What are Regulation D Securities?
When companies want to raise funds via private placements and wish to avoid registering the securities, they can make use of Regulation D offerings. Although appealing, Regulation D securities still have certain requirements that companies need to meet to stay legal and valid.
Read the rest of this article to learn more about how Regulation D securities work, their exemptions, and how a lawyer can help you with them.
What are Regulation D Exemptions?
There are three rules that create exemptions for companies who want to make use of Regulation D private offerings. These are Rule 504 and Rule 506, and they have different benefits.
Rule 504
This rule enables companies to sell a maximum of $10 million in securities within a period of 12 months, without having to register them. However, not all companies can make use of a 504, such as investment companies or those that have a “bad actor” disqualification.
Rule 506
Under this rule, a company can raise an unlimited amount of capital but must be available to buyers if they have questions. The company can sell to up to 35 non-accredited investors and an unlimited number of accredited ones. There are quite strict disclosure rules to follow when selling to non-accredited investors.
Rule 506 has two rules: 506(b) and 506(c).
- 506(b). This rule allows companies to raise an unlimited amount of capital but they’re not allowed to advertise the offering, such as on websites.
- 506(c). By comparison, this rule lets companies engage in general solicitation and advertising activities, without restrictions on how much capital they can raise.
What are Regulation D Filing Requirements?
Regulation D securities need to be filed with the U.S. Securities and Exchange Commission (SEC). This is done by submitting Form D, which must be completed within 15 days of the first sale of securities.
Form D is a simple type of filing that includes information such as the company details and doesn’t take a long time to complete. Once you’ve submitted it, bear in mind that you’ll have to amend it if there are any information changes in future.
If you don’t file Form D correctly, or neglect to submit it, you could risk losing the chance to make a Reg D offering in the future. The same goes for any mistakes or omissions in your submission.
How Do You Complete a Regulation D Private Placement?
There are some important things to consider and do when completing the Reg D process. First, you’ll have to select the right exemption, such as Rule 506(b) or (c).
Then, you’ll prepare the documents. These include a private placement memorandum (PPM) and subscription agreement.
Private Placement Memorandum (PPM)
This document contains information about the offering so that everything is disclosed to prospective investors. This enables them to have all the information they need to make an informed decision. Here’s what it includes:
- Business summary. This provides company information and a business overview.
- Offering terms. This outlines information about the offering, such as valuation.
- Purpose. How the company will use the investor funds must be defined.
- Risks. To ensure full disclosure, this section of the PPM should include all potential risks for the investor, such as those of a legal nature.
Subscription Agreement
This agreement specifies the offering terms and basically states that the investor commits to purchasing the securities. It provides information such as the following:
- Purchase details. How many shares the investor is purchasing and their price.
- Investor representations. The investor must confirm if they’re an accredited or non-accredited investor and that they accept all outlined risks.
- Disclosure confirmation. The investor states that they are aware of all risks and have reviewed all the required information provided by the company.
What are Common Mistakes to Avoid in Regulation D Offerings?
Although Regulation D offerings can be appealing to companies, they can result in common errors that expose them to legal or financial consequences. Mistakes to avoid include the following:
- Improper general solicitation in a Rule 506(b) offering. This can cause you to lose the exemption.
- Not verifying investors properly. Accredited investors need to be properly verified under Rule 506(c), otherwise this can result in regulatory issues.
- Not providing strong disclosure documents. Anything vague or misleading can result in investor disputes.
- Not considering Blue Sky laws. State-level rules can still apply under Regulation D, and not being compliant can lead to legal problems.
How Can a Lawyer Help You with a Regulation D Offering?
A lawyer can help you with a Regulation D offering in many ways, so hiring one is recommended, especially if you are investing in or issuing Regulation D offerings for the first time.
- A lawyer will ensure that the offering is aligned with all federal and state securities laws.
- They’ll avoid making mistakes that can expose the company to enforcement by the SEC.
- They’re skilled at structuring the Reg D offering correctly, with all appropriate documents.
- They’ll advise the company on what should be avoided during the fundraising process to protect their interests.
- They’ll verify investors so that they meet all the requirements.
- They’ll handle Form D filings on your behalf.
- They’ll draft or review your documents, such as the PPM, so that everything is clear, transparent, and legally sound.
Where to Find a Lawyer for a Regulation D Offering
Hiring a lawyer for Regulation D offerings doesn’t have to be time-consuming or expensive. You can find a lawyer on an online legal platform such as ContractsCounsel, one of the largest online legal marketplaces that connects clients with reputable, professional lawyers who have been vetted on the platform.
All lawyers have the skills and experience to help clients with Regulation D offerings so that they’re legally compliant and structured correctly. They can also help you review all Reg D documents you require.
To request a document review from a lawyer on ContractsCounsel, here are the steps to follow:
1. Visit the ContractsCounsel marketplace and post your project. It’s free.
2. Receive multiple bids from lawyers directly on the platform who can assist you with a legal review of your document or agreement.
3. Once you receive the lawyer bids, you should review the lawyers' profiles. There’s lots of info on the platform to help you choose the best lawyer, such as their location, client ratings, years of experience, and field of expertise.
4. Hire a lawyer who is best suited to your requirements.
