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.

Regulation D Offering Securities Lawyers Mangum & Associates

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.

While Regulation A also exempts security sales from SEC registration, it also has its limitations. Reg A focuses on small public offerings, rather than broader private placements, and requires additional SEC disclosures and an offering circular.

Under Regulation D, you can sell stock privately to investors with streamlined disclosures — while avoiding a full securities registration. Rather than a comprehensive SEC filing, most of its disclosures are contained in a private placement memorandum (PPM).

In our experience, Regulation D (Reg D) is the most common way to issue private placements. According to national statistics, companies and entrepreneurs are embracing Regulation D offerings. In 2017 alone, there were roughly 40,000 Reg D offerings, which is more than the number of initial public offerings from that year.

Types of Regulation D Offerings

While Regulation D offers many benefits, it also requires a detailed understanding of U.S. securities law and the regulatory environment. To properly frame your offering, you must select the correct exemption.

There are three main exemptions under Reg D: Rule 504, Rule 505, and Rule 506.

Rule 504

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.

Rule 505

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.

Rule 506

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.

Understandably, even the most sophisticated investors and companies struggle to identify the right Regulation D offering exemption. And you should never take the decision lightly — you can face SEC and other regulatory fines and penalties if you make a mistake. 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

The SEC considers all other investors as non-accredited.

Under Rule 504, 505, and portions of Rule 506, you must solely or predominately sell your securities to accredited investors.

Launch Your Reg D Offering With Professional Guidance

A Regulation D offering is a significant undertaking. In addition to compliance with the SEC’s regulations, you need a comprehensive plan for the selling and marketing of your offering. That means you need to understand how to qualify investors (when necessary), solicit them, and market your offering properly. This can involve a tangle of state and federal laws and regulations — and typically requires sophisticated guidance from a Regulation D attorney.

Even if your offering is only available to a small, select group of investors, you must provide detailed disclosures and a framework that complies with securities laws and educates potential investors about your opportunity.

Completing Form D

This includes a Form D, which provides a brief summary of your company’s key stakeholders (including executives and stock promoters), whether a broker-dealer is involved in the transaction, and some basic information about your offering. As of February 2008, you can electronically submit your Form D to the SEC via its electronic portal (EDGAR), although you can still submit a paper copy. You must submit your Form D within 15 days of your offering’s first sale.

Providing Disclosures

However, your work is not done once you have completed a Form D. In addition, you will need to provide a variety of disclosures that outline:

  • Nature and attributes of the offering
  • Information about any past bad acts, criminal convictions, or other issues that may impact an investor’s decision
  • Notices of sale
  • Individuals who receive compensation from your offering

You may also have to make disclosures and file documents with the various state regulatory agencies that govern your transaction.

You should never include misleading information or exclude information that could impact your investors’ decision-making process; these acts or omissions could run afoul of both state and federal anti-fraud provisions. Our team can also help you comply with anti-fraud and liability laws that may impact your transactions and offering.

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.