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 $10,000,000
Rule 505 - No longer available 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.

RULE 504

Under Rule 504 you can raise up to $10 million and is not limited to 35 limited non-accredited investors. But use caution as most states do not allow the use of Rue 504 without registration or other requirements.

RULE 505

NOTE: Effective May, 22, 2017 Rule 505 can no longer be used.

RULE 506

Under Rule 506(b) and (c) you can raise an unlimited amount of capital and under 506(b) use up to 35 limited non-accredited investors. With 506(c) you cannot use any non-accredited investors but you are allowed to advertise

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 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
debentures
options
warrants

Special Note:

Not raising capital properly can provide investors with a "right of rescission" in the future. This means they can get their investment back regardless of the circumstances. You could also face fines and other penalties resulting from an improper sale of securities to investors.

Find a PPM Template for Your Offering:

We have PPM Templates for Debt, Equity, Debt Convertible and even a Combo Debt/Equity

PPM Store