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Every privately-held company that is seeking to raise equity capital from investors should properly comply with State and Federal guidelines prior to having a securities offering in place.

 

If your transaction will only involve one or two investors - you will still need to provide the proper transaction structure, disclosure documentation and investment agreements necessary for raising capital. Raising capital from investors in the form of equity in your new company, of any amount requires very specific documentation in addition to what is already disclosed in your business plan. It is imperative that a company seeking capital from investors have in place a Private Placement Memorandum and a Subscription Agreement. Raising capital without these documents is nearly impossible - they are a necessity.

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 - an exemption to sell securities in a private transaction without registering the securities and the appropriate structure and documentation for doing so properly. Regulation D Offerings are the practical method companies use to raise capital from individual investors.

 

 


"Foreign" Direct Public Offering

 

 

US Private Placement Offering

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SEC Regulation D Exemptions

 


The following information (below) is a description provided by the Securities Exchange Commission of the 3 types (Rules) of a Reg D offering. Frank Nagy Financial Services can assist in identifying which type of offering is best for raising the necessary capital for your company.

 

In addition to Regulation D, under SEC Regulation S, Companies seeking to raise capital can now use "General Solicitation/Advertising" to locate accredited investors. In addition, companies can also utilize mailing lists and pay finder's fees to non-broker dealers for introducing accredited investors. Companies can also utilize Reg D to offer a private placement offering of securities to U.S. investors as well. By combining both a U.S. Private Placement Offering and a "foreign" Direct Public Offering, the company has a broader chance of raising the required capital they need.

 

Rule 504

 

Rule 504 of Regulation D provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $1,000,000 of their securities in any 12-month period.

 

A company can use this exemption so long as it is not a blank check company and does not have to file reports under the Securities Exchange Act of 1934. Also, the exemption generally does not allow companies to solicit or advertise their securities to the public, and purchasers receive "restricted" securities, meaning that they may not sell the securities without registration or an applicable exemption.

 

Rule 504 does allow companies to sell securities that are not restricted, if one of the following circumstances is met:

 

1) The company registers the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors;

 

2) A company registers and sells the offering in a state that requires registration and disclosure delivery and also sells in a state without those requirements, so long as the company delivers the disclosure documents required by the state where the company registered the offering to all purchasers (including those in the state that has no such requirements); or

 

3) The company sells exclusively according to state law exemptions that permit general solicitation and advertising, so long as the company sells only to "accredited investors."

 

Even if a company makes a private sale where there are no specific disclosure delivery requirements, a company should take care to provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. This means that any information a company provides to investors must be free from false or misleading statements. Similarly, a company should not exclude any information if the omission makes what is provided to investors false or misleading.

 

While companies using the Rule 504 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company's owners and stock promoters, but contains little other information about the company.

 

Rule 505

 

Rule 505 of Regulation D allows some companies offering their securities to have those securities exempted from the registration requirements of the federal securities laws. To qualify for this exemption, a company:

 

1) Can only offer and sell up to $5 million of its securities in any 12-month period;

 

2) May sell to an unlimited number of "accredited investors" and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions;

 

3) Must inform purchasers that they receive "restricted" securities, meaning that the securities cannot be sold for six months or longer without registering them; and

 

4) Cannot use general solicitation or advertising to sell the securities. Rule 505 allows companies to decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that generally are equivalent to those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well. The company must also be available to answer questions by prospective purchasers.

 

Here are some specifics about the financial statement requirements applicable to this type of offering:

 

1) Financial statements need to be certified by an independent public accountant;

 

2) If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company's balance sheet (to be dated within 120 days of the start of the offering) must be audited; and

 

3) Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under the federal income tax laws.

 

While companies using the Rule 505 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company's owners and stock promoters, but contains little other information about the company.

 

Rule 506

 

Rule 506 of Regulation D is considered a "safe harbor" for the private offering exemption of Section 4(2) of the Securities Act. Companies using the Rule 506 exemption can raise an unlimited amount of money. A company can be assured it is within the Section 4(2) exemption by satisfying the following standards:

 

1) The company cannot use general solicitation or advertising to market the securities;

 

2) The company may sell its securities to an unlimited number of "accredited investors" and up to 35 other purchases. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;

 

3) Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well;

 

4) The company must be available to answer questions by prospective purchasers;

 

5) Financial statement requirements are the same as for Rule 505; and

 

6) Purchasers receive "restricted" securities, meaning that the securities cannot be sold for at least a year without registering them.

 

While companies using the Rule 506 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company's owners and stock promoters, but contains little other information about the company.

 

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