An overview of Reg D (Regulation D) and Private Placement Memorandums
In 1982, Reg D was introduced. (Reg D is formally known as Regulation D). Reg D allows companies to avoid filing a registration statement with the SEC when raising investment capital. Investment capital in this case means both equity and/or debt securities. Reg D therefore enables investors to acquire bonds and/or stocks from the company with only a reasonable amount of paperwork. A deal that offers securities to a number of private accredited investors is called a Private Placement Offering (PPO). In order to secure funds, a Private Placement Memorandum (PPM) is required. This is a confidential document that discloses all significant information to investors about the firm, proposed operations, transaction structure (equity ownership or debt financing), terms of the investment, potential risks, management details, etc. In order to develop the Private Placement Memorandum, it is important to understand the details of Regulation D. .
Regulation D consists of six rules: Rules 501, 502, 503: Terms and conditions that apply in Reg D are defined in these three rules.
Rule 504: Pertains to transactions where securities under the amount of $1,000,000 are sold in any consecutive twelve-month period. This rule allows payment of commissions, creates no cap on investor numbers, and according to specific guidelines allows companies to sell securities that are not otherwise restricted.
Rule 505: This applies to transactions where less than $5,000,000 of securities is sold in any consecutive twelve-month period. Sales to accredited investors are not limited, but "non-accredited" investors category is limited to 35 people. General solicitation or general advertising is not permitted.
Rule 506: Rule 506 does not impose a dollar limitation on the offering. It is open to all issuers for offerings sold to not more than thirty-five "non-accredited purchasers" and an unlimited number of accredited investors. General solicitation is banned as is general advertising.
There are 2 Primary Types of Regulation D Offerings:
Equity: This scenario is pretty much what it sounds like. The firm raises capital by selling stocks (or other membership units). This is often a preferred method as with the sale of equity the investors profit when the company does.
Debt: A debt offering is structured in a similar fashion as a business loan, however instead of a financial institution providing the loan, it is a group of investors lending capital to the company. Debt financing typically has a set annual rate of return and a maturity date that clearly outlines when the capital will be repaid in full.
Private Placement Memorandum (PPM)
In order to successfully raise funds from an accredited investor, a company should have a sound business plan and needs to have a well-written Private Placement Memorandum (PPM) that discloses the full facts of the investment and business venture. A PPM is a detailed document. The PPM almost certainly has to be written by a professional specializing in PPMs.
AI - Accredited Investors
Reg D specifically defines Accredited Investors: An individual earning $200k per year or venture funds, some banks and other institutions or a household with income of $300K per year or having a net worth over $1M.
The following points are key to accredited investors:
"Proprietary technology such as patents
An experienced management team
An exit strategy within a reasonable time frame
Potential high growth in terms of revenue, market share, size, etc."
Networking is key to finding investors as the investment community is diverse and spread out. Useful starting points are business media and the Internet. As well, you should review your personal contacts including investment professionals that you know. In addition, industry and local organizations can be helpful. Assuming investment is successful, the firm must comply with federal notice filings. In each state where the private placement offering was made, it must file notice filings.
Orignal From: Incorporation Or Business Planning
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