1. WHAT TYPE OF COMPANIES CAN RAISE MONEY WITH REGULATION D?
2. IS THERE ANY TYPE OF COMPANY THAT CAN’T USE A REGULATION D OFFERING?
3. WHAT IS A REG D, RULE 504 OFFERING?
4. WHAT IS A REG D, RULE 505 OFFERING?
5. WHAT IS A REG D, RULE 506 OFFERING?
6. WHAT IS A PRIVATE PLACEMENT MEMORANDUM?
7. WHAT IS A “LETTER OFFERING”?
8. WHAT ARE BLUE SKY LAWS?
9. CAN A CORPORATION RAISE MONEY SELLING COMMON AND/OR PREFERRED STOCK?
10. CAN OUR COMPANY RAISE MONEY BY BORROWING FROM INVESTORS?
11. DEBT OR EQUITY FINANCING?
12. WHAT IS AN ALL-OR-NOTHING OFFERING?
13. WHAT IS A MINIMUM-MAXIMUM OFFERING?
14. WHAT IS AN ACCREDITED INVESTOR?
1. WHAT TYPE OF COMPANIES CAN RAISE MONEY WITH A REGULATION D OFFERING?
The following types of entities can raise money by utilizing a Regulation D Offering:
(a) Corporations
(b) Limited Liability Companies
(c) Limited Partnerships
(d) General Partnerships
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2. IS THERE ANY TYPE OF COMPANY THAT CAN’T USE A REGULATION D OFFERING?
Yes, sole proprietorships (an unorganized company owned by one natural person who directly owns the business and is directly responsible for its debts).
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3. WHAT IS A REG. D, 504 OFFERING?
This exemption allows a company to raise up to $1,000,000 in any 12-month period. In addition to meeting the federal securities requirements, companies must comply with the state securities in each state where they offer and sell securities. Companies reporting under the 1934 Act, the Investment Company Act or blank check or blind pool companies (companies which have no specific business plan or purpose) may not utilize Rule 504.
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4. WHAT IS A REG. D, 505 OFFERING?
This exemption allows a company to raise up to $5,000,000 in any 12-month period to any number of accredited investors and to no more than 35 non-accredited investors if they have been furnished specific information. In addition to meeting the federal securities requirements, companies must comply with the state securities in each state where they offer and sell securities. Companies reporting under the Investment Company Act may not utilize Rule 505.
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5. WHAT IS A REG. D, 506 OFFERING?
This exemption allows a company to raise unlimited amount of money to any number of accredited investors and up to 35 other sophisticated purchasers. However, if a company sells to any sophisticated purchaser it must furnish specific information to all investors. Rule 506 preempts concurrent state regulations and state qualification requirements (except states can require a notice filing and fee).
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6. WHAT IS A PRIVATE PLACEMENT MEMORANDUM?
Under Reg. D companies have to disclose certain information if they are offering and selling securities to unaccredited investors pursuant to Rules 504, 505 and 506 at the federal level. At the state level, additional information is required for sale of securities pursuant to Rules 504 and 505 (Blue Sky regulations). This specific information on a company and the securities offered is included in a “Private Placement Memorandum” (“PPM”) document. The PPM also includes the necessary subscription documents to purchase a company’s securities.
States are preempted from concurrent state regulation under Rule 506 (no Blue Sky regulations) and therefore a company needs to provide a PPM (rather than a Letter Offering) only if they are offering and selling securities to unaccredited investors.
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7. WHAT IS A “LETTER OFFERING”?
If a company offers and sells securities only to accredited investors, pursuant to Rule 506, no specific disclosure information is required (States no longer regulate Rule 506 offerings so there are no state Blue Sky regulations). That is because it is thought that Accredited Investors have the knowledge and expertise to request enough information from a company to make an informed investment decision. However, the antifraud regulations are still relevant, that is any representation, verbal or written must not contain a material omission or misstatement.
In order to protect your company, its officers, directors and agents from potential liability, it is important to provide potential investors with adequate disclosure of the investment risks, securities advisements and proper documentation. This information and the necessary subscription documents to purchase a company’s securities is provided in a simplified version of a private placement memorandum called a “Letter Offering.”
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8. WHAT ARE BLUE SKY LAWS?
While the SEC directly, and through its oversight of the NASD and the various Exchanges, is the main enforcer of the nation’s securities laws, each individual state has its own securities laws and rules. These state rules are known as “Blue Sky Laws”. A company still is subject to state securities laws when utilizing a Reg. D, Rule 504 or Rule 505 offering. Federal securities law preempts state securities regulation under Rule 506. Under Rule 506, states can only require a notice filing and fee.
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9. CAN A CORPORATION RAISE MONEY BY SELLING COMMON AND/OR PREFERRED STOCK?
Yes, a corporation can raise capital by selling either common stock or preferred stock.
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10. CAN OUR COMPANY RAISE MONEY BY BORROWING FROM INVESTORS?
Yes. You can raise money through Secured or Unsecured Debt instruments. However, generally debt raised through non-commercial banks is considered securities, and as such the company will have to comply with federal and state securities laws, unless it utilizes a Regulation D exemption.
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11. DEBT OR EQUITY FINANCING?
To raise capital a company can either sell interest in the company (i.e., stock, limited partnership interest, membership interest in a limited liability company) or obtain loans. If a company sells interest in the company, this is “equity security.” This is permanent equity and does not have to be paid back by the company. If a company obtains loans, this typically is defined as “debt security.” The holder of the debt security instrument is a creditor and the company has to pay the loan back to the creditor, normally with interest.
The choice of whether a company obtains debt or equity financing depends upon many factors, including the investors’ choice of investment, tax considerations and how much risk investors are willing to take.
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12. WHAT IS AN ALL-OR-NOTHING OFFERING?
Most companies decide on how much money they want to raise and the amount of securities they want to sell for this amount. If a company decides that they need, for example, $5,000,000.00 and cannot succeed without this amount, they will proceed with an “all-or-nothing” offering. Under this type of offering, the Company cannot break escrow until the entire amount of money is raised (for instance in our example, that amount would be $5,000,000).
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13. WHAT IS A MINIMUM – MAXIMUM OFFERING? (CALLED A MINI-MAXI OFFERING)
Companies may offer to sell investors a minimum amount of securities and a maximum amount of securities in an offering. That way a company may break escrow when the minimum amount of the offering is raised. On an all-or-nothing offering, the company must raise the entire amount of the offering before it can break escrow.
Example: XYZ Company is offering a Minimum Offering of 100,000 shares of common stock for $1,000,000 and a Maximum Offering of 1,000,000 shares of common stock for $10,000,000.
CAUTION: You cannot set the Minimum Offering at an amount less than what is required to meet the day-to-day operations of the company (this would expose the company and/or officers and directors to potential liability from the investors).
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14. WHAT IS AN ACCREDITED INVESTOR?
The definition of an accredited investor can be found in the free overview of Regulation D we send to interested companies. The short definition, for a natural person, is an investor that has a net worth of $1,000,000 or more OR income in the last two years and expected in the current year of $200,000 per individual or $300,000 per couple. Currently there is a pending rule which, if enacted, would preclude an investor’s primary residence from being included in their net worth.
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