Private Placement Memorandums,

SEC Regulation D

What is Regulation D?

"Regulation D" is a government program created under the Securities Act of 1933, instituted in 1982, that allows companies the ability to raise capital though the sale of equity or debt securities.

 

The programs were designed to provide two main things - the legal exemption to sell securities in a private transaction (something that happens in any transaction involving raising capital from investors) and the appropriate framework and documentation for doing so properly.

 

 

 

 

 

 

 

 

 

Regulation D Offerings are the legal, practical method companies use to raise capital from individual investors. Who should use a Regulation D Offering? Any company or entrepreneur that is seeking to raise equity or debt capital from investors.

 

Structure Types

There are 2 basic types of Regulation D Offerings that can be structured:

1. An "equity" offering is where the company sells partial ownership in the company (via the sale of stock or a membership unit) to raise capital. Equity offerings are preferred by early stage companies because there is no set repayment schedule or debt service payments - the investors profit when the company profits.

2. A "debt" offering is where the company raises debt financing by selling a note instrument to investors with a set annual rate of return and a maturity date that dictates when the funds will be paid back to investors in full. A debt offering functions much like a business loan except instead of a bank providing the financing it is a group of investors lending funds to the company.

 

Preparing a Regulation D Offering is Very Straightforward.

It involves three primary steps:

1. Pre-Offering Structuring: Most entrepreneurs are not experts in raising capital. As a result, transactions may be poorly structured. An improper or non-existent transaction structure will portray a very unprofessional image of you to potential investors. Thus, the very first step in an offering is properly setting the transaction structure and, in equity transactions, company share structure.

Pre-offering structuring typically includes such items as setting share price or note amount, determining how much of the company to sell (in equity situations), which Reg. D program to use, setting the maturity date and annual rate of return for corporate notes (in debt situations), share allocations to principals so they maintain a set amount of control in the company, minimum and maximum offering amounts which set the effective range of the offering, minimum amount of investment per investor, etc.

2. Document Creation: Step two of preparing an offering involves the creation of the related Regulation D offering documents. These documents include:

Private Placement Memorandum: The Private Placement Memorandum, or "PPM", is the document that discloses all pertinent information to the investors about the company, proposed company operations, the transaction structure (whether you are selling equity ownership or raising debt financing from the investors), the terms of the investment (share price, note amounts, maturity dates, etc.), risks the investors may face, etc. Do not confuse the detailed disclosures and transaction structure in a PPM with the general information a business plan provides - they are not the same.

Subscription Agreement: The Subscription Agreement sets forth the terms and conditions of the investment. It is the "sales contract" for purchasing the securities. It is practically impossible to raise capital without this document - investors are not going to invest into your company or opportunity based on a handshake. Would you invest into a company without having the terms and conditions of the investment set in writing and agreed to by both parties?

Promissory Note: In debt offerings you need to have a Promissory Note outlining the terms of the loan arrangement with the investors. The note is the actual "loan document" between the company and the investor.

Form D SEC Filing: The Form D is the notification filing that is sent to the SEC in Washington, DC. It notifies the SEC that you are using the Regulation D program and provides them basic information on the company and the offering. It is not an approval document or registration. It is merely a filing that notifies the SEC that you have a Regulation D Offering in place. Raising capital from investors without filing this document with the federal government could place your company in violation of securities laws.

3. Marketing: The offering is now considered ready for marketing to potential investors. Issuers may implement a diversified marketing campaign that often involves targeting Private Capital Sources, Securities Dealers, Lenders and Institutional providers of capital.

A Regulation D Offering will solve all of the technical issues you will face when dealing with investors (investment structure, investment documentation, etc.). These are issues that should be addressed before you interact with investors. Not addressing them ahead of time presents a very unprofessional image of you to the investor.

The Regulation D Programs can be used by domestic as well as foreign corporations. While the programs can be used by any corporation type - the preferred structure is a stock "C" Corporation or Limited Liability Corporation "LLC".

Want to learn more about Reg. D and our PPM Preparation Services? Please contact us for more information.

© Michael A. Ross, CPA, P.C. All Rights Reserved.