Regulation D Offerings
If you’re considering selling equity in your business to raise capital for your long-term plans, you may be frustrated by the SEC’s level of oversight and regulation. But there are less rigorous fundraising options, including a Regulation D offering.
At Mangum & Associates, our nationwide team of lawyers guides business owners and entrepreneurs through their Regulation D offerings, private placement memoranda (PPMs), and other fundraising efforts. To learn more about our comprehensive legal services, contact us today.
Streamlined Approach to Capital Fundraising
Typically, when you offer securities, you must follow the SEC’s complicated registration process and make extensive disclosures. For many small businesses and startups, the time and expense associated with this venture are prohibitive.
Under Regulation D, you can sell stock privately to investors with streamlined disclosures — while avoiding a full securities registration. In our experience, Regulation D (Reg D) is the most common way to issue private placements.
There are three main exemptions under Reg D: Rule 504, Rule 505, and Rule 506.
Under Rule 504, your business can sell up to $1 million in restricted securities. While you can sell to both accredited and non-accredited investors under Rule 504, you still must comply with Blue Sky Laws in any state where your securities are offered. Typically, this means that you will still need to make extensive disclosures to state regulatory agencies.
Your business can sell up to $5 million in restricted securities. But it must limit the number of non-accredited investors and cannot generally advertise or solicit investors. You are usually limited to 35 or fewer non-accredited investors.
The most popular Reg D exemption, Rule 506, lets you raise an unlimited amount of capital from an unlimited number of investors. Your business is also exempt from state blue sky laws. There are two subsections of Rule 506:
- Rule 506(b): You are limited to 35 non-accredited investors, you must provide them with a private placement memorandum, offer to answer investors’ questions, and cannot publicly advertise or solicit interest for your offering.
- Rule 506(c): All investors must be accredited, and you must take reasonable steps to ensure their sophistication. However, you can advertise your offering publicly.
If you’re unsure which version of Rule 506 is best for your offering, consult with our experienced securities lawyers. We will spend time with your team, get to know your business and long-term goals, and help you craft a comprehensive fundraising strategy.
What Is an Accredited Investor?
What are accredited investors and non-accredited investors? Because your Regulation D offering may be limited to accredited investors, it is vital that you understand the distinction between the two.
The formal definition of an accredited investor is included in Rule 501. An individual or entity is an accredited investor if they:
- Earn at least $200,000 annually or $300,000 jointly with their spouse
- Must have a net worth in excess of $1 million
- If the investor is a trust, business, or employee benefit plan, it must hold a minimum of $5 million in assets
- Meet other requirements that demonstrate their sophistication and expertise
Under Rule 504, 505, and portions of Rule 506, you must solely or predominately sell your securities to accredited investors.
Build an Effective Private Placement Memorandum
Under Rule 506, you may have to draft a PPM and provide it to non-accredited investors. This document typically includes detailed information about your business and its financial data, as well as outlines potential risks and benefits associated with the investment. In many ways, it is the legal foundation of your private offering — and a well-drafted PPM is vital.
Due to its complexity, we strongly discourage businesses and entrepreneurs from attempting to draft their own PPMs. A single mistake can make you run afoul of both the SEC and state securities agencies — costing you time, money, and goodwill. Instead, it’s wise to consult with a seasoned securities and PPM lawyer. We can help you comply with regulatory expectations and avoid misrepresentations or allegations of fraud.
Start Fundraising Today With Help From Our Regulation D Offering Lawyers
If your business or startup is looking for innovative ways to raise capital, a Regulation D offering may be your best option. However, modern securities laws and regulations are constantly changing. Before you initiate one of these complex transactions, speak to Mangum & Associates. Our nationwide team of securities lawyers has helped ventures of all sizes meet their fundraising goals with a Rule 504, Rule 505, or Rule 506 offering. To learn what options are best for you, contact us today.