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 dollar amount of $1,500,000

Question

The offering is made to a total of 38 family members and no notice is given to the SEC. Is this a permissible offering under the federal securities laws? Explain.

Answer 1

Hugo would probably be able to qualify for a private placement exemption under Section 42. of 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. Hugo must furnish all of the investors with disclosure materials since there are non-accredited investors included. Hugo might be able to qualify this offering as a limited offer not exceeding $5 million (under Rule 505 ) but, 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.