A limited partnership is a security offering. It is important to invest with a sponsor who is knowledgeable and experienced in securities law to ensure compliance with regulations. The Securities and Exchange Commission (SEC) defines a security as a financial instrument that represents an ownership interest in an entity, in our case, a membership interest in a limited liability company. A security is considered to be any investment of money with the expectation of profits from the efforts of others.
The SEC's definition of a security is based on the concept of an "investor" and a "sponsor" or "issuer". The investor is the person or entity buying the security, while the sponsor or issuer is the person or entity selling the security. In general, the investor has no management control over the entity issuing the security, and the sponsor or issuer has all control. This is not always the case with every investment type, but with LPs, it is. The other distinction is that the risk of loss to the LP is limited to the investment amount whereas the sponsor or issuer has no limit of risk.
The SEC's registration requirements for securities offerings are based on the federal securities laws, which generally require that any offer or sale of securities be registered with the SEC, unless an exemption from registration is available. Many limited partnerships (LPs) are not required to be registered with the Securities and Exchange Commission (SEC). In fact, this is true of most of our syndications. But even though they are not registered, we as the sponsor/issuer are obligated to comply with SEC reporting requirements which will be specific to the exemption being utilized.
Most LPs are considered to be "exempted securities" under the Securities Act of 1933 and are not required to be registered with the SEC, provided they meet certain conditions.
Regulation D is a set of SEC rules that provide exemptions from the registration requirements for certain types of securities offerings. These exemptions allow companies to raise capital through private offerings without having to register the securities with the SEC. There are three main rules under Regulation D: Rule 504, Rule 505, and Rule 506.
Rule 504 allows companies to raise up to $5 million in a 12-month period through the sale of securities. There are no restrictions on who can invest, but the securities cannot be offered or sold through general solicitation or advertising.
Rule 505 allows companies to raise up to $5 million in a 12-month period through the sale of securities. However, only accredited investors (those with a net worth of at least $1 million or income of at least $200,000 per year) can invest, and the securities cannot be offered or sold through general solicitation or advertising.
Rule 506 is the most widely used exemption under Regulation D and allows companies to raise an unlimited amount of capital from an unlimited number of accredited investors. There are two subsections.
Rule 506(b) [There is no 506(a)]: This is the traditional private placement exemption under Regulation D, which allows companies to raise an unlimited amount of capital from an unlimited number of accredited investors, and up to 35 non-accredited investors. However, companies must provide extensive disclosure about their business and financial condition to investors, and the securities cannot be offered or sold through general solicitation or advertising.
Rule 506(c) : This is the most recent and widely used section of Regulation D. This rule allows companies to raise an unlimited amount of capital from an unlimited number of accredited investors, and it also permits general solicitation and advertising to market the offering, as long as the company takes reasonable steps to verify that all investors in the offering are accredited investors.
It's worth noting that even though the company is allowed to use general solicitation under Rule 506(c), it must still file a Form D with the SEC within 15 days of the first sale of securities and provide the SEC with certain information about the offering, including the names and addresses of the investors.
It's also important to know that both Rule 506(b) and Rule 506(c) of Regulation D, have no limits on the amount of money that can be raised from the investors and no ongoing reporting requirements, which makes it an attractive option for many companies that want to raise capital.
Finally, both of these rules are subject to anti-fraud provisions of the federal securities laws, and companies should be careful to provide accurate and complete information to investors, and to comply with all other applicable laws and regulations.
If you want to go deeper here is the latest bulletin from the SEC regarding Regulation D.