regulation d programs

“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 needed “exemption” to sell unregistered securities in a private transaction (something that happens in any transaction involving investors) and the appropriate framework and documentation for doing so properly.

There are several programs that are available under the Regulation D Exemption. Most of our clients typically choose the JOBS Act 506(c) program as it allows general advertising and solicitation of the offering and also benefits from some compliance efficiencies with State “Blue Sky” filings.

The Necessity of a Regulation D Offering

Why do so many companies fail at raising private capital from investors? One primary reason for failure is significant: the company did not provide investors with the fundamental capability to execute the investment transaction.

Many companies do not execute a proper private placement securities offering in conjunction with their capital raise – instead relying on a business plan or executive summary to serve as the basis for investment. This is not only unprofessional, but it doesn’t provide the basis for accommodating investment from individual investors properly, effectively, or in compliance with State and Federal rules.

Any company seeking capital from investors has the responsibility to ensure it provides investors with the fundamentals necessary for them to execute an investment into the subject company. Most companies seeking capital from investors fail because they do not provide investors the means to execute an investment into the subject company.

A substantial number of companies severely restrict their capital raising activities by simply using a business plan to solicit investors. While a business plan may disclose certain information about the company’s current or planned business activities it in no way provides the capability to accommodate actual capital investment. Further, any capital raised would most likely be in violation of certain State or Federal rules regarding the investment transaction.

It is also nearly impossible to articulate concise transaction structure to investors outside of a formal securities offering thus hampering an investors capability to properly evaluate a transaction.

Regulation D Program Information

Raising capital from investors properly and effectively requires the development of a securities offering executed in compliance with State and Federal rules. Most small and medium size companies choose the SEC’s Regulation D exemption program to execute such offerings. With the advent of the JOBS Act 506(c) Program – companies can now execute a “public offering” of their investment opportunity and securities offering while still retaining the low execution cost and straightforward compliance benefits of a traditional Regulation D offering. What will a Regulation D offering provide your company? Two main advantages:

(a) The ability to solicit investors and sell them equity or debt securities in compliance with applicable regulations and;

(b) The fundamentals necessary to provide concise investment structure, proper and mandated SEC disclosure, and the capability to execute the subscription of investment funds into your company effectively

Who should use a Regulation D Offering

Any company or entrepreneur that is seeking to raise equity or debt capital from investors properly and legally. Even if you plan on only having one or two investors in your transaction you need to provide the transaction framework, related disclosure documentation and investment agreements necessary for raising capital. A Regulation D Offering provides the proper transaction structure and documentation for raising debt or equity capital from investors. Trying to raise private capital of any amount without these fundamentals in place is almost impossible.

Most companies use the programs to raise from $25,000 to $50,000,000 in capital. Regulation D Offerings have been used for a wide variety of transaction and industry types: corporate seed capital, corporate expansion capital, film production capital, real estate equity funding (acquisitions, development projects, golf courses, rehab), capitalization for early to pre-IPO stage Internet and technology companies, expansion funding for retail companies, and product development and distribution funding.

Use the menus at the top of this page to find specific information on the available Regulation D Programs, the advantages of a Regulation D Offering, and details on the offering preparation process.

Regulation D 506c “General Advertising” Program

Ready to engage in general advertising of your private placement offering to investors?

The JOBS Act, passed in April 2012, mandated the creation of a new exemption under the Regulation D 506 program that would allow for general advertising of an offering to accredited investors. This new exemption is termed “506c” and is widely known as the “general advertising” 506 program.

The 506c exemption was activated on September 23, 2013 and allows an issuer to engage in general advertising and solicitation of accredited investors for the securities offering. The Regulation D 506c program will retain many of the characteristics of the current 506b program with some notable changes:

There are some other small adjustments to execution aspects of the offering, but the above listed changes constitute the primary modifications inherent in the 506c program. It is important to note that the current 506b program will still be available for issuers that do not need the capability to engage in general solicitation.

The 506c program is a significant change in the solicitation rules and essentially allows a client to execute a public offering of securities while retaining the benefits of a Regulation D exempt private placement (lower preparation costs, less compliance interaction with the SEC, etc.)

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Offering Types — Debt or Equity

Structure for an offering is fully dependent on the company’s business and planned operations - thus the following is just a general overview of basic investment structure options for an offering. There are two basic types of Regulation D Offerings that can be structured; an “equity” offering where the company is selling ownership in the company (via the sale of stock or an LLC membership unit for example) to raise capital – or a “debt” offering where the company raises debt financing by selling a note or bond 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.

An equity offering is where the subject company sells an ownership stake in the company or project to investors. Equity is usually preferred by early stage companies that need flexibility regarding capitalization. We also execute about 80% of our real estate offerings as equity based investments.

In an equity situation investors profit as the company profits since they are partial owners. In some cases, for example an LLC raising capital for real estate acquisitions, there may be a Preferred Return distribution made first to investors prior to sharing proportionally in additional operating income with management and founders. Most operating companies sell 5%-30% of their company for a first round funding – obviously there are exceptions but this tends to be the average range. A real estate project or real estate fund, or oil and gas company typically deploy a different structure regarding investor share of operating income and providing participation in the accretive value of the asset(s).

Most of our clients are using either a “C” Corporation (where you would sell stock to investors) or a Limited Liability Corporation LLC (where you sell a membership unit to investors). Real estate and energy transactions tend to use a Limited Liability Company or Limited Partnership as the issuer entity type. Investors typically profit in two ways from an equity deal; via their proportionate “per share” percentage of company profit (called a dividend or profit distribution depending on entity type) and via the final sale or company redemption of the security through an exit strategy (example: the company buying the securities back from the investors, the company and its issued securities being bought out by another company, going public and selling on the open market, or a real estate asset being sold, etc.). There are significant differences between how an offering for an operating company (a software company for example) would be structured versus a real estate fund, real estate project, or energy company offering would be structured. There are also permutations from the base equity structure including convertible preferred shares, redeemable preferred shares, and for an LLC the utilization of various classes of Membership Units to provide specific investment terms and rights to investors and management control and management participation in net income to the manager(s). Assisting the client in structure is part of our core services and RDR clients benefit from our vast expertise and transactional experience in developing proper structure.

A debt offering functions much like a private business loan where the company sells a promissory note to investors. The note sets forth the terms and conditions of the loan arrangement between the company and the investor. Thus, a note would provide a certain interest rate typically paid annually to investors with a maturity date that dictates when the principal is paid back in full to investors. The downside to a debt offering is; (a) you have a balance sheet capitalized with debt which may limit options for leveraging external funding and; (b) you have default risk should you fail to make an interest payment or fail to repay funds at maturity. Notes can be convertible into equity within the company which provides investors the security of a Note but the capability to participate in equity ownership at a later date.

Developing proper structure is company and project specific - thus the prior overview is providing only a general understanding of the various forms of capitalization. For more specific guidance on potential structures for your company or project - please call us today to discuss (303) 984-4883.

Transaction Structuring

A key aspect of a successful private placement offering is the structure employed in the offering. Often overlooked, this is a major part of a successful placement and proper structure is critical to the success of the offering. Your company may have a compelling opportunity, but if you do not employ the appropriate structure for the investment transaction the company could easily have an unsuccessful capital raise.

At any given time our firm has a substantial number of clients on the market raising private capital from investors. We are intrinsically involved in the execution of our clients’ offerings and are highly knowledgeable regarding the type and form of transaction structure investors find appealing.

Key aspects of transaction structure involve:

  • Choosing a debt or equity structure
  • Application of preferred equity securities or common equity
  • Voting rights
  • Liquidation rights
  • The application of warrants or options
  • Participation rights in excess of a preferred return
  • The application of a conversion feature from preferred equity to common equity or from debt to equity
  • Identifying the appropriate target ROI for investors to maximize interest in the company and the offering
  • Identifying and disclosing potential exit strategies
  • Implementing a securitization of the debt or equity securities with assets from the company

There are a substantial number of variables involved in the proper structuring of an investment transaction and private offering of securities. The expertise of our staff in the proper structure and execution of private placement offerings is a significant advantage for our clients.