What, if anything, in the United States, makes executing a private loan agreement different from issuing a private placement bond? In other words, how does a corporation know whether to always, sometimes, or never submit an SEC Form D when entering into a private loan agreement (with a non-accredited investor)?
1 Answer
To be covered by the securities laws at all, there must be a public offering of a security.
Section 4(a)(2) of the Securities Act of 1933 exempts from registration transactions by an issuer not involving any public offering, and Regulation D merely provides a safe harbor for loans and investments that are guaranteed to qualify as not being "a public offering of a security."
In Reves v. Ernst & Young, one of the seminal cases on this issue, the U.S. Supreme Court stated that there is a general presumption that loans evidenced by notes are in fact securities. However, the Supreme Court explained that the following types of notes are not securities under the federal securities laws:
A note delivered in a consumer financing
A note secured by a mortgage on a home
A short-term note secured by a lien on a small business or some of its assets
A short-term note secured by an assignment of accounts receivable
A note that simply formalizes an open-account debt incurred in the ordinary course of business (particularly if, as in the case of the customer of a broker, it is collateralized).
Loans with a "family resemblance" to such loans are also exempt.
Even if something would otherwise be a security, however, it is not necessarily a "public offering of a security."
A loan made by active participants in a business to the business in which they are active, for example, is not a public offering of a security, even if the loan is a security (and subject to the 10b-5 anti-fraud regulations of the U.S. securities laws).
Also, as a practical matter, the smaller in amount a very simple loan from one lender to one borrower is, the less likely there is to be a felt need to file Form D, which prior to 2017 was not required for offerings made to investors (i.e. lenders) other than accredited investors under $1,000,000 with whom the borrower had a pre-existing relationship.
Securities laws are focused mostly on significant business investments, especially those that are meant to be sold to many investors who are in the investment together, or that are intended to be traded in a secondary market, or that are for a long time period and aren't backed by collateral. The exemptions aren't quite so black and white, but echo and are interpreted in this light.
Still, if you are getting a major investment long term from an unaccredited investor (from the investor-lender's perspective), even in the form of a simple investment loan, better practice would be to file Form D which does no harm and isn't that hard in the case of a large loan from an unsophisticated person that poses higher risk that there will be a claim or some kind filed.
answered Mar 1, 2022 at 2:14
