Raising Capital Under Regulation D

For small businesses and startups who cannot afford a traditional public offering, here's what to know if you want to raise capital under Regulation D.

How Do Startups Raise Capital?

In some cases, starting a small business can be done with relatively low costs.  This is especially true for those who offer online services.  For most small businesses, however, some amount of startup capital is needed to get operations off the ground and maintain funding for at least the first six to twelve months.

Seeking investors is one option that many business owners explore.  However, once a company decides to take on investors, they are subject to SEC (Securities and Exchanges Commission) rules and regulations.  In other words, you may have to register with the SEC and jump through additional legal hoops in order to secure funding.

For most small businesses and startups, a traditional public offering (IPO) is well beyond their means and positioning.  But, the cost, time, and hassle of an IPO can be avoided with a Regulation D exemption.  Here’s what you need to know if you want to raise capital under Regulation D.

What is Regulation D?

This regulation pertains specifically to private placement exemptions.  A private placement is when a company seeks to raise capital by selling securities (equity ownership or debt) to investors without filing a full registration statement with the SEC and without conducting a full IPO.

A private placement is an exemption to the general rules associated with a public offering, so it’s no surprise that there are a great deal of complex and disparate rules that govern private placements.  A Regulation D offering is only one such exemption, but there are a number of other fantastic exemptions as well that may also be available to startups and small businesses.  In any event, the Regulation D exemption process can save a company a lot of time and money and reduce the hassles usually involved in filing a registration with the SEC.

What is Rule 506(c)?

Rule 506(c) is a section of Regulation D that allows businesses the opportunity to raise unlimited capital through accredited investors, with certain restrictions.  Those operating under Rule 506(c) may not have to register with the SEC, although they will still have to file certain forms (including a Form D) in order to legally proceed.  A suitable Regulation D lawyer can determine if Rule 506(c) applies to your company and help you to file appropriately.

What is a PPM?

Whenever a company conducts a Regulation D offering, in order to protect themselves from legal exposure and enforcement action by the SEC as well as state regulators, it is imperative to prepare a private placement memorandum or PPM for investors.  Essentially, the PPM is a legal document that spells out the terms of the investment for investors.

A PPM also includes information such as a description of the business, financial statements, and a rundown of objectives and potential risks for investors.  It may also set forth a payment schedule or maturity date if debt is being offered.

Ultimately, it is extremely important to provide this legal document to investors when seeking Regulation D capital, and using the services of an experienced corporate securities lawyer is essential to get this document right.

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