William Rosellini

Reg D Basics

“Regulation D” (or Reg D) is a United States Federal program created under the Securities Act of 1933, indoctrinated in 1982, that allows companies the ability to raise capital through the sale of equity or debt securities (private or public stock shares). Specifically, this allows small businesses to raise capital from private investors, without going through the red-tape and financial burden of securities registration.

The Reg D basics include 2 general “exemptions” that are relied upon to raise capital. These exemptions equate to rules, which allow different amounts of capital, different types of investors, and different methods for conducting an offering. Before determining which PPM template you need you will need to read these rules and figure out which rule works best for your particular offering.

Rule 504 | Raise up to $5 million

Rule 506 | Raise any amount ($5k – $1B+)

The Reg D programs were designed to provide an exemption to sell securities in a private capital raise without registering the securities (any business transaction involving investors), and also to provide the appropriate documentation for properly accepting and using the capital.

There are 2 basic types of Regulation D Offerings (which can also be combined):

  • An “equity” offering is where the company sells partial (or a majority) ownership in the company (via a security, stock or LLC membership units) to raise capital. Equity offerings are preferred by early stage companies because there is no structured repayment schedule or debt payments, the investors receive a return when the company profits and those profits are shared.
  • A “debt” offering is where the company raises debt financing by selling a promissory note to investors with a set annual rate of return, and a maturity date for when funds will be paid back to investors. A debt offering is much like a business loan, but instead of a bank providing the financing, a group of investors lends funds to the company.

Preparing a Regulation D Offering involves three steps:

1. Pre-Offering Framework: Most entrepreneurs are not experts in raising capital, thus typically have poorly structured transactions. An improper transaction structure will portray an unprofessional image to potential investors. The very first step in an offering is properly developing the structure (in equity transactions, company stock share structure).Structuring usually includes: setting stock price or note amounts, determining how much of the company to sell (in equity transactions), which Reg D program to use, setting the maturity date and rate of return for promissory notes (in debt situations), share allocations to principals (so they maintain a set amount of control in the company), minimum and maximum offering amounts which set the effective range of the offering, minimum amount of investment per investor, etc.

2. Document Creation: Preparing an offering involves the creation of the Regulation D Offering documents. These documents include:

  • Subscription Agreement: The Subscription Agreement explains the terms and conditions of the offering. It is the “investment contract” for purchasing the securities. Typically an investor will complete this document, a questionnaire, and then attach a check for the investment.
  • Promissory Note: In debt offerings you need to have a Promissory Note outlining the terms of the loan arrangement with the investors. The note is the actual “loan document” between the company and the investor.
  • Form D SEC Filing: The Form D is the form filing that is sent to the SEC in Washington, DC. It notifies the SEC that you are using the Regulation D program and provides them basic information on the company and the offering. (See our section on “Filing Form D.”)Note: It is not an approval document or registration, rather it is a filing that notifies the SEC that you have a Regulation D Offering in place.
  • State Form Filing: Also called “Blue Sky” Filings, most states require a specific form to be filed along with a copy of the SEC Form D and the PPM. Nearly all states charge a fee ranging from $50 to $495. In most states the form does not need to be filed until capital has been received from an investor in that state. After receiving the capital you typically have 15 days to file the appropriate documentation. (See our section on “Blue Sky Compliance.”)

3. Marketing: The offering is now ready for marketing to investors. Regulation D prohibits any type of solicitation or advertising to investors.The Regulation D Programs can be used by domestic as well as foreign corporations. While the programs can be used by any corporation type – the preferred structure is a “C” Corporation or Limited Liability Corporation “LLC”.


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