Financing Through Exempt Private Capital Raise Transactions Under Regulation D of the…

Financing Through Exempt Private Capital Raise Transactions Under Regulation D of the Securities and Exchange Commission. Part I.


Securities offerings continue to be a key source of financing for companies and exempt private equity offerings enable avoidance of the time and expense of the registration process. In an exempt private equity offering, a public or private entity (Issuer) directly, or through an agent, solicits buyers for its equity securities from among a narrowly tailored class of potential investors (Investors). The Issuer avoids registration of the offering with the U.S. Securities and Exchange Commission (SEC) so long as an exemption from registration applies. A transactional exemption is available to Issuers that offer and sell securities to sophisticated or accredited investors enabling the Issuer to lawfully avoid registering the offering. The securities issued to subscribing investors pursuant to such an offering are restricted securities that may not be resold by the investor, unless an exemption from registration is available or there is a subsequent registration of those securities under the Securities Act of 1933 (the Securities Act).

Reglation D (Reg D) of the SEC is promulgated under the Securities Act as a safe harbor implementation of an offering under section 4(2) of the Securities Act, both being transactional exemptions for offerings not involving any public offering of securities.  A securities offering compliant with section 4(a)(2) or with Reg D excuses such offering from the default imperative of section 5 of the Securities Act that the offering and sale of securities be registered with the SEC. The Issuer solicits Investors on the basis of a summary of the investment in a disclosure document referred to as a “Private Placement Memorandum” (or “PPM”) or  “Private Offering Memorandum.” Each state also has its own securities laws governing the offer and sale of securities such laws being referred to as “Blue Sky Laws.”  Two other important transactional exemptions promulgated under the Securities Act are Regulations S and A, the discussion of either of which are outside the scope of this article.

Regulation D, Rules Governing the Limited Offer and Sale of Securities Without Registration under the Securities Act of 1933, contains Rules 500 through 508. The most notable safe harbors under Reg D for exempt offerings under section 4(a)(2) of the Securities Act are Rules 506(b) and 506(c). The ensuing parts of this article will delve into the approach to the selection of the Rule to govern a company’s exempt private equity raise transaction. A large element of that decisions turns on the classification of the target pool of potential investor candidates – either as being only accredited investors or a mix of both accredited investors and non-accredited investors. 

An accredited investor include any person (i.e., individual or entity) coming within thirteen defined categories, such as banks, private business development companies, certain exempt organizations, certain professionals, the officers, directors and general partner of the issuer, and individuals possessing certain indicia of financial wherewithal.  Such individuals include those whose net worth, or that when combined with that of her spouse, is greater than $1,000,000 without regard to the value of such persons’ primary residence, and individuals whose income in the two most recent tax years is greater than $200,000 or the joint income with that person’s spouse is greater than $300,000 in each of said years, with the reasonable expectation of attaining the same include level in the current tax year. 

A non-accredited investor is an investor which or who is not an accredited investor.

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