Private Placements 119 Rule 506 This rule is similar to Rule 505 in that you may sell your securities to an unlim- ited number of accredited investors and up to 35 nonaccredited investors. For companies that need more than $5,000,000 in capital for growth or to achieve their business-plan objectives, this exemption is the most attractive because it has no dollar limitation. The big difference under Rule 506 is that any nonac- credited investor must be "sophisticated." In this context, a "sophisticated in- vestor" is one who doesn't fall into any of the categories found in Figure 6-1, but whom you believe to "have knowledge and experience in financial and business matters that render him capable of evaluating the merits and understanding the risks posed by the transaction (either acting alone or in conjunction with his `purchaser representative,' such as a financial adviser or accountant)." The best way to remove any uncertainty over the sophistication or accreditation of a prospective investor is to request that she complete a comprehensive confiden- tial purchaser (or offeree) questionnaire (an example of which is shown in the appendix) before the securities are sold. If only accredited and sophisticated investors participate in the transaction, then Rule 506 eliminates the need to prepare and deliver disclosure documents in any specified format. Here too, an absolute prohibition on advertising and general solicitation exists. State Securities Laws Applicable to Private Placements You and your team will have to consider the expense and requirements on both the federal and state levels. Every state has statutes governing securities transactions and securities dealers, and Regulation D was designed to provide uniformity between federal and state securities laws. It has worked in some states, but there's still a long way to go on a national level. Whether or not your offering is exempt under federal laws, registration may still be required in the states where the securities will be sold under applicable "blue sky" laws. (These are laws that require securities issuers to register the offering and pro- vide financial details so that investors have solid information on which to base their decisions. The story goes that a judge once said that a particular offering had as much value as a patch of blue sky.) There are many levels of review among the different states, ranging from very tough "merit reviews" (which ensure that all offerings of securities are fair and equitable) to very lenient "notice only" filings (which primarily promote full disclosure). Before you distribute offering documents in any state, check American Management Association www.amanet.org