Regulation D Offerings Guide
Regulation D Offerings Allow Companies to Conduct Private Placements Without Meeting the SEC’s Burdensome Registration Requirements
For many companies, conducting a registered initial public offering (IPO) to raise capital is prohibitively expensive. Fortunately, Regulation D provides a registration exemption for qualified offerings. Under Regulation D, companies can solicit outside investors without conducting a public offering, and certain types of Regulation D offerings allow companies to raise unlimited capital.
When can companies conduct Regulation D offerings? What is the first step in the process? What are the risks involved? Find out what you need to know from the federal securities lawyers at Oberheiden P.C.:
What is a Regulation D Offering?
A Regulation D offering is an issuance of securities conducted in accordance with the relevant provisions of 17 C.F.R. Part 230. Regulation D allows companies to offer their securities to qualifying investors without registering with the U.S. Securities and Exchange Commission (SEC), provided that they clearly meet all pertinent requirements.
This raises an important point: While companies that conduct Regulation D offerings do not need to register with the SEC, they still need to prioritize SEC compliance. As we discuss in greater detail below, conducting noncompliant unregistered securities offerings can present serious risks—not only for companies, but for their owners and executives as well.
What are the Types of Offerings Under Regulation D?
There are three main types of Regulation D offerings: (i) Rule 504 offerings; (ii) Rule 506(b) offerings; and, Rule 506(c) offerings. Each type of Regulation D offering has its own unique set of restrictions and requirements, so it is critical that companies structure their offerings to comply specifically with one of these three rules.
Rule 504 Offerings
Rule 504 allows companies to offer up to $10 million in securities to both accredited and non-accredited investors. The $10 million issuance cap under Rule 504 applies on a rolling 12-month basis. For companies that do not need to raise more than $10 million in a given year, conducting a Rule 504 offering can be a cost-effective solution.
Rule 506(b) Offerings
Rule 506(b) allows companies to offer an unlimited value of securities to an unlimited number of accredited investors and up to 35 non-accredited investors, though companies generally cannot conduct public solicitations under Rule 506(b). Additionally, as the SEC explains, “[a]ny non-accredited investors in the offering must be financially sophisticated or, in other words, have sufficient knowledge and experience in financial and business matters to evaluate the investment,” and, “[i]f the issuer offers securities to non-accredited investors, the issuer must disclose certain information about itself, including its financial statements.”
Rule 506(c) Offerings
Rule 506(c) allows companies to publicly solicit investments from an unlimited number of accredited investors. Companies conducting Rule 506(c) offerings cannot accept funds from non-accredited investors, and they must take “reasonable steps” to confirm investors’ accredited status. However, the ability to publicly solicit investments makes conducting a Rule 506(c) offering a desirable option for many issuers.
Who Qualifies as an “Accredited Investor” Under Regulation D?
For companies conducting Regulation D offerings under either Rule 506(b) or 506(c), determining whether prospective investors with “accredited investor status” is a critical part of the process. So, who qualifies as an “accredited investor”?
Prospective investors in Regulation D offerings can qualify as accredited investors based on either: (i) financial criteria; or, (ii) professional criteria. The SEC describes these criteria as follows:
Financial Criteria
- “Net worth over $1 million, excluding primary residence (individually or with spouse or partner);” or,
- “Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year.”
Professional Criteria
- “Investment professionals in good standing holding the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82);”
- “Directors, executive officers, or general partners (GP) of the company selling the securities (or of a GP of that company);” or,
- “Any “family client” of a “family office” that qualifies as an accredited investor.”
When conducting Regulation D offerings, companies cannot simply rely on prospective investors’ representations regarding their accredited status. Instead, they must process accredited investor verification—and they should document this verification process thoroughly. This way, should the SEC raise questions, they will be able to affirmatively demonstrate their good-faith efforts to comply with the state securities law. s
How Do You Conduct a Regulation D Offering?
As mentioned above, one of the first steps for conducting a Regulation D offering is deciding whether to rely on the registration exemption that exists under Rule 504, Rule 506(b), or Rule 506(c). After making this decision, from a legal perspective, the main steps are:
- Establish Procedures for Vetting Prospective Investors – All companies conducting Regulation D offerings need to have clear and well-documented procedures for vetting prospective investors. As relevant, this may include both vetting non-accredited investors’ experience and vetting accredited investors’ financial or professional qualifications.
- Prepare a Private Placement Memorandum (PPM) – The main offering document used under Regulation D is the private placement memorandum (PPM). A well-drafted PPM will contain various disclosures while also including key protections for the issuer.
- Prepare a Subscription Agreement – When investors decide to purchase the company’s securities, they will need to sign a subscription agreement. This subscription agreement should clearly outline all of the terms and conditions of the company’s unregistered offering and the restrictions on the transfer of its securities.
- Communicate with Prospective Investors in Compliance with Regulation D (and All Other Pertinent Securities Laws and Regulations) – In addition to complying with Regulation D, companies conducting unregistered offerings under Rule 504, Rule 506(b), or Rule 506(c) must comply with various other securities laws and regulations as well. For example, issuers must be extremely careful to avoid overstating their capabilities or misrepresenting investors’ financial prospects.
- Issue PPMs and Subscription Agreements to Qualified Investors – With the necessary groundwork and documentation in place, companies conducting Regulation D offerings can begin issuing PPMs and subscription agreements to qualified investors. If any investors seek to negotiate the terms of their subscription agreement, companies should work with their counsel to determine when (and if) concessions are appropriate.
This is just a very brief overview. When conducting a Regulation D offering, a comprehensive and custom-tailored approach is key. All documents should reflect the specific nature of the company’s securities and its unregistered offering, and all companies should have thorough policies and procedures in place to effectively manage federal securities law compliance. Engage with a state securities regulator to help ensure compliance and learn more about the company.
Is a Regulation D Offering Different from a Private Placement?
A Regulation D offering is a type of private placement. Other federal statutes and regulations allow for unregistered private placements as well—so Regulation D offerings and private placements are not strictly synonymous. However, the term “private placement” is commonly used to refer to a Regulation D offering.
Do Regulation D Offerings Have Filing Requirements?
Yes, and this is important. While Regulation D provides exemptions from SEC registration for qualifying securities offerings, companies conducting Regulation D offerings still have filing requirements. Specifically, Regulation D issuers must file Form D with the SEC after conducting their first issuance. As the SEC explains, “A company must file this notice within 15 days after the offer to sell securities in the offering. For this purpose, the date of first sale is the date on which the first investor is irrevocably contractually committed to invest. If the due date falls on a Saturday, Sunday or holiday, it is moved to the next business day.”
What Are the Risks of Noncompliance with Regulation D?
The risks of noncompliance with Regulation D of the Securities Act can be substantial. The SEC has the authority to pursue both administrative and civil enforcement actions when companies conduct noncompliant unregistered securities offerings, and these enforcement actions can lead to fines, bars from issuing securities, and other serious financial consequences.
When accused of intentionally conducting illegal and restricted securities offerings, companies and individuals can face criminal charges as well. In criminal cases, companies can face substantial fines and other penalties, while owners, executives, and other individuals can face fines and prison time.
What Are the Alternatives to Regulation D Offerings?
While conducting an offering under Regulation D is one option for avoiding SEC registration, it is not the only option that is available. Regulation A (commonly known as Regulation A+), Regulation CF, and Section 4(a)(2) provide registration exemptions as well. For companies seeking to raise capital without going through an IPO, it is important to carefully consider all of the options that are available. Each option offers unique benefits in varying circumstances; and, of course, each option is subject to its own unique restrictions and requirements as well.
Discuss Your Company’s Regulation D Offering with a Securities Lawyer at Oberheiden P.C.
Do you have questions about conducting a Regulation D offering (or the alternatives that are available)? If so, we invite you to get in touch. To schedule a call with a securities lawyer at Oberheiden P.C., give us a call at 888-680-1745 or tell us how we can reach you online today.
