A detailed discussion on the rules and regulations regarding Regulation D is available in the “PPM Details - a White Paper” – a free download.

For almost all businesses, the fastest, easiest way to raise money in debt or equity is to obtain their financing using a Private Placement Memorandum under a federal exemption for raising funds under SEC Regulation D. This is an exemption to the laws that allows a company to sell their company’s securities, stock, units or debt without registration under the Federal Securities Act of 1933. It is accomplished through the use of a Private Placement Memorandum document.

By using a PPM document, it provides the company, its officers, and its directors with liability protection against shareholder lawsuits as relates to improper disclosure.

You – the company issuing the securities – have complete control over how you structure the financing. For equity financings where you are selling stock in your company, you decide what the price of the stock will be, how much money you want to raise, and how much of the company you want to give away as well as any other terms and conditions. For debt financings, where the investor is loaning your company money, you decide what the interest rates will be and what your plan is for the timing and repayment of the loan.

There Are Six Basic Rules Regulation D consists of six basic rules.

  • The first three are concerned with definitions, conditions, and notification.
  • · Rule 501 covers the definitions of the various terms used in the rules.
  • · Rule 502 sets forth the conditions, limitations, and information requirements for the exemptions in Rules 504, 505, and 506.
  • · Rule 503 contains the SEC notification requirements.
  • · Rule 504 offers companies an exemption to raise up to $1 million.
  • · Rule 505 applies to offerings from $1 million to $5 million.
  • · Rule 506 is for securities offerings exceeding $5 million.
  • The last three rules (504, 505, and 506) deal with the specifics of raising money under Reg D.

A word of caution to the entrepreneur Regardless of the amount of disclosure the issuer is willing to provide, Regulation D does not dismiss the issuer from the federal requirements from the fraud provisions, including the areas of material omissions or misstatements. The penalties for noncompliance are severe, including monetary fines and mandatory jail sentences.

Regulation D Rule 504 offers companies:

  • An exemption to raise up to $1 million.
  • No disclosure criteria.
  • Few general solicitation and resale restrictions.
  • No limit as to the number or type of investors.

Rule 504 is considered by many as the perfect answer for the company just starting out OR one that needs to raise less than $1 million.

Rule 504 works for almost any type of organization – including corporations, LLCs, partnerships, trusts, or other entities.

You Cannot raise more than $1 Million. The total offering amount under Rule 504 can be up to $1 million in a 12-month period, less any money you have put into the company within 12 months before the start of a 504 offering. So, if a company has raised $100,000 in private money in the previous 12 months, it can still raise up to $900,000 without being accused of breaking the rules.

Rule 504 is the simplest Reg D document to fill out. It does require the submission of Form D to the SEC (filed electronically ay no cost). You should check the blue-sky laws in  your state for its filing information.

Number of Investors. With its limited disclosure requirements, Rule 504 also allows an issuer to sell securities to an unlimited number of investors. Theoretically, a company could raise $1 million by selling stock at a dollar per share to 1 million different investors. Obviously, it would be tough to keep track of 1 million investors, but there’s no rule that stops an issuer from selling $500 blocks of stock to 2000 investors. Rule 504 is the only rule under Reg D that permits an unlimited number of investors.

The Rule 504 exemption provides for sales of securities of either debt or equity. This also means you can sell combinations of both debt and equity by using a convertible debenture. By way of explanation, convertible debentures are a debt issue (debenture) that is convertible to a preferred or, most commonly, common stock at some future date. Rule 504 does not require audited financial statements.

Read the official SEC information on Rule 504 http://www.sec.gov/answers/rule504.htm

Rule 505: Offerings of $5 million or less

Rule 505 is used for offerings of $5 million or less in any 12-month period and is restricted to 35 purchasers other than “accredited investors.” Briefly, an accredited investor is one who has a net worth of $1 million or $200,000 in income.

There are a number of required disclosures if the sale of securities includes investors who are not accredited investors: advertising and a general solicitation are prohibited, one must inform purchasers that they receive “restricted” securities (meaning that the securities cannot be sold for a time period without registering them). You must not violate the antifraud prohibitions of the Federal Security Laws and your financial statements need to be certified by an independent public accountant or at a minimum, the balance sheet needs to be audited.

Companies must give non-accredited investors disclosure documents that are 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. The company must also be available to answer questions by prospective purchasers. The issuer must comply with the securities laws of each state in which a person who buys the security is a resident, and must usually file a notice with that state’s commissioner of corporations or similar official, as well as filing Form D.

Read the official SEC information on Rule 505 http://www.sec.gov/answers/rule505.htm

Rule 506: Offerings with no dollar limit

Under SEC Rule 506; an issuer may issue an unlimited amount of securities, with no dollar limit, to no more than 35 non-accredited investors plus any number of “accredited investors.” There are required disclosures, if a sale of securities includes purchasers who are not accredited investors. All non-accredited investors must be sophisticated and must sign an Investor Questionnaire acknowledging same. Advertising and a general solicitation are prohibited. The securities are “restricted securities” which may not be readily resold.

There is a major advantage to 506, in that it supersedes and preempts the securities laws of all the states. This saves a lot of time, effort, and expense if the issuer is obtaining money from investors in multiple states. Form D must be filed with the SEC within 15 days after the first sale of securities and also with the secretary of state of each state in which a purchaser is a resident.

Read the official SEC information on Rule 506 http://www.sec.gov/answers/rule506.htm

A detailed discussion on the rules and regulations regarding Regulation D is available in the “Free Financing Paper” download.

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