( ) Information
For virtually all entrepreneurs, the most efficient mechanism to procure equity financing under an exemption is through the use of Regulation D (Reg D), which is a limited offer and sale of their company’s , or securities, without registration under the Federal Securities Act of 1933. A positive outcome by complying with Regulation D is that it provides the company’s officers and directors an insurance policy of sorts regarding disclosure. PPM.net creates all of the following regulation d private placement memorandums.
Different Types of Securities
There are two common and basic types of securities that companies offer via a regulation d: equity and debt securities.
Equity securities typically consist of common stock for a corporation (or units for an LLC) and convey a portion of the ownership interest (the shares) in the company to the holder of the security. Stockholders are usually entitled to receive dividends when - and if declared - as well as vote on corporate matters, and receive information about the company, including financial statements and updates on company growth.
Debt securities usually consist of bonds (debentures and more) and represent debt obligations of the company. Debt offerings have a specified interest rate, including the maturity date and repayment amount to the investor(s). In a securities offering (via private placement memorandum), a company should only offer debt securities if it can demonstrate that it has the ability to repay the debt based on its past performance (what PPM.net calls “the position of power”). It is typically difficult for small companies or even start ups (though not impossible) to demonstrate the ability that they can repay the investor(s) his/her initial investment via a debt offering. Companies with an operating history have a better chance of securing debt financing for their company.
The Six Common Rules of Regulation D that.net can Help With
The first three Reg D rules are concerned with definitions, conditions, and notification.
- Rule 501 contains the definitions of the various terms used in the rules.
- Rule 502 lists the conditions, limitations, and information requirements for the exemptions in Rules 504, 505, and 506.
- Rule 503 includes the SEC notification requirements.
Rule 504, 505, 506 encompass the specifics of raisingunder Reg D.
- Rule 504 is generally relevant to securities sales up to $1 million. Rule 504 is maintained to be the most beneficial to the entrepreneur. More below.
- Rule 505 applies to securities offerings from $1 million to $5 million.
- Rule 506 is for securities offerings exceeding $5 million.
Rule 504 of Regulation D
Rule 504 is viewed as the optimal road for entrepreneurs seeking less than $1 million. It is good for those who cannot afford many of the costs associated with the Securities & Exchange Commission (SEC) registration process. Until the entrepreneur’s company is at a point where they can afford additional expenditures, Rule 504 offers companies the following needed breaks:
- An exemption to raise up to $1 million;
- No disclosure criteria;
- Few general solicitation and resale restrictions;
- No limit as to the number or type of investors. (see below)
The above Rule 504 exemptions can be utilized for almost any type of organization, including corporations, partnerships, trusts, or other entities. However, it is not applicable to companies who are currently reporting to the SEC (subject to the ‘34 Act) or investment companies.
Rule 504 of Regulation D - Restrictions
Not to Exceed $1 Million. The total offering amount permitted to be procured under Rule 504 can be up to $1 million. This is the rule over a 12-month period, less the aggregate offering of all securities sold within 12 months before the start of a 504 offering. Therefore, if a company has raised $100,000 in private financing in the previous 12 months, it can still procure up to $900,000 without being accused of breaking the restrictions.
Overall, there are no specific disclosure requirements under Rule 504 (such as disclosing the company’s profile or model, and what people are involved). An investor (or purchaser), then, can sign a subscription agreement, purchase companywhile having little to no information about the company at hand. However, this is not always the standard and can vary from state to state. For instance, the rule is dependent on the blue-sky laws of each state in which the securities are offered, and many states often have various requisites. If a state’s blue-sky rules require disclosure, it must be provided regardless of Rule 504.
Rule 504 stipulates that at least $500,000 of securities must be sold pursuant to a registration under a state’s securities law. As such, an offer must comply with the blue-sky laws of each individual state in which it is offered. In many states, unfortunately for entrepreneurs, this negates the ease of Rule 504 and the federal government’s initial intent, because many states’ blue-sky laws are more restrictive than Regulation D.
Entrepreneurs beware–regardless of the amount of information one is willing to disclose: Rule 504 does not dismiss the issuer from the federal requirements. Furthermore, there is no exemption from the fraud provisions, including the areas of material omissions or misstatements. The penalties for noncompliance are severe, which can include monetary fines and jail sentences.
Number of Investors
The number of investors can vary depending on the scope and value of a project, as well as the entrepreneur’s network. Depending on the type of incorporation, as well as the state the company will conduct business, restrictions apply as to the number of individuals who are allowed to invest. However, Rule 504 allows an issuer to sell securities to an unlimited amount of investors, up to, of course, $1 million in procured financing. Rule 504 is the only rule under Regulation D that permits an unlimited number of investors.
Rule 505 of Regulation D (reg d)
- Raise up to $5 million in a 12-month period;
- Security sales can be made to an unlimited number of accredited investor plus 35 additional investors;
- Disclosure documents, i.e. a private placement memorandum, must be delivered to all non-accredited investors;
- No public advertising is allowed.
Rule 506 of Regulation D (reg d)
Rule 506 of Regulation D allows a company to raise an unlimited amount of capital, as long as the company satisfies the following standards for an exemption under this rule:
- The company can raise an unlimited amount of capital;
- The company does not use general solicitation or advertising to market the securities;
- The sale of the company’s securities can be to an unlimited number of accredited investors and select few other purchasers. Unlike Rule 505 of Regulation D, all non-accredited investors, either alone or with a purchaser representative, must be “sophisticated”. This means that they must have “sufficient” knowledge and “experience” in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
- The company, i.e. the seller of the securities, must be available to answer questions by prospective purchasers;
- Financial statement requirements as for Rule 505; and
- Purchasers receive restricted securities, which may not be freely traded in the secondary market after the offering.
Form D – What is it?
The Form D Compliance Filing is the only filing document that is required by the Securities and Exchange Commission (SEC) in Washington, DC. It is an 8 page document detailing the relevant information about the offering, the company, use of proceeds, and the principals of the company.
Selling securities of any kind to investors without filing the Form D could subject the company to fines by the SEC. The Form D, therefore, is an integral part of raising capital properly and legally. PPM.net can assist in the filing of the Form D.
(Some of the aforementioned information taken from www.SEC.gov).
Main Offering Documents that we Create
PPM.net can create one of the Regulation D memorandums outlined above, as well as create Regulation S and Regulation A offering documents and assist in all filing. Choose a link below to view more information on: