Is there a difference between the number of non-accredited investors permitted under USA and under Reg D?

Question

One source states 35 for Reg D and another states 10 per year under the USA.

Answer 1

Hello Keith,

Reg D exists as a part of the Securities Act of 1933 which is Federal law. You are also referring to the definition of a private placement under the Uniform Securities Act which is State law.

Under Reg D, there are two types of private placements: 506(b) and 506(c).

506(b) allows for up to 35 non-accredited investors to purchase the issue but this issue cannot be advertised.

On the other hand, a private placement under 506(c) allows for zero non-accredited investors to participate, but the issue may be advertised. Investors must certify their accredited status in writing to the issuer.

Notice, Reg D is part of Federal law which allows private placements to be exempt from SEC registrations. A security offered under Reg D is considered federally covered and exempt from State registration as well.

While similar, this is different than a private placement under the Uniform Securities Act which is the other type you are referring to.

Under the Uniform Securities Act, an issue can be considered exempt from State registration if it is offered to no more than 10 non-institutional (retail) clients, the salesperson cannot receive compensation for selling to the retail clients, and the issuer must have reason to believe these retail investors are purchasing for investment purposes (not resale).

Notice that the definition here is retail clients. This is ANY client that is not an institution no matter how much money they have. This is different from the definition of Reg D.

Also, notice that the Uniform Securities Act says the issue cannot be offered to more than 10 retail clients. Whether those retail clients buy or not, it can only be offered to 10 of them.

In summary, both the Federal and State regulators allow for private placements which provide for an exemption from registration, however the rules are different for each.

Keep in mind the general idea for both of these types

of private placements is to minimize the ability for less sophisticated investors to participate, thus protecting them and allowing the private placements to be exempt from registration. Then main purpose of regulators is to protect retail investors.