The Orange Grove Limited Partnership would like to make an offering of $2 million in limited partnership interests under either Rule 505 or Rule 506 of Regulation D of the Securities Act of 1933. Orange Grove plans to sell to 40 investors, eight of whom

Question

have net incomes in excess of $200,000 per year and net worth of more than $2 million. The 40 investors also include five mutual funds and three insurance companies. The other investors to whom Orange Grove plans to sell are not experienced investors. Is either Rule 505 or Rule 506 available to the Orange Grove Partnership?

Answer 1

Rule 505 is available, but Rule 506 is not. Both rules limit the number of purchasers to 35 unaccredited investors. This is not a problem here, because eight of the investors have incomes over $200,000 or a net worth of over $1 million and eight of the investors are institutional investors. This leaves only 24 unaccredited investors. Rule 506 requires that the issuer reasonably believe that each unaccredited investor have knowledge and experience in business and financial matters such as to be able to assess the merits and risks of the investment. There is no indication that this requirement has been met here. Rule 505 has a limit of $5 million and Rule 506 has no dollar limit for the offering. The $2 million offering here is well within the dollar limitations of both rules.