Integration of Offerings
One of the limitations with a Rule 506 offering is that you are limited to thirty-five nonaccredited purchasers in any one offering, and you cannot get around this limitation by creating multiple offerings, of smaller portions. When two or more offerings are substantially similar, the SEC treats them as a single integrated offering and applies the thirty-five person limitation to the combined offerings. The following are the factors to consider when deciding whether two offerings will be integrated.
• Are the different offerings part of a single plan of financing?
• Are the offerings offering the same type of security?
• Are the offerings made at or about the same time?
• Is the same type of consideration to be received in both?
• Are the offerings made for the same general purpose?
The best way to avoid having two offerings integrated is to either offer substantially different types of securities in subsequent offerings that are close together in time or wait six months between offerings. The six month rule—no securities sold six months before or six months after—is another safe harbor provision. If you meet the time requirements of the safe harbor rule, you do not have to consider the factors mentioned and you are free to offer a similar or identical security.
If your company seeks to raise several million dollars in a private placement, holding to the thirty-five nonaccredited limitation can become problematic. As a possible strategy, the company could stage the total capital raise in phases, six months apart, to avoid integration. Integration is only an issue with the number of nonaccredited investors since Regulation D allows an unlimited amount of accredited investors. If, for example, your second or third round is sold to accredited investors only, the issue of integration does not arise.
Offering different types of securities is another viable solution. For example, sell common stock in your first offering. Close that offering and then open a second offering selling a class of preferred stock.
Avoid Integration Problems: The best way to avoid integration is to wait six months between rounds of raising capital. Alternatively, sell a different security, such as preferred stock after common stock, or a debt instrument so the two offerings are very different from one another.