Reg D Private Placements

Although interest rates are low and it would seem that banks have money to loan, many entrepreneurs and business owners are finding that is it very difficult to get the start up or working capital needed to get their new business idea off the ground. Private Placements are a great way to bridge the gap between unrealistic requirements of conventional financing and the needs of budding entrepreneurs. Based primarily on exemptions allowed for what are known as Reg D offerings, those who need to raise funds can bypass the expense and complexity of the registered securities markets and go directly to private investors they know, or are introduced to by friends and family. Private Placements are growing in popularity as faith in the stock market dwindles and investors are looking for alternate places to put their money.

Private Placements must have an offering document called a Private Placement Memorandum, or PPM, that discloses all the relevant information necessary to make an informed business decision about the investment. The Private Placement Memorandum describes the anticipated risks and rewards and the key players in the management structure as well as their background, experience and qualifications for the planned business. It includes a business plan, a description of competitors and how to compete with them, and a pro-forma to project income, expense and cash flow over the first 2-5 years.

In addition to the Private Placement Memorandum, a subscription agreement is prepared as the signing document for investors who wish to invest in the Private Placement. Federal and State laws require the filing of a Form D informational document in most cases. Requirements under State laws vary and must be examined on a state by state basis, depending on where potential investor reside.

By definition, a Private Placement is not offered to the public or through mass media or electronic distribution. Although Broker Dealers may be used and paid a commission, most Private Placements are offered and promoted only by the Executives or Key employees of the entity raising the funds.

Video - Reg D Private Placement

Regulation D Offering FAQ

General Program Questions

Is a Regulation D Offering right for our company?

If your company is seeking equity capital or private debt financing from $25,000 to $50,000,000 from individual investors – then you will definitely benefit from the structure of a Regulation D Offering. From simple deals like seed capital for opening a coffee shop to multi-million dollar raises for high growth companies – these programs will provide you the practical method of raising capital from investors in compliance with Federal and State rules. It is important to understand that the SEC and State regulators do have rules that apply to private companies raising capital from individual investors. If you sell securities improperly to investors – or don’t make the proper filings – you could face a rescission issue with investors.

Do I really need to do an offering? I just need a few wealthy investors to invest into my opportunity.

Most private companies are capitalized by pooling together investment from a multitude of private investors. The real key to being successful at raising capital from investors is approaching them in a sophisticated manner and providing for them the method of investing into the transaction. A business plan, while important, is not adequate for accomplishing this task. Many companies attempt to locate one or two super-wealthy investors for funding. In theory this sounds attractive, however statistically you will have a much better chance at raising capital by accommodating investment from small to mid level investors (individuals investing between $10,000 and $250,000). There are exponentially more small to mid level investors in the marketplace than super-wealthy investors. Super-wealthy angel investors are difficult to locate and even if you do find one you still need to approach them with sophistication. A Reg D offering will ensure that you approach them with a concise, sophisticated method for accommodating their investment. Even if you only have three investors it is still necessary from a practical and regulatory compliance standpoint to use the Regulation D program. Three investors deserve the same level of disclosure, the same offering documentation, and the same level of professionalism as a thirty investor raise.

What is the success rate of the programs?

Because the Regulation D programs are government programs they are open for use by nearly any private company that has the practical need to use them. Thus – you have companies with good opportunities using the programs and companies with not so good opportunities. A Regulation D offering is not going to change a bad opportunity into a good one – but it will drastically enhance the capability of good opportunities in effectively raising capital. In the end – whether or not you raise capital is still going to be based on your core opportunity. If you have a solid investment opportunity your chances of raising capital with a Reg D offering are good.

Will my company be a public company at the end of this process?

Absolutely not – you will still be a private company.

Doesn’t my company have to go through an expensive registration process with the Securities and Exchange Commission before I can sell our company’s stock?

Not with a Regulation D Offering. These offerings were designed to be utilized by companies that needed to raise capital in amounts much smaller than a traditional IPO (typical companies raise between $25,000 to $50,000,000 under Regulation D). The SEC only requires that an 8 page compliance document (Form D) be filed and it is an “information only” filing – not a filing that is subject to approvals or reviews.

Do I have to personally guarantee the invested capital?


I want to raise equity capital – how much of my company do I need to sell to investors? What type of return do investors look for?

This depends on several factors – however most companies sell between 10-25% of their stock for a first round funding – less if it is a second or third round situation. We will work you through a “projected income model” of determining how much of the company to sell in an equity offering. Returns vary depending on risk. Most companies re-invest company income during the first few years after an offering to assist in the overall growth of the company.

What Is a “Private Placement Memorandum” and why is it important to raising capital?

A private placement memorandum (PPM) is the document that discloses everything the investor needs to know to make an informed investment decision. This includes: the offering structure, the share structure of the company, SEC disclosures about the securities being purchased, company information, information on company operations, risks involved with the investment, management information, use of proceeds, information on certain transactions that could affect the investor, and investor suitability data. The PPM also includes the subscription agreement which is the actual “sales contract” for purchasing the securities. This is the document that the investor will sign and send in with their investment funds.

The PPM is very important because it provides the investor with all of the prescribed data they will need to make an investment decision and includes the actual documentation to effect the investment transaction. PPM’s are designed as a stand-alone document – meaning that there need not be other information presented to the investor for them to make an accurate investment decision. Many companies will attach their business plans to the PPM as supporting documentation. This is an acceptable practice so long as the information in the business plan properly corresponds with the information in the PPM and that the investor is made aware that the business plan alone does not constitute an offer to sell securities – only the PPM can make that offer.

Qualifying / Company Structure Questions

My company is a start-up with very little in assets – are there financial requirements or minimum net worth requirements to use these programs?

No, not for the 504 and 506 programs. A substantial number of companies that successfully use the Regulation D programs are recently formed start-up companies or seed capital situations.

Can we use the programs to raise capital for a real estate transaction?

Yes. Many real estate professionals and developers use the programs to raise equity capital and then utilize the enhanced balance sheet of the company post-offering to qualify for real estate loans. That is one of the critical advantages of raising equity – the investment is shown as an asset of the company (cash) rather than a liability as in debt arrangements. The programs are excellent for raising needed equity for re-hab projects, commercial real estate purchases, and real estate development.

Our company tried to get a business loan at a local bank but they turned us down – does this hamper our ability to successfully use these programs?

No, individuals who invest in Reg D offerings do so because they feel the long term possibilities of the company are good and/or a profitable exit strategy will develop – ie: the company will be acquired by a competitor at a substantial increase in stock value; the company will complete an IPO, or the company will be successful and produce a profitable return for the investor each year. They are much less concerned about the traditional bank criteria for lending. Banks are also notorious for not lending to early stage companies with little operating history – the Regulation D programs are ideal for these situations.

I don’t have a good personal credit history – is this a factor in using these programs?

No, personal credit history of the principals is not a factor and is not disclosed to investors.

What is the best corporate type for an offering? Can it be an “S” Corporation, Limited Liability Company “LLC”, or “C” corporation? Which is best?

This depends on the type of transaction. S Corporations do not make good choices for equity offerings over $2mm in size simply because S Corporations are limited to a maximum of 75 shareholders.

Limited Liability Company “LLC” formats are popular with companies that have one-off type deals (film deals, real estate development, etc.) where there is a definitive end of the transaction, and with companies that are going to remain private and only need one or two rounds of funding. In an LLC the company sells a membership unit in lieu of stock – it is basically an ownership stake in the company the same as stock ownership is but with some “pass through” tax advantages at the corporate level.

C Corporations are the most used entity type because the C corporation structure provides for more flexibility in future rounds of funding and allows for the company to go public without the massive entity restructuring that would be needed in an LLC.

Regulation D Offering Process Questions

How complicated is this process?

While some of the disclosure requirements may seem a little overwhelming the process for preparing a Regulation D Offering is actually very straightforward:

Preparing an offering consists of 3 key parts:

  1. Pre-offering structuring and decision items: this is an important part of the offering process where key decisions are made about the offering structure, share structure of the company, share price, how much of the company to sell, which program to use, and key numbers and figures are set.
  2. Offering Document Preparation: there are 3 main documents that comprise the offering documentation;
    • The Private Placement Memorandum – this is the disclosure document that is presented to investors and underwriters at brokerages. This document details all pertinent information about the offering, the company, management, use of proceeds, SEC legends and disclosures regarding the offering, state disclosures, etc.
    • The Subscription Agreement – this is the actual sales contract for the purchase of the stock or membership units. When an investor invests capital you will receive a signed subscription agreement and the investment check.
    • The Investor Suitability Questionnaire – this is a basic questionnaire that queries the investor about certain financial data to qualify them as an accredited or non-accredited investor
  3. Preparation of the Form D SEC Notification Filing: this 8 page SEC filing is sent in to notify the SEC regarding your company’s use of the Regulation D program and provides details about the company and the offering.

Regulation D Offering Marketing Questions

What is “Blue Sky” and how does it work?

Blue Sky filings are merely the State notification filings that are sometimes required (depending on the State of residency of the investor). They are typically straightforward in nature and typically mimic the basic data found in the Federal Form D filing. Most offering only need to be filed in 5-10 States to be sold out. About 35% of States have a small filing fee they attach to the Blue Sky filing – this usually is $50.00 – $200.00.

How do you market a Regulation D Offering?

Regulation D Offerings are not necessarily marketed differently than any other type of investment opportunity. Companies that have Reg D’s in place are much better equipped to interact with investors and accommodate their capital investment.

There are some key marketing advantages to a Reg D offering:

  • Internet Resources: the dawn of the Internet has created some excellent venues by which entrepreneurs can market their opportunities to investors. There are numerous “bulletin boards” that cater to marketing deals to private investors. The companies that have the most success with Internet based marketing resources are the companies that have Reg D offerings in place. Most of the Internet resources specialize in attracting investors with between $10,000 – $50,000 to invest. Thus – it becomes critical for the company to approach these investors in a sophisticated manner and to be able to practically and legally accommodate their fractional investment.
  • Brokerage Resources: yes – brokerage firms can sell Regulation D Offerings. For customers that have higher growth deals the brokerages firms we provide access to are an excellent resource. The offering is sold through the brokerages stockbrokers to investors just like an IPO is sold by a lead underwriter (like Lehman Brothers). The brokerages in our service are all regional size and smaller and have the capability to sell offerings up to about $15mm in size.
  • Sphere of Influence Resources: most entrepreneurs and growth companies have a wealth of potential investors all around them. The problem is that when these companies just use a business plan to seek capital they get into a “one big investor” mentality that blinds them to the potential resources in their midst. Since a business plan cannot provide the practical capability to raise capital from numerous investors these companies typically miss out on excellent resources for capitalization. With a Reg D offering everyone becomes a potential investor: customers, accountants, lawyers, employees, trade groups, local stockbrokers, members of the chamber of commerce, etc.

The main key to remember about a Reg D offering is that it is the proper practical method you would use to solicit and accommodate investment from individual investors. Where you locate investors is actually secondary to being able to properly accommodate their investment in the first place.