Make Regulation D Your Best Friend When Raising Capital

One of your best friends when raising private money should be Regulation D.

What is Regulation D?

Very simply, Regulation D is a private securities offering - you can raise money without having to go through the SEC registration process. The registration process is quite involved, and should generally be reserved for when you want to raise LOTS of capital (e.g. millions and millions).

You should note that there are three Rules you can offer securities under with Reg D.

Rule 504

Rule 504 provides an exemption for the

offer and sale of up to $1,000,000 of securities in a 12-month period. With Rule 504, you may not advertise to the public to sell your securities. Under most circumstances, any investors that purchase securities from you under Rule 504 cannot sell them without exemption or registration. There are some circumstances that allow your investors to sell their securities purchased from you under Rule 504, the details of which are beyond the scope of this website. You must provide sufficient information to each investor about your offering so that you comply with the anti-fraud provisions of the securities laws. Make sure that you don’t omit any important information either, as this could be considered false or misleading.

Rule 505

This rule provides an exemption for offering and selling securities for amounts up to $5 million in any 12-month period. You cannot use advertisements or general solicitations to sell securities when you use this exemption. Under Rule 505, you can sell your securities to an unlimited number of ‘accredited investors’ and up to 35 non-accredited investors. Under Rule 505, there are specific requirements for the type of information you must provide to accredited vs. non-accredited investors. Check with your securities lawyer for your particular offering. In addition, with a Rule 505 offering, all or part of your financial statements must generally be audited by a licensed CPA. This can increase the expense of your offering.

Rule 506

Rule 506 is considered a "safe harbor" for the private offering exemption. This exemption stipulates that your securities purchasers meet the following criteria:

• have enough knowledge and experience in finance and business matters to evaluate the risks and merits of the investment (the "sophisticated investor"), or be able to bear the investment's economic risk; • have access to the type of information normally provided in a prospectus; and
• agree not to resell or distribute the securities to the public.

Like Rules 504 and 505, you cannot use a general solicitation to find investors when using a Rule 506 exemption. Rule 506 allows you to raise unlimited amounts of capital, sell securities to accredited investors and non-accredited investors (up to 35). The information, sale restriction and information disclosure requirements, including financial statements are similar to Rule 505. The main difference between Rule 506 and Rule 505 is that any non-accredited investor you sell securities to must meet sophistication requirements

As you can see, there are several ways to raise as much capital as you need without having to register your securities. State rules will vary on this, so it's always mandatory that you work with a securities attorney to do your offering. Since the securities law compliance is so much less with exemptions vs. registration, what's stopping you? After all, there are hungry investors out there waiting for your deals!

 

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This writing is for informational and educational purposes only The contents of this post and of this website do not constitute legal or tax advice. Before conducting any transaction, please consult proper legal and tax counsel.