The success of any business often hinges on whether or not it can finance its expansion goals in line with its original business plan. Offering securities by way of “private offerings” to investors in return for a capital injection is a popular way for startups and businesses to raise much needed cash.
These private offerings are subject to federal and state restrictions. The Federal Securities Act of 1933 states that all securities sold must be registered by filing a statement with the Securities and Exchange Commission (SEC) unless they meet an applicable exemption. The most commonly used exemption under federal law is found in Regulation D of the Act.
What is Regulation D?
Regulation D contains three separate exemptions, found in Rules 504, 505 and 506.
Rule 504 provides an exemption from the registration requirements when a business offers and sells up to $1 million of their securities in any 12-month period. Investors may be accredited investors or unaccredited. State securities laws still apply.
Rule 505 provides an exemption from the registration requirements when a business offers and sells up to $5 million of their securities in any 12-month period. Only up to 35 investors may be unaccredited investors. All other investors must be accredited. There are strict information disclosure obligations if any investors are unaccredited. State securities laws still apply.
Rule 506 is the most commonly used exemption under Reg D. It provides an exemption for an unlimited amount of capital. Like Rule 505, only up to 35 investors may be unaccredited investors. All other investors must be accredited. One major advantage of Rule 506 is that it preempts state regulation.
Rule 506 Gets a New Exemption
Rule 506, which was already the most popular Reg D exemption just got better. In 2013, it became possible to conduct a Rule 506 offering, which is considered a “private” offering and still generally solicit and advertise the offering. It sounds counter-intuitive, but it’s true. Companies have already taken advantage of the new laws to raise billions of dollars.
What Are The Benefits Of The Exemptions?
Regulation D offerings are beneficial to any small business or entrepreneur as they provide the opportunity to secure funding much more quickly – and much more cost effectively – than with a public offering. With the new Rule 506(c) offerings, businesses can raise money more easily and faster than they ever could before.
Rule 506(c) offerings can be generally solicited but may only be closed with investors that have been verified as accredited investors. For more detailed information on what steps must be taken to properly verify accredited investors, visit https://verifyinvestor.com/how-to-verify-an-investor
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