Evidence on the Use of Disclosure Documents in Private Securities Offerings to Accredited Investors

A company selling securities only to a category of buyers called accredited investors under the terms of a regulation of the Securities and Exchange Commission, Rule 506 of Regulation D, has no legal obligation to provide any information to prospective buyers. Nonetheless, anecdotal information indicated that, in practice, issuers have usually provided some amount of disclosure. The possibility that issuers actually supplied disclosure to accredited investors in private transactions when they had no legal obligation to do so suggested a need for empirical research. Did issuers provide disclosure to accredited investors in a few or many private offerings, and, if so, in what circumstances and in what detail was disclosure provided? For information on these topics, I interviewed a group of lawyers who represented clients in a large number of private securities transactions in which accredited investors were the only buyers. The practitioners reported that issuers nearly always provided some form of disclosure to accredited investors. The amount of disclosure depended on several factors, such as the participation of a financial intermediary in the transaction, the experience and sophistication of the buyers, and the issuer’s resources and stage of development. In some types of transactions, issuers provided a full disclosure document resembling a prospectus in a registered offer. In other types, the quantity of disclosure was much smaller.