“Regulation D” is a government program created under the Securities Act of 1933, instituted in 1982, that allows companies the ability to raise capital though the sale of equity or debt securities. The programs were designed to provide two main things – the needed “exemption” to sell unregistered securities in a private transaction (something that happens in any transaction involving investors) and the appropriate framework and documentation for doing so properly.
There are several programs that are available under the Regulation D Exemption. Most of our clients typically choose the JOBS Act 506(c) program as it allows general advertising and solicitation of the offering and also benefits from some compliance efficiencies with State “Blue Sky” filings.
The Necessity of a Regulation D Offering
Why do so many companies fail at raising private capital from investors? One primary reason for failure is significant: the company did not provide investors with the fundamental capability to execute the investment transaction.
Many companies do not perform proper private placement security offering in conjunction with their capital raise – instead of relying on a business plan or executive summary to serve as the basis for investment. Why is this an unprofessional approach? It does not provide the basis for accommodating investment from individual investors properly, effectively, or in compliance with State and Federal rules.
Any company seeking capital from investors has the responsibility to ensure it provides investors with the fundamentals necessary to execute an investment into the subject company. Most companies seeking capital from investors fail because they do not allow investors the means to run investments into the subject company.
A substantial number of companies severely restrict their capital raising activities by simply using a business plan to solicit investors. While a business plan may disclose certain information about the company’s current or planned business activities, it in no way provides the capability to accommodate actual capital investment. Furthermore, any capital raised would most likely violate the State or Federal rules regarding the investment transaction.
Regulation D Program Information
Raising capital from investors effectively and adequately requires the development of a securities offering executed in compliance with State and Federal rules. Most small and medium-size companies choose the SEC’s Regulation D exemption program to implement such offerings. With the advent of the JOBS Act 506(c) Program – companies can now execute a “public offering” of their investment opportunity and securities offering while still retaining the low execution cost and straightforward compliance benefits of a traditional Regulation D offering.
What will a Regulation D offering provide your company? Two main advantages:
(a) The ability to solicit investors and sell them equity or debt securities in compliance with applicable regulations and;
(b) The fundamentals necessary to provide concise investment structure, proper and mandated SEC disclosure, and the capability to execute the subscription of investment funds into your company effectively
Who Should Use a Regulation D Offering?
Any company or entrepreneur benefits from seeking to raise equity or debt capital from investors legally and adequately. Even if you plan to have only one or two investors in your transaction, you need to provide the transaction framework, related disclosure documentation, and investment agreements necessary to raise capital. A Regulation D Offering provides the proper transaction structure and documentation for raising debt or equity capital from investors. Attempting to raise private capital of any amount without these fundamentals in place is nearly impossible.
Most companies use the programs to raise anywhere from $25,000 to $50,000,000 in funds. Regulation D Offerings are used for a wide variety of transaction and industry types: corporate seed capital, corporate expansion capital, film production capital, real estate equity funding (acquisitions, development projects, golf courses, rehab), capitalization for early to pre-IPO stage Internet and technology companies, expansion funding for retail companies, and product development and distribution funding.
Use the menus at the top of this page to find specific information on the available Regulation D Programs, the advantages of a Regulation D Offering, and details on the offering preparation process.
Regulation D 506c “General” Advertising Program
Ready to engage in general advertising of your private placement offering to investors?
The JOBS Act, passed in April 2012, mandated the creation of a new exemption under the Regulation D 506 program that would allow for general advertising of an offering to accredited investors. This new exemption is termed “506c” and is widely known as the “general advertising” 506 program.
The 506c exemption was activated on September 23, 2013, and allows an issuer to engage in general advertising and solicitation of accredited investors for the securities offering. The Regulation D 506c program will retain many of the characteristics of the current 506b program with some notable changes:
- Advertising and general solicitation of investors is allowed
- Participating investors must be “accredited” investors per the Regulation D Rule 501 definitions
- Accredited investors must provide proof or an approved third party verification that they meet the accredited standard for income and/or net worth
- The SEC filing process will be adjusted to include a “pre-filing” of Form D with a 15 day waiting period prior to advertising being allowed for the offering.
There are some other small adjustments to execution aspects of the offering, but the above listed changes constitute the primary modifications inherent in the 506c program. It is important to note that the current 506b program will still be available for issuers that do not need the capability to engage in general solicitation.
The 506c program is a significant change in the solicitation rules and essentially allows a client to execute a public offering of securities while retaining the benefits of a Regulation D exempt private placement (lower preparation costs, less compliance interaction with the SEC, etc.)
An equity offering is where the subject company sells an ownership stake in the company or project to investors. Equity is usually preferred by early stage companies that need flexibility regarding capitalization. We also execute about 80% of our real estate offerings as equity based investments.
In an equity situation investors profit as the company profits since they are partial owners. In some cases, for example an LLC raising capital for real estate acquisitions, there may be a Preferred Return distribution made first to investors prior to sharing proportionally in additional operating income with management and founders. Most operating companies sell 5%-30% of their company for a first round funding – obviously there are exceptions but this tends to be the average range. A real estate project or real estate fund, or oil and gas company typically deploy a different structure regarding investor share of operating income and providing participation in the accretive value of the asset(s).
Most of our clients are using either a “C” Corporation (where you would sell stock to investors) or a Limited Liability Corporation LLC (where you sell a membership unit to investors). Real estate and energy transactions tend to use a Limited Liability Company or Limited Partnership as the issuer entity type. Investors typically profit in two ways from an equity deal; via their proportionate “per share” percentage of company profit (called a dividend or profit distribution depending on entity type) and via the final sale or company redemption of the security through an exit strategy (example: the company buying the securities back from the investors, the company and its issued securities being bought out by another company, going public and selling on the open market, or a real estate asset being sold, etc.). There are significant differences between how an offering for an operating company (a software company for example) would be structured versus a real estate fund, real estate project, or energy company offering would be structured. There are also permutations from the base equity structure including convertible preferred shares, redeemable preferred shares, and for an LLC the utilization of various classes of Membership Units to provide specific investment terms and rights to investors and management control and management participation in net income to the manager(s). Assisting the client in structure is part of our core services and RDR clients benefit from our vast expertise and transactional experience in developing proper structure.
A key aspect of a successful private placement offering is the structure employed in the offering. Often overlooked, this is a major part of a successful placement and proper structure is critical to the success of the offering. Your company may have a compelling opportunity, but if you do not employ the appropriate structure for the investment transaction the company could easily have an unsuccessful capital raise.
At any given time our firm has a substantial number of clients on the market raising private capital from investors. We are intrinsically involved in the execution of our clients’ offerings and are highly knowledgeable regarding the type and form of transaction structure investors find appealing.
Key aspects of transaction structure involve:
- Choosing a debt or equity structure
- Application of preferred equity securities or common equity
- Voting rights
- Liquidation rights
- The application of warrants or options
- Participation rights in excess of a preferred return
- The application of a conversion feature from preferred equity to common equity or from debt to equity
- Identifying the appropriate target ROI for investors to maximize interest in the company and the offering
- Identifying and disclosing potential exit strategies
- Implementing a securitization of the debt or equity securities with assets from the company
There are a substantial number of variables involved in the proper structuring of an investment transaction and private offering of securities. The expertise of our staff in the proper structure and execution of private placement offerings is a significant advantage for our clients.
Private Placement Memorandums
Regulation D Resources provides full services for the preparation and execution of a Regulation D exempt securities offering. Part of the preparation for a Regulation D offering is the development of a Private Placement Memorandum. Regulation D Resources prepares the finest Private Placement Memorandum documentation in the industry creating a SEC compliant disclosure document that is also a high-end investor presentation that maximizes investor confidence in your offering.
The Private Placement Memorandum (“PPM”) serves to disclose critical information to potential investors ensuring they are properly informed regarding the company’s operations, investment risks, SEC disclosures, and offering terms prior to investing. Our PPM’s allow our clients to present an ultra high specification PPM to investors which dramatically increases the quality of engagement and ensures investors are provided a high quality, professional perception of the client company.
A private placement memorandum will also have Exhibits to disclose additional needed information critical to the investment decision such as historical and projected financials, subscription documents, related contracts, company bylaws, and other pertinent supporting data. For offerings executed under certain Regulation D exemptions the SEC has specific regulations that govern what is disclosed to investors.
Regulation D Resources has adopted the SEC’s Form 1A disclosure standard for use in crafting our Regulation D exempt private placement memorandum documents. The Form 1A standard is the disclosure standard and disclosure format the SEC mandates for certain registered type securities offerings and exceeds what is typically required under a Regulation D exempt offering. Drafting our PPM’s to this standard provides several important benefits to our clients:
A properly prepared Form 1A spec private placement memorandum protects the client more effectively than the “letter” or summary type offering documents typically prepared by other Regulation D preparatory firms.
Form 1A provides for a very high specification private placement memorandum document which greatly enhances the professionalism of your disclosure package for investors
Form 1A is the disclosure standard most broker-dealer firms will require in order to have the offering approved for retail to their investor clients.
Most private placement memorandum documents are comprised of basic text content with minimal presentation quality aspects. In fact, most lawyers and other preparatory firms use a “speed doc” type process for creating these documents which involves fill-in-the-blank forms and minimal customization and drafting. Our PPM’s are developed to a standard that far exceeds “typical” and truly enhances the quality of the client’s presentation to investors. Our PPM’s are also referred to as “Tier 1 Grade” meaning they could be utilized effectively with a Tier 1 level investment bank or broker-dealer. Our private placement memorandum documents regularly pass compliance and legal review at FINRA broker-dealer firms as well as applicable State merit compliance review.
Our PPM’s allow our clients to present an ultra high specification prospectus to investors which dramatically increases the quality and effectiveness of the offering and ensures investors have a high quality, professional perception of the client company. Each PPM is carefully custom drafted by our expert staff to provide accurate SEC Form 1A spec disclosure and a professional grade presentation that has customized graphics and content specific to your business and industry.
Securing private investment successfully involves many factors and a critical factor is investor confidence. Potential investors must have confidence that the company’s management team is comprised of sophisticated professionals that will manage the company effectively. One of the key metrics they will use to judge your sophistication level is the quality of your investment presentation and offering documents as those documents are the primary source of information for potential investors. A PPM ensures you are providing the very best PPM materials to your investor prospects.
The sample prospectus, seen above, is for a Multi-family Property Real Estate Fund and contains fictional information about the issuer, business operations, and individual managers. Any similarities with an existing operational entity and/or individuals is entirely coincidental. All of our PPM documents are custom created for the client and relative to their specific planned business operations.
Whether you are raising $250,000 or $25,000,000 – you never get a second chance to make a quality first impression with investors