The Securities and Exchange Commission (“SEC“) provides flexible options to access capital from accredited investors while avoiding the time-consuming and costly process of a full registration.
Access to investment for start-ups and small businesses can pose regulatory challenges which are complex and expensive to overcome for the small entrepreneur. After asking friends, family members, and partners for funds, the next step usually involves finding outside investors, which means issuing securities. Broadly defined, a “security” can include any type of investment, including but not limited to stocks, bonds, notes, limited partnership interests, mineral interests, and investment contracts. Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet certain qualifications under Section 4(a)(2) to be exempt from such registration.
SEC Regulation D is a set of rules and exemptions established under the Securities Act of 1933 which provide guidelines for private placements of securities to raise capital without undergoing the full registration process required for public offerings. The key provisions of SEC Regulation D are as follows:
- Exemptions: Regulation D provides exemptions from the registration requirements of the Securities Act for certain private securities offerings which allow companies to raise capital from investors without having to file a registration statement with the SEC.
- Offering Types: Regulation D offers two primary exemptions for private placements:
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- Rule 504: Allows companies to raise up to $10 million within a 12-month period through the sale of securities. There are no specific disclosure requirements, but state securities laws may apply. Investors receive restricted securities which cannot be sold for at least six months or more without registering them.
- Rule 506: One of the most common methods of raising capital, the issuer must meet several restrictions:
- Rule 506(b): Companies can raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited investors who meet certain sophistication requirements and must be provided with information that is generally the same as what is required for registered offerings. Companies are prohibited from engaging in general solicitation or advertising to market the securities
- Rule 506(c): Permits companies to engage in general solicitation or advertising to raise an unlimited amount of capital, but all investors must be accredited and the company must take reasonable steps to verify their accredited status.
- Accredited Investors: Exempt offerings under Regulation D are generally restricted to persons who are accredited investors because the SEC considers them to have the financial sophistication to understand and bear the risks associated with private securities offerings. The SEC is very specific about who qualifies to be an accredited investor and specifies income or net worth requirements that must be verified prior to issuing securities.
- Disclosure Requirements: Regulation D imposes specific disclosure requirements on issuers conducting offerings under 506(b). These requirements ensure that investors receive adequate information to make informed investment decisions, even in the absence of a full registration statement.
- Form D Filing: Issuers conducting offerings under Regulation D must file a Form D online using the SEC’s Electronic Data Gathering, Analysis and Retrieval system within 15 days of the first sale of securities. Form D contains basic information about the offering, including the issuer, offering amount, and types of investors.
- Anti-Fraud Provisions: While Regulation D exempts certain offerings from registration, it does not exempt issuers from the anti-fraud provisions of federal securities laws. Any information a company provides cannot contain false or misleading statements and an issuer also must not omit any information which would result in the full disclosure providing a false or misleading picture.
A company must also comply with state securities laws and regulations in the states where securities are offered and sold. While the SEC regulates and enforces the federal securities laws, each state has its own securities regulator who enforces what are known as “blue sky” laws. If an offering qualifies for the exemptions from registration under Regulation D Rule 506, that offering is not required to be registered or qualified by state securities regulators. This is not necessarily the case under Rule 504. Likewise, states will still have the authority to investigate and enforce against fraud, impose state notice filing requirements, and collect state fees.
SEC Regulation D provides a framework for private companies to raise capital through private placements while ensuring investor protection and compliance with securities laws as well as flexibility for issuers to access capital from accredited investors while avoiding the time-consuming and costly process of a full registration with the SEC.
This blog is for educational purposes only and does not constitute legal advice. This article, or contacting Apex, does not in any way form an attorney-client relationship. Speak to a licensed attorney if you need help or advice navigating the legal issues of SEC Regulation D offerings. If you have any questions or would like to learn more, please contact George Ptasinski at george@apexlg.com or visit our website.