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
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).
3. 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.
4. 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.
5. 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.
5. 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".
6. WHAT IS A 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 amount of
money is raised (for instance in our example, that amount would
be $5,000,000).
7. 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).
8. WHAT IS A PRIVATE PLACEMENT MEMORANDUM?
Under Regulation 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 no longer regulate Rule 506 offerings (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.
9. WHAT IS A “LETTER OFFERING”
If a company offers and sells securities only to accredited
investors pursuant to Rule 506 of Regulation D, 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.”
10. 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.
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