Private Placement

The exemption trades SEC registration for limits on who may buy and how the offering is sold.

Section 4(a)(2) exempts 'transactions by an issuer not involving any public offering.' The SEC explains that purchasers relying on it must be sophisticated or able to bear the economic risk, must have access to prospectus-type information and must agree not to resell to the public. Because 'the precise limits of the private placement exemption are not defined by rule,' most issuers use Rule 506 as a safe harbor with objective standards.

The buyer test is usually accredited investor status under Rule 501(a). For individuals that means net worth above $1,000,000 alone or with a spouse or spousal equivalent, excluding the primary residence, or income above $200,000 individually or $300,000 jointly in each of the two most recent years with a reasonable expectation of the same this year. The DST rules are set out at DST accredited investor rules.

The disclosure document is the PPM. Under FINRA Rule 5123, a member firm that sells a private placement must file the PPM, term sheet or other offering document with FINRA within 15 calendar days of the first sale, unless an exemption applies.

In a hypothetical $50,000,000 DST offering, the paperwork is a PPM for you and a Form D notice for the SEC.

Hypothetical: a sponsor offers $50,000,000 of DST interests under Rule 506(b) and sells to 300 accredited investors. Rule 506 allows an unlimited amount and an unlimited number of accredited purchasers, so no registration statement is filed.

Within 15 days after the first sale the issuer files Form D, a short notice; the SEC treats the date of first sale as the date the first investor is irrevocably contractually committed to invest. Under Securities Act section 18, states cannot require registration of a Rule 506 offering but may still require notice filings and collect fees.

You receive a restricted security. Rule 502(d) says securities acquired under Regulation D cannot be resold without registration or an exemption, and the issuer must tell you so in writing before the sale.

It bites on liquidity and on information, because there is no public market and the PPM is your main window into the deal.

A Rule 506(b) offering cannot use general solicitation, which is why you will not find most DST offerings advertised; see why DST offerings are not listed online. The offering reaches you through a broker-dealer or adviser, and what you know is what the PPM and your adviser's diligence tell you.

FINRA Regulatory Notice 23-08 reminds broker-dealers that recommending a private placement requires a reasonable investigation of the issuer and its management, its business prospects, its assets, the claims made and the intended use of proceeds. Use the same list yourself with how to read a DST PPM and Form D.