Regulation D Private Placement FAQs

Our Federal Securities Lawyers Answer Frequently Asked Questions (FAQs) About Private Placements Under Regulation D

Attorney Nick Oberheiden
Regulation D Private Placement
Team Lead

While the default rule in the United States is that companies must register their securities offerings with the U.S. Securities and Exchange Commission (SEC), there are a handful of exceptions. Two of the most commonly used exceptions exist under Regulation D. But, while Regulation D allows companies to conduct securities issuances without going through the time-consuming (and significantly more expensive) registration process, conducting Regulation D offerings still requires a custom-tailored approach and a diligent commitment to compliance.

With this in mind, what do you need to know about Regulation D if you are seeking to conduct an unregistered securities offering? Here are the answers to some frequently asked questions (FAQs) from the federal securities lawyers at Oberheiden P.C.:

What is Regulation D?

In federal securities laws, Regulation D is a set of rules that the SEC has adopted pursuant to its rulemaking authority under the Securities Act of 1933. As the SEC explains, Regulation D, “provides a number of exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the offering with the SEC.”

Has Regulation D Been Lifted?

No, Regulation D has not been lifted. While the Federal Reserve System amended its Regulation D in 2020 to modify the rules governing transfers from savings deposits, this is a completely different set of rules from those adopted and enforced by the SEC.

When Can (and Should) Companies Use Regulation D?

Companies can use Regulation D to sell securities without going through the SEC registration process. While a company’s ownership shares constitute securities under federal law, there are many other types of securities as well. These include (but are not limited to):

Stock options
Bonds and other debt instruments
Convertible instruments
Tokenized offerings
Other investment contracts

Regarding when companies should use Regulation D, this depends on the specific circumstances surrounding a company’s securities offering. While most companies use either Rule 504 or Rule 506 under Regulation D, there are a handful of other registration exemptions as well. An experienced federal securities lawyer will be able to help you make an informed and strategic decision.

Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd

Former DOJ Trial Attorney

Partner

Brian J. Kuester

Former U.S. Attorney

Hon. Kevin McCarthy

55th Speaker, U.S. House of Representatives (ret.)

Government Consultant

Mike Pompeo

Of Counsel

Former U.S. Secretary of State

John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara

Federal Appeals Attorney

Nicholas B. Johnson

Former Prosecutor

Roger Bach

Former Special Agent (DOJ)

Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen

Former Supervisory Special Agent (FBI)

What is the Difference Between Rule 504 and Rule 506 Under Regulation D?

Rule 504 and Rule 506 D establish two different paths to conduct an unregistered and restricted securities offering under Regulation D. Rule 504 allows companies to offer up to $10 million in unregistered securities through private placements in a 12-month period. Rule 506 does not have a dollar-amount restriction (which makes it more desirable for many companies), though other restrictions apply. In most cases, conducting a Rule 506 offering involves selling securities to accredited investors.

What is an “Accredited Investor Status” Under Regulation D?

An accredited investor is a person (or entity) that meets certain requirements, as set forth in Regulation D. For example, an investor can qualify as an accredited investor for purposes of a Rule 506 offering if he or she:

Has a net worth of over $1 million, excluding the investor’s primary residence; or,
Earned an annual income of $200,000 ($300,000 with a spouse or partner) in each of the prior two years and reasonably expects the same (or greater) income in the current year.

Regulation D also provides that licensed investment professionals can qualify as accredited investors, as can certain other individuals. Rule 506(c) sets out a principles-based method for accredited investor verification.

How Do You Conduct a Regulation D Private Placement?

Conducting a Regulation D private placement starts with deciding whether to conduct the placement in compliance with Rule 504 or Rule 506. Under Rule 506 there are two options: (i) selling to accredited investors and up to 35 identified non-accredited investors; or, (ii) selling to accredited investors only while promoting the private placement to the general public.

Once you choose which option to pursue, the next step is to prepare the necessary documentation. Two of the main documents used for Regulation D offerings are the private placement memorandum (PPM) and subscription agreement, though various other forms of documentation may be necessary as well.

Is There an Alternative to Conducting a Regulation D Private Placement?

Yes, while most companies conduct their private placements under Regulation D, there are a handful of alternatives. These include, but are not limited to, conducting a private placement under Section 4(a)(2) of the Securities Act of 1933 and conducting a private placement under Regulation A+ (commonly referred to as a “mini IPO”).

Again, informed decision-making is critical, and company owners and executives will also want to think strategically about both: (i) how they intend to use the funds raised from their private placement; and, (ii) how they may want private placements raise capital in the future. These are key considerations that will play a significant role in deciding which option to pursue.

What is the Difference Between a Private Placement Under Regulation D and Rule 144A?

While Regulation D allows companies to conduct private placements involving newly issued securities, Rule 144A allows for the unregistered resale of securities outside of the public markets. As a result, unlike Section 4(a)(2) and Regulation A+, Rue 144A is not an alternative to a Regulation D private placement.

Does the SEC Oversee Regulation D Private Placements?

The SEC has the authority to enforce compliance with Regulation D; and, while the SEC does not scrutinize all private placements, it will take action when violations (or potential violations) are brought to its attention. SEC enforcement actions related to Regulation D private placements are most often the result of complaints from investors who have suffered investment losses.

Do You Have to Register a Regulation D Private Placement?

No, private placements under Regulation D are exempt from SEC registration—which is one of the primary benefits of complying with Regulation D. However, once a company conducts its first private placement for a securities offering under Regulation D, it must promptly file Form D with the SEC and comply separately with state securities laws.

Do You Need a Private Placement Memorandum (PPM) Under Regulation D?

A private placement memorandum (PPM) is a disclosure document that companies use to establish compliance with Regulation D and ensure that prospective investors have all material information they need, including financial statements. While Regulation D does not specifically require use of a PPM, some form of documentation is needed, and PPMs have become the standard in the industry. Experienced accredited investors will expect to receive a detailed PPM; and, when examining compliance with Regulation D, the SEC will expect to be able to review a PPM (or similar document) as well.

Do You Need a Subscription Agreement Under Regulation D?

Similarly, while a subscription agreement is not expressly required under Regulation D, a subscription agreement is still an essential tool for conducting a private placement in accordance with either Rule 504 or Rule 506. While a PPM is a disclosure document, a subscription agreement is a binding contract that establishes the terms governing securities issuances under the private placement.

What Are the Penalties for Conducting a Private Placement in Violation of Regulation D?

Companies that conduct private placements in violation of Regulation D (i.e., by exceeding the $10 million issuance limit under Rule 504 or selling to non-accredited investors under Rule 506(c)) can face a variety of administrative and civil penalties from the SEC. In cases involving willful noncompliance, company owners and executives may also be at risk for criminal prosecution. Along with substantial fines in both civil and criminal cases, SEC enforcement actions can also result in prohibitions against future securities offerings; and, in cases involving criminal prosecution, federal imprisonment.

Can Investors Sue for Violations of Regulation D?

Yes, investors can sue for violations of Regulation D, and these lawsuits can expose companies to substantial civil liability. Investor lawsuits may trigger SEC enforcement action as well. These risks make it critical for companies to prioritize federal compliance when preparing to offer securities to accredited or non-accredited investors.

Along with pursuing claims based specifically on Regulation D violations, investors can pursue claims for general investor fraud and other statutory and regulatory violations as well. As a result, even if a private placement meets the technical requirements under Regulation D, this does not necessarily mean that the issuer is safe from potential liability.

What is the First Step for a Regulation D Offering?

With all of this in mind, for companies that are considering private placements, the first step is to consult with a lawyer who has experience evaluating and preparing the necessary documentation for Regulation D offerings. An experienced lawyer will be able to help you make informed and strategic decisions, prepare a custom-tailored PPM and subscription agreement, and assist with taking all of the other steps that are necessary to protect you and your company.

Schedule a Free Initial Consultation with a Regulation D Private Placement Lawyer at Oberheiden P.C.

Do you have questions about conducting a private placement under Regulation D? If so, we invite you to get in touch. To schedule a free initial consultation with a senior lawyer at Oberheiden P.C., please call 888-680-1745 or request an appointment online today.