New York Private Placement & Securities Compliance Lawyer

Why Seek Legal Counsel for Private Placements & Securities Compliance in New York?

Frequently Asked Questions (FAQ) 

What is a private placement offering?

A private placement offering sells securities, such as stocks or bonds, to a select group of private investors, such as institutional investors or high-net-worth individuals, rather than the general public. It’s typically done to raise capital without the regulatory requirements of a public offering, like extensive SEC filings.

Should I register my offering with the SEC or New York if I only raise a small amount?

Whether you need to register your offering with the U.S. Securities and Exchange Commission or New York state depends on the nature of your fundraising, the amount you’re raising, the type of entity (for-profit or nonprofit), and how you’re soliciting funds. For example, Rule 504 states that you can raise as much as $10 million in one year without being registered with the SEC.

What is SEC Regulation D, and how does it help NY companies raise capital?

SEC Regulation D is a set of rules under the U.S. Securities Act of 1933 that provides exemptions from the registration requirements for specific private securities offerings. It allows companies to raise capital by selling securities, equity, or debt, to investors without the costly and time-consuming process of a public offering, provided they comply with specific conditions.

What are the key differences between a Rule 506(b) and Rule 506(c) offering in NY?

Rule 506(b) and Rule 506(c) offerings under Regulation D of the Securities Act of 1933 differ primarily in investor eligibility, advertising, and verification requirements. Only accredited investors can participate, and no non-accredited investors are allowed.Rule 506(b) prohibits general solicitation or advertising. Issuers can only offer securities to investors with a preexisting substantive relationship. This means no public promotions, such as websites, social media, or cold-calling. The rule allows up to 35 non-accredited investors (who must be “sophisticated,” meaning they have sufficient knowledge and experience in financial matters) and an unlimited number of accredited investors. If non-accredited investors are included, issuers must provide detailed disclosures, including financial statements and other information akin to a registered offering.Rule 506(c) permits general solicitation and advertising to attract investors. Issuers can market the offering through public channels like websites, crowdfunding platforms, or media. Only accredited investors can participate; non-accredited investors are not allowed. No specific disclosure requirements are mandated since only accredited investors participate, though issuers must still avoid fraud and provide accurate information.

What is an “accredited investor,” and why is it essential for NY private placements?

An accredited investor is an individual or entity that meets specific financial criteria set by the U.S. Securities and Exchange Commission (SEC), allowing them to invest in specific private securities offerings, such as private placements, that are not registered with the SEC. For individuals, income must exceed $200,000 (or $300,000 with a spouse) in the past two years, with the expectation of the same in the current year, and net worth must exceed $1 million, excluding your primary residence.

What are “Bad Actor” disqualifications, and how do they impact NY fundraising?

Under Rule 506(d) of Regulation D, implemented by the SEC in 2013 as part of the Dodd-Frank Act, “Bad Actor” disqualifications prevent issuers and specific individuals or entities from relying on Rule 506 exemptions for securities offerings if they have committed specific “disqualifying events.” These rules are designed to protect investors by limiting the ability of individuals or entities with a history of securities-related misconduct to participate in private securities offerings.

What disclosures should I provide to potential investors in a NY private placement?

In a New York private placement, typically conducted under Rule 506(b) or 506(c) of Regulation D, issuers must provide specific disclosures to potential investors to comply with federal securities laws and New York state regulations and reduce their legal risks. The disclosures are intended to ensure investors receive material information to make informed decisions and adhere to anti-fraud provisions. Disclosures should include offering and issuer information and disclosures related to “Bad Actor” disqualifications.

How can a securities lawyer help protect my NY company during a private placement?

A securities lawyer like Attorney Weberman is critical in protecting your New York company during a private placement by ensuring compliance with federal and New York securities laws, mitigating legal and financial risks, and facilitating a smooth fundraising process. Attorney Weberman can help you navigate Rule 506 requirements and New York Blue Sky Laws, assist with anti-fraud compliance, and perform due diligence on covered persons. Attorney Weberman may conduct or oversee background checks on “covered persons” to identify disqualifying events under Rule 506(d), such as securities-related convictions or SEC orders. Daniel will use tools like FINRA’s BrokerCheck or third-party services.

What filings are required with New York state when conducting a private placement?

When conducting a private placement in New York, usually under Rule 506 of Regulation D, issuers must comply with both federal and New York state securities laws. Rule 506 offerings are considered “covered securities” under federal law, preempting most state registration requirements. New York still has specific filing obligations under its “blue sky” laws, primarily governed by the Martin Act.

What are the risks of failing to comply with securities laws when raising money in NY?

Not complying with securities laws when raising money in New York through a private placement, such as under Rule 506 of Regulation D, exposes your organization to significant legal, financial, operational, and reputational risks. New York’s strict regulatory environment, encouraged by the Martin Act and oversight from the New York Attorney General’s Investor Protection Bureau, increases these risks compared to other states.

Potential risks for your organization include losing federal and state exemptions, which can lead to delayed fundraising and drain your financial resources. Investors can demand rescission if securities were sold without a valid registration or exemption. Recission can lower your firm’s capital, especially if you have already deployed funds, threatening your financial stability. There could also be investor lawsuits, where investors can sue under anti-fraud rules, such as Section 10(b) of the Securities Exchange Act of 1934.

What happens if I mistakenly sell securities to a non-accredited investor in NY?

Mistakenly selling securities to a non-accredited investor in a New York private placement, particularly under Rule 506 of Regulation D, can have severe legal, financial, and operational consequences on you and your organization. The impact depends on whether the offering is conducted under Rule 506(b) or 506(c), the extent of the mistake, and how it is addressed. For example, if you sell to a non-accredited investor who does not meet the sophistication requirement or exceeds the 35-investor limit, the offering may lose its Rule 506(b) exemption. Losing the Rule 506 exemption means the offering is no longer exempt from SEC registration. The securities sold are considered unregistered, potentially violating Section 5 of the Securities Act of 1933, which prohibits the sale of unregistered securities unless an exemption applies.Please speak to our experienced securities fraud attorney Daniel Weberman, for assistance with private placements in New York City.