Hugo wishes to raise money for his restaurant. He offers to sell stock to his brothers, sisters, aunts, uncles, and cousins. The offering is made by telephone to each of the investors and amounts to a stock offering in the total dollar amount of $1.5
million. The offering is made to a total of 38 family members and no notice is given to the SEC. Is this a permissible exempt offering under the federal securities laws? Explain.
Hugo would probably be able to qualify for a "private placement" exemption under the 1933 Act. Rule 506 provides a safe harbor under which Hugo would only be required to notify the SEC of sales made pursuant to the exemption. He would not be required to file a full registration statement. The dollar amount of the offering is not important. Sales do not have to be made only to family members, but only 35 nonaccredited investors are allowed under the safe harbor rules. If investors have net worth exceeding $1 million or have had income in excess of $200,000 in each of the two preceeding years and reasonably expect at least $200,000 in income in the current year, they are "accredited investors.". Hugo must furnish all of the nonaccreditors investors with disclosure materials. Hugo might be able to qualify this offering under Rule 505 as a limited offer not exceeding $5 million. As under Rule 506, he would be required to notify the SEC of sales made under the exemption and would have to take precautions against nonexempt, unregistered resales. He would be limited to selling to no more than 35 nonaccredited investors under this exemption, too.
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