Regulation D Private Placements
At some point during the operation of every private business, there comes a time to raise money. Perhaps you’re just starting out and need the initial funds to get your business off the ground. Or perhaps your business has proven successful and you need funds to expand. For many private business owners the natural place to seek these funds would be your bank. However, the requirements for a business loan may be out of reach for the person looking to get a startup with little in assets up and running. Another option is a Regulation D private placement offering. The private placement option allows business owners the opportunity to seek the funding they need from individual investors instead of a bank while remaining a private company. As such it is an ideal way for budding entrepreneurs to secure the funding needed for their startup.
In the United States, any company selling securities is governed by the Securities Act of 1933. As such, the company must either register the offer with the United States Securities and Exchange Commission (SEC), which can be cost prohibitive to smaller companies, or be qualified for exemption under the rules of Regulation D. By offering the securities using a Regulation D private placement, a small business may raise funds by directly approaching private investors without needing to register the securities with the SEC. This is obviously a great incentive for the use of Regulation D private placements.
When setting out to raise funds with a private placement, it is important to have a Private Placement Memorandum (PPM). This document contains all the relevant information for the security offering. This is the document that presents your argument for why your company is a sound investment. It will detail the possible risks and rewards; the operating structure of the company; the offering structure, share structure, and securities purchase disclosure to the SEC; and the use of the proceeds. This one document will contain all the information a prospective investor will need to make an informed decision on whether or not to invest in your private placement offering. This document will also include the subscription agreement. The subscription agreement is the “contract” the investor will sign and return with their funds.
A well-prepared Private Placement Memorandum is essential to a successful round of fund raising. This is the document that will show investors that investing in you and your company is a risk worth taking. Having a Private Placement Memorandum is requirement for the offering process, but it is more than just some annoying piece of paperwork. The Private Placement Memorandum can be a major asset to your fund raising endeavors. A carefully prepared and well thought out memorandum shows that you have given serious thought to your plans and helps to establish you as a knowledgeable business professional. It also allows you to approach many more possible investors, drastically increasing the likelihood of reaching your financial goal. On the other hand, a hastily prepared memorandum will undoubtedly harm your attempt.
So for what kind of company is a Regulation D private placement offering suited? A Regulation D offering is ideal for companies looking to raise $25,000 to $50,000,000 from private investors. Regulation D offerings can cover a large range of financial needs, from small startups to larger established companies. This versatility is one of the many reasons Regulation D offerings are a popular means of raising capital.
The simplicity is another. Preparation for a Regulation D private placement offering can be broken down into three steps. The first is to decide all of the pertinent information of the offering. This is the part of the process where the specifics of the offering are decided, including the share structure of the company, the share price, and how much of the company to sell to outside investors.
During this phase it is important to consider which of the variations of the Regulation D rules to use. These rules set different limits on the amount of capital that can be raised in a given period of time, as well as the number and types of investors who can take part in the offering. Types of investor are split between accredited and non-accredited. These classifications are determined by certain financial data related to the investor.
The second step is to complete all of the requisite paperwork. This includes the Private Placement Memorandum, the Subscription Agreement, and an Investor Suitability Questionnaire. This latter form is a questionnaire that determines whether a potential investor is qualified as an accredited or non-accredited investor.
The last step is to complete and file the Form D SEC Notification Filing with the Securities and Exchange Commission in Washington, as well as any state filings required in the states in which the offering is made. This form notifies the SEC and the State Securities Boards of your use of a Regulation D offering and provides details about the company and the offering.
It is easy to see why Regulation D private placements are a popular way for small businesses to raise much needed capital. They are a well-established way to approach multiple investors in a professional manner and avoid the prohibitive cost of an SEC filing. As always, when dealing with regulated business issues such as this, never hesitate to contact your private attorney. Your private attorney can assure that you have followed all the proper regulations so that your offering goes without a hitch.