For individuals investing on a regular basis, it may quite literally pay to make sure you understand the rules of the game. SEC rules for private companies are complex — and infringing them could lead to financial trouble down the line.
Just as you need to be aware of the risks that certain stock purchases might carry in terms of depreciation, so too do you need to avoid legal issues. This quick guide to regulation and exemption will shine a light on the common pitfalls to avoid.
U.S. investors are free to park their money in a variety of assets, but all investing still takes place within a strong legal framework.
Regulation aims to ensure that the markets are fair for all involved. This is overseen stateside by the Securities and Exchange Commission (SEC). Without SEC rules for private companies, there would be nothing to stop an unscrupulous business defrauding its investors, for example.
Regardless of size and ownership status, all U.S. companies are regulated and operate under SEC guidelines. Even if their offerings are exempt from registration, firms must follow certain rules, which protect investors and shareholders from fraud.
These rules have become even more relevant as accredited investors increasingly seek exposure to fast-scaling companies via secondary markets.
Private companies often use security offerings as a way to raise capital. The SEC rules for private companies require them to register these offerings with the Commission unless they qualify for an exemption. These are commonly known as exempt offerings.
There is a long list of exemptions, but Regulation D (Reg D) and the new crowdfunding regulation (Reg CF) are among the most common. Reg D allows offerings to be made without SEC registration, so long as certain conditions are met, either in terms of value or investor regulation. Meanwhile, Reg CF limits the value of offerings online.
Again, exempt does not mean free from oversight. The conditions for exemption must be complied with. Even if SEC registration is not necessary, anti-fraud legislation still applies, as do any relevant state laws. A disclosure must be made via Form D for all offerings seeking exemption.
Reg D rules can differ from offering to offering. Rule 504, for example, is normally used for multi-state offerings, and allows companies to offer up to $10 million over a year. Rule 506(b) does not allow a general listing, but does allow sales to up to 35 unaccredited investors. Rule 506(c), on the other hand, permits general solicitation, but only to accredited investors.
Reg CF, a relatively new addition to the SEC rules for private companies, applies to online offerings. These must be carried out via an SEC-registered broker or platform and are limited to $5 million in a 12-month period. Additionally, there are limits to how much a single investor can buy in the same time period.
Regulation A (Reg A) is another increasingly common exemption. These offerings are more accessible to retail investors than Reg D, but come with stricter transparency requirements for companies. For more on the differences between these two popular exemptions, check out our full guide on Reg A vs. Reg D.
Even exempt offerings require honest, clear disclosures under the SEC rules for private companies. This is done via Form D, the filing that signals a private raise is happening.
Form D is submitted through the SEC platform known as EDGAR. It confirms that the individual making an offering is fully authorized to do so. Misleading investors can lead to serious trouble with the SEC, other federal bodies, and even state authorities. That means you should expect to see an honest and detailed risk assessment, full financial reports, and clear intentions for the use of any funds.
These kinds of disclosures are also key to strong equity management practices, especially when preparing for liquidity events or future fundraising.
Now that you know the key SEC rules for private companies and why they are important, how can you protect yourself?
Augment* is here to help with an array of services designed to make sure you avoid legal risk and stay fully compliant with the SEC.
Built-in accreditation and eligibility checks offer an extra layer of assurance that both parties in any transaction are honest actors. Augment’s platform also provides fully standardized deal disclosures across offerings, so you always know where you stand.
Finally, as a platform for investing in private companies, Augment is here to support you with a full suite of tools and education designed specifically for private market investors. If you’re new to the space, this guide to investing in private companies walks through the fundamentals — and why private markets are growing in investor appeal. On the secondary markets, where regulatory complexities abound, knowledge isn’t just power, but also, potentially, money. Augment provides knowledge in spades.
*Securities transactions are executed on Augment Capital, LLC's ATS and offered through Augment Capital, LLC (member FINRA/SIPC).
Important Disclosures: Investing in private securities involves substantial risk, including the potential loss of principal. Private securities are typically illiquid, have limited pricing transparency, and often require longer holding periods. These investments are available exclusively to qualified accredited investors and offer no guarantee of returns. Additionally, past performance of private securities does not indicate or predict future results.
FOR ACCREDITED INVESTORS ONLY: Under federal securities laws, private market investments on this platform are available exclusively to Accredited Investors. Verification of status required before investing. Private investments involve significant risks including illiquidity, potential loss of principal, and limited disclosure requirements. "Augment" refers to Augment Markets, Inc. and its affiliates. Augment Markets, Inc. is a technology company offering software and data services, in addition to financial products and services through its wholly-owned but separately managed subsidiary, Augment Capital, LLC. Securities are offered by Augment Capital, LLC, member of FINRA / SIPC.
