Securities law exemptions

Your ABF securities are, well, securities. Unless you register with the SEC (expensive, time-consuming, and rarely done for private ABF), you need an exemption from registration. This guide covers the three primary exemptions used in private ABF deals and the compliance requirements for each.

Regulation D (Rule 506)

Regulation D is the workhorse exemption for private ABF. Rule 506 offerings are exempt from registration and preempt state blue sky laws, making it the default choice for most private placements.

Rule 506(b): The traditional approach

Rule 506(b) is the most commonly used exemption in ABF:

Investor limitations:

Unlimited number of accredited investors
Up to 35 sophisticated (but non-accredited) investors (rarely used in ABF because it requires additional disclosure and creates litigation risk)
No general solicitation or advertising

Accredited investor verification:

You can rely on investor self-certification with “reasonable belief”
Acceptable methods include investor questionnaires with representations about income, net worth, or professional status
No third-party verification required (unlike 506(c))

Why 506(b) dominates ABF:

Lower administrative burden than 506(c)
Most institutional ABF investors are accredited by definition
No need for intrusive income/net worth verification
Established market practice with well-understood terms

Rule 506(c): General solicitation with verification

Rule 506(c) allows general solicitation but requires verification of accredited status:

When to use 506(c):

You want to advertise the offering publicly
You’re reaching beyond your existing network
You’re raising from a broader base of individual investors

Verification methods (must use one):

Review of tax returns showing income above thresholds for most recent two years
Written confirmation from registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA
Review of bank/brokerage statements showing sufficient assets
For entities: reasonable verification of ownership structure and status

506(c) in practice:

More administrative burden (verification records must be maintained)
Investors may resist providing tax returns or financial statements
Most institutional ABF deals stick with 506(b) because the investor base is known
506(c) is more common for fintech platforms or broadly marketed funds

Accredited investor thresholds

Know the current thresholds (updated in 2020):

Individuals:

Income exceeding $200,000 (single) or $300,000 (joint) in each of the two most recent years, with reasonable expectation of the same in current year
Net worth exceeding $1 million (excluding primary residence), individually or jointly with spouse
Licensed securities professionals (Series 7, 65, or 82)

Entities:

Banks, insurance companies, registered investment companies, BDCs
Entities with total assets exceeding $5 million (not formed for the purpose of acquiring the securities)
Trusts with assets exceeding $5 million and sophisticated decision-maker
Family offices with at least $5 million in assets under management
Any entity in which all equity owners are accredited investors

Tip: “Family client” of a family office qualifies as accredited if advised by that family office. This covers many multi-generational wealth situations.

Form D filing requirements

Form D is filed with the SEC within 15 days of the first sale of securities:

What to include:

Issuer information (name, address, jurisdiction)
Amount of securities sold and minimum investment
Sales compensation (finder’s fees, placement agent commissions)
Type of securities (debt, equity, pooled investment fund interests)
506(b) or 506(c) election

Practical considerations:

Form D is public (competitors and data providers scrape these filings)
Consider what information you’re comfortable disclosing
Failure to file doesn’t invalidate the exemption but is a technical violation
File amendments if material information changes or offering continues

State filing:

Most states require notice filing (copy of Form D plus fee) within specified time after first sale to state residents
NASAA’s Electronic Filing Depository (EFD) allows single filing for multiple states
Missing state filings can create complications for subsequent offerings

Rule 144A

Rule 144A creates a secondary market for restricted securities among institutional investors. If you want liquidity for your investors or access to the broadest institutional buyer base, 144A eligibility is essential.

Qualified Institutional Buyer (QIB) requirements

144A resales are limited to QIBs:

QIB thresholds:

Institutions that own and invest on a discretionary basis at least $100 million in securities of non-affiliates (not just assets under management)
Registered broker-dealers need only $10 million
Banks and S&Ls must also have $25 million in net worth

Who qualifies:

Insurance companies, investment companies, and BDCs (meeting the $100M threshold)
ERISA plans (meeting threshold)
Registered investment advisers (for accounts they advise, meeting threshold)
Most large credit funds and institutional investors

Who doesn’t qualify:

Many smaller funds (if they don’t hit $100M in securities)
High-net-worth individuals (no natural person can be a QIB)
Family offices below the threshold

Information requirements

Non-reporting issuers must provide certain information to QIB buyers on request:

Rule 144A(d)(4) requirements:

Brief description of issuer’s business
Issuer’s most recent balance sheet and P&L (audited if available)
Similar financial statements for the two preceding fiscal years
For ABF vehicles, portfolio characteristics and performance data typically included

Practical approach:

Most ABF deals include 144A information rights in the offering documents
Information is provided to requesting QIBs, not filed publicly
Servicer reports and trustee reports often satisfy ongoing information needs

144A vs. Reg D only

Understanding the difference matters for deal structure:

Aspect	Reg D Only	144A Eligible
Initial purchasers	Accredited investors	Accredited investors (typically QIBs in practice)
Resales	Restricted (2-year holding period absent another exemption)	Immediate resale to other QIBs
Liquidity	Limited	Secondary market among QIBs
Documentation	Standard subscription agreement	May include 144A legend, DTC eligibility
Investor preference	Smaller/illiquid investors may accept	Insurance companies and banks often prefer

Why most institutional ABF deals are Reg D / 144A:

Initial sale under Reg D (no registration)
Securities eligible for 144A resale (liquidity for investors)
Best of both worlds: private placement with secondary market
Insurance companies often require 144A eligibility for regulatory/portfolio flexibility

Regulation S

Regulation S provides a safe harbor for offers and sales outside the United States. For ABF deals targeting non-U.S. investors, Reg S works alongside Reg D/144A.

Category system

The distribution compliance period and restrictions depend on the category:

Category 1 (no U.S. market interest):

Foreign private issuers with no substantial U.S. market interest
No distribution compliance period required
Rarely applies to ABF issuers (U.S. assets = U.S. market interest)

Category 2 (SEC reporting issuers):

SEC reporting issuers
40-day distribution compliance period
Distributor must agree to comply with restrictions

Category 3 (non-reporting issuers with U.S. market interest):

Non-reporting issuers (most ABF vehicles)
1-year distribution compliance period
Offshore transaction only, no directed selling efforts
No flowback to U.S. persons during compliance period
Certification of non-U.S. status on resale

Combined Reg D / Reg S structures

Most ABF deals targeting both U.S. and non-U.S. investors use a combined structure:

Typical approach:

Reg D / 144A for U.S. sales
Reg S for offshore sales
Separate Reg S and Reg D notes, or single global note with transfer restrictions
Different CUSIP/ISIN for Reg S notes

Transfer restrictions:

Reg S notes cannot be resold to U.S. persons during compliance period
After compliance period, Reg S notes can be exchanged into Rule 144A notes (if structure permits)
Legend requirements on certificates

Warning: Reg S is not a loophole for U.S. persons to buy offshore. If you structure a deal primarily for U.S. investors but use Reg S as window dressing (sales to offshore entities controlled by U.S. persons, immediate flowback anticipated), you risk losing the exemption.

Practical considerations for offshore investors

Why offshore investors matter:

European insurance companies, Asian banks, sovereign wealth funds
Different capital treatment in some jurisdictions
Portfolio diversification demand for U.S. assets

Structuring for offshore:

Ensure offering documents are suitable for non-U.S. distribution (local securities law compliance)
Consider withholding tax implications (TEFRA D certification)
Clearing system compatibility (Euroclear/Clearstream for Reg S notes)

Common securities law mistakes

Avoid these frequent compliance failures:

Documentation failures

Certificate legends:

All securities must bear restrictive legends indicating they are unregistered
Legend should reference applicable exemptions (Reg D, 144A, Reg S)
Missing or incorrect legends can complicate resales

Investor questionnaires:

Generic “check the box” forms without substance provide weak protection
Questionnaires should require specific factual representations
Keep signed originals (or reliable electronic copies) indefinitely

Subscription agreements:

Should include detailed investor representations (accredited status, investment intent, no distribution)
Risk factors appropriate to the offering
Acknowledgment of restricted securities status

Transfer tracking

Secondary transfers:

144A transfers require confirmation purchaser is QIB
Issuers/trustees should verify QIB status before recording transfer
Keep records of QIB certifications
Transfer agent procedures should require compliance certification

Lost exemption risk:

If a non-QIB purchases 144A securities in violation, subsequent transfers may be invalid
Integration issues if multiple offerings within 6 months

Form D compliance

Filing delays:

15-day deadline from first sale is short
Late filing is a technical violation (doesn’t invalidate exemption but creates clean-up issues)
Set calendar reminder at signing

Disclosure errors:

Incorrect amount sold (must be accurate at time of filing)
Missing or incorrect sales compensation
Wrong exemption claimed

Updates:

Annual amendment required if offering continues
Amendment for material changes

General solicitation traps

What counts as general solicitation:

Press releases announcing the offering
Marketing materials distributed broadly
Website content describing the offering terms
Social media posts about investment opportunity

Safe practices:

Pre-existing substantive relationship with potential investors
No public discussion of specific offering terms
“Testing the waters” materials clearly labeled
506(c) election if broad marketing desired

Compliance documentation checklist

Before closing, confirm:

Ongoing compliance:

Form D amendments filed as required
Secondary transfer certifications obtained and tracked
144A information requests responded to timely
Reg S distribution compliance period tracked (if applicable)
Investor eligibility reconfirmed for subsequent closings

When securities law compliance fails

If you discover a securities law violation:

Assess scope:

How many investors affected?
What is the rescission exposure?
Did investors receive adequate disclosure despite technical violation?

Immediate steps:

Consult securities counsel before taking any action
Evaluate whether remedial disclosure is appropriate
Consider rescission offer (return of investment plus interest)
Assess SEC notification obligations

Documentation:

Memorialize the issue and remediation steps
Preserve evidence of investor knowledge and sophistication
Update procedures to prevent recurrence

Note: Most securities law violations in ABF are technical (late Form D, incomplete questionnaire) rather than substantive fraud. Early identification and good-faith remediation typically limit exposure, but counsel should guide the response.