REGULATION D BASICS
Regulation D is a United States Federal program created under the Securities Act of 1933, indoctrinated in 1982, which allows companies the ability to raise capital through the sale of equity or debt securities (private or public stock shares). It is 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 accepting and using capital.
There are a total of 9 Rules that make up Regulation D; 2 basic "Exemption Rules" which are relied upon to raise capital and 6 Administrative Rules that establish the ground rules for an Exempt Offering Reg D Offer:
- Rule 500 - Use of Regulation D
- Rule 501 - Definitions and terms used in Regulation D
- Rule 502 - General conditions to be met
- Rule 503 - Filing of notice of sales
- Rule 504 - Exemption for offerings not exceeding $5,000,000
- Rule 505 - No longer availible effective May 22, 2017
- Rule 506 - Exemption for unlimited offering
- Rule 507 - Disqualifying provision relating to exemptions 504 and 506
- Rule 508- Insignificant deviations from a term, condition or requirement of Regulation D
The exemption rules (504 and 506) allow for different amounts of capital, different types of investors and different methods for conducting an offering. Before moving to the "Prepare" phase of a Reg D Offering you will need to read these rules and figure out which rule works best for your particular offering.
According to a report done by the SEC 99% of reported Regulation D offerings used Rule 506 despite the fact that two thirds of the Issuers could have used Rule 504 or 505 based on offering size .
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.
The Following Items can be Considered a Security:
- stock shares
- any percentage of ownership sold to another person or entity
- promissory notes
- memberships (such as in an LLC or Partnership)
- real estate
Find a PPM Template for Your Offering:
We have PPM Templates for Debt, Equity, Debt Convertible and even a Combo Debt/Equity