The offer and sale of securities is regulated by both federal and state securities laws. A security generally includes any of the following: stock, LLC Membership Units (unless the investor will have a major say on most business matters), Limited Partnership Units, debt, warrants, options, certificates of participation in any profit shareing plan, or any instrument that is convertible into a security. The U.S. Supreme Court further defined a security in the Howey case as being all of the following:

- An investment of money.
- In a common enterprise.
- With the expectation of a profit.
- To be derived in whole or substantial part from the efforts of people other than the investor.

Offerings of securities are either public offerings or private placements. Section 4(2) of the Securties Act of 1933 defines a private securities offering, as an offering not intended to be a public offering. There are 3 rules that further define what is a private placement, and in order to save substanital legal and accounting fees and expenses, you will need to structure your securities offering such that it falls under one of the following 3 rules:

Rule 504 17 C.F.R. 230.504

This rule exempts offerings not exceeding One Million Dollars. But the offering must comply with all applicable state laws and regulations in each and every state in which the security is offered (not sold).

Rule 505 17 C.F.R. 230.505

This rule exempts offerings not exceeding Five Million Dollars to no more than 35 unaccredited investors, and an unlimited amount of accredited investors. There can be no solicitation or general advertisements in the U.S. (this means no internet offerings). No commissions may be paid, other than to a broker dealer. There can be no resale of the securities. You are not prohibited from making a private offering of securities under the "bad-boy" provisions. All unaccredited investors must receive a prospectus. Rule 505 offerings are exempt from the public registration provisions of each states securities laws and regulations. Form D must be filed with both the SEC and in every state in which the securities are offered.

Rule 506 17 C.F.R. 230.506

This rule exempts offerings unlimited dollar amounts to no more than 35 unaccredited investors, and an unlimited amount of accredited investors. There can be no solicitation or general advertisements in the U.S. (this means no internet offerings). No commissions may be paid, other than to a broker dealer. There can be no resale of the securities. You are not prohibited from making a private offering of securities under the "bad-boy" provisions. All unaccredited investors must receive a prospectus. Rule 506 offerings are exempt from the public registration provisions in most states securities acts and regulations. Form D must be filed with both the SEC and in every state in which the securities are offered.

Who Is An Accredited Investor?

- Any individual with a net worth of $1,000,000 or more excluding house, car, and life insurance.
- Any individual earning $200,000 (or husband and wife earning $300,000) or more and your client has every exceptation this will continue.
- A bank.
- A broker-dealer.
- An investment company.
- A corporation, LLC with assets of more than $5,000,000 (most venture capitalists).
- A trust fund with assets of more than $5,000,000.

Summary:

- You need a prospectus to give to each unaccredited investor before she/he takes any money.
- Form D must be filed with both the SEC and every applicable state securities agency (states where the securities may be offered).
- You need a subscription agreement to verify, who is accredited, who is not, and whether a prospective unaccredited investor can bear the risk of loss of the entire investment.

Potential Liabilities

- Even if you are incorporated or have formed an LLC, you are presonally liable for any material misstatements, or omissions made in the offering of a security. Do not say anything to investors, that is not in the prospectus.

- You could be fined heavily by both the Securities and Exchange Commission as well as every state securities agency in which you made an offer, if there are any material misstatements, or ommission made in the offering of a security.

- Fines to be paid to the federal and state governments are not dischargable in bankruptcy.

If you have any questions, please contact me at (240) 481-2706.

Sincerely,

Steve Rinaldi