The Arizona equivalent is Rule R14-4-126, sections A through H. SEC Rule 501 and Arizona Rule R14-4-126(B) define or explain a number of terms and related matters under Regulation D, including accredited investor, affiliate, aggregate offering price, business combinations, calculation of number of purchasers, executive officer, issuer, and purchaser representative. SEC Rule 502 and Arizona Rule R14-4-126(C) sets forth the requirements regarding the information that an issuer must provide a prospective purchaser under each of the exemptions. SEC Rule 503 and Arizona Rule R14-4-126(D) describe the notice filing requirement that is applicable to each of the exemptions. Federal Regulation D, Rules 504 through 506, provide exemptions for three categories of limited offerings: A. SEC Rule 504 [no direct Arizona equivalent, but public offerings may be used in conjunction with Arizona Rule R14-4-140 or ULOR; private offerings may be used in conjunction with Arizona Rules R14-4-101, R14-4-126(E), or R14-4-126(F)]provides an exemption from registration for limited offerings and sales not exceeding $1 million. Offerings by non-reporting companies (i.e., companies without a class of equity securities registered under the federal Securities Exchange Act of 1934 (the “1934 Act”) and not subject to the reporting requirements of the 1934 Act) of not more than $1 million in a 12-month period are exempt from federal registration under Rule 504, provided that an appropriate federal filing is made. “Blank check” companies (i.e., companies in the development stage with no specific business plan or purpose or a plan to merge with an unidentified company or companies) and investment companies may not rely upon Rule 504. If the sale complies with subsection (b)(1)(i), (ii), or (iii) of rule 504, the securities sold in a Rule 504 offering are transferable without restriction under federal law. In Arizona, sales of securities relying on federal Rule 504 for an exemption from federal registration, and complying with Rule 504(b)(1)(i), (ii), or (iii) rely on either Arizona Rule R14-4-140 for an exemption from registration for offerings to accredited investors, or registration in Arizona pursuant to A.R.S. § 44-1902 and R14-4-134 as a “ULOR/SCOR” offering. If the Rule 504 offering is a private offering, R14-4-101, R14-4-126(E), R14-4-126(F), or other applicable exemptions may be used. B. Rule 505 [Arizona equivalent: Rule R14-4-126(E)] provides an exemption from registration for limited offers and sales not exceeding $5 million. Offerings by any issuer of less than $5 million in a 12-month period to an unlimited number of “accredited investors” plus 35 additional persons are exempt from federal registration under Rule 505. An issuer could be disqualified from using the rule if it or its affiliates or certain other persons associated with the offering were the subject of certain administrative, civil, or criminal actions (so-called “bad boy” provisions). Investment companies are precluded from relying upon Rule 505. Regulation D prohibits the use of general solicitation or advertising under Rule 505. Securities sold under Rule 505 are “restricted securities” and may not be resold without registration or an exemption from registration. “Restricted securities” are securities upon which some limitation is imposed on the purchaser’s ability to resell the securities. Such restrictions may be stated in a legend printed on the certificate that represents the security. C. Rule 506 private placements [Arizona equivalent: Rule R14-4-126(F); however, A.R.S. § 44-1843.02(C) applies to Rule 506 offerings] Offerings of any amount by any issuer to an unlimited number of accredited investors plus 35 “sophisticated” persons are exempt from federal registration under Rule 506. Regulation D prohibits the use of general solicitation or general advertising under Rule 506. Securities sold under Rule 506 also are restricted securities. The National Securities Markets Improvement Act of 1996 (“Act of 1996”) provides that securities exempt from registration with the SEC under rules or regulations issued under section 4(2) (i.e. Rule 506) are “covered securities.” Arizona’s rules or regulations regarding these securities are affected by the Act of 1996. Only the Division’s authority to impose notice filing requirements is preserved. Therefore, issuers relying on Rule 506 for an exemption from registration on the federal level need only file in Arizona a copy of Form D no later than 15 days after the first sale of securities in Arizona and the initial filing fee. Issuers not relying on federal Rule 506 are not precluded from compliance with and reliance on Arizona Rule R14-4-126(F). Reliance on any particular exemption in Regulation D does not act as an exclusive election. An issuer may always claim the availability of any other applicable exemption. Regulation D is available only to an issuer and not to its affiliates or others for resale. Thus, Regulation D is not available for firm underwritings (as opposed to best-effort offerings), because securities are resold by definition in a firm underwriting of securities. Even though there may be technical compliance with the Regulation, if an offering is part of a plan or scheme to evade the registration requirements, the Regulation is not available. If an issuer sells securities to accredited investors, no specific disclosure to the investors by the issuer is mandated. If securities are sold under Rules 505 or 506 to non-accredited investors, the type of information to be furnished depends on the size of the offering and whether the issuer is subject to the reporting requirements of the 1934 Act
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