Companies will often seek to raise capital through the issuing of securities. These issuances are governed by the Securities Act, intended by Congress to prevent widespread securities fraud and protect the retail investor from depredations by securities issuers.  Regulation D allows companies to raise capital through a sale of securities without the onerous registration and disclosure processes usually required by such sales under the Securities Act of 1933.

 Before offering securities for sale, companies must comply with onerous registration requirements, which include detailed disclosures about the terms and conditions of the sale and the financial health of the company. This can consist of past performance, information about the company's structure and executive officers, and financial risks to the issuing company. The registration process is overseen and enforced by the Securities Exchange Commission.  

 Registration Requirement Exemptions

 Certain exemptions exist, however, to the general registration requirements. Three of the most important exemption categories are Regulation D, Regulation A, and Regulation S. All of these exemptions allow companies to issue securities without registering their offering with the SEC, thus bypassing the onerous disclosure requirements.

 These exemptions are limited to only certain offerings because the disclosure and registration burdens are alleviated. These exemptions also limit the kinds of purchasers who may participate in these sales to one extent or another. We will deal particularly with Regulation D and compare it to the other exemptions.

 Uses and Purposes of Regulation D 

 Regulation D allows companies to raise capital through a sale of securities without the onerous registration and disclosure processes usually required by such sales under the Securities Act of 1933.

 Such offerings are typically referred to as “private placements," because, under the terms of the exemptions, sales generally are made to accredited insiders or otherwise knowledgeable parties, and general advertising of the sale to the public is, for the most part, prohibited. 

 The sophisticated and connected parties involved in private placements do not require the same level of protection as the average retail purchaser of securities. Thus, the burdens imposed by disclosure and registration requirements are alleviated.

 What are the Two Rules Under Regulation D?

 Regulation D contains two rules that spell out the registration rules' exemptions. Rule 506, containing the Rule 506(b) and (c) exemptions, concern qualitative limits on who may purchase securities offered by those taking advantage of the Rule 506 exemption – buyers must be either accredited investors or, if non-accredited, “sophisticated” buyers.

 Rule 504, on the other hand, places qualitative limits on the value of securities offered, taking advantage of a Regulation D exemption – issuers may sell up to $10 million worth of securities in any 12 months without registering with the SEC.

 Unlike Rule 506, companies taking advantage of this exemption need not be concerned with the identity of buyers – these “securities may be sold to any number and type of investor, and the issuer is not subject to specific disclosure requirements.”

 Form D and “Notice of Sales”

When a company undertakes a private placement of securities, there are certain disclosure and procedural requirements that a company must comply with.  §230.503 of the CFR requires issuers and sellers of securities under the exemptions of Regulation D to file with the Securities and Exchange Commission a “notice of sales.” Such notice will contain the information required by Form D for each offering. Such notice must be filed no later than 15 calendar days after the initial sale of securities in such offering.

 Form D, available through the SEC's website, will contain certain information about the issuer, its place of business, its industry, the securities being offered, compensation to salespersons offering the securities, and the number of non-accredited investors. Issuers will provide:

 ·       Their name and jurisdiction of incorporation; 

·       The type of corporate entity and charter under which the company is organized;

·       The names and contact information of important executive officers;

·       The industry group in which the company does business;

·       The size of the issuer, in terms of either net revenues or net asset values;

·       The exemptions claimed by the issuer, including whether the securities are offered under Rule 504 or Rule 506;

·       The types of securities offered in the private placement;

·       The minimum investment requested;

·       Detailed compensation information for salespersons offering the securities; and

·       The intended use of the proceeds once securities are sold.

 Differences Between Regulation A, Regulation S, and Regulation D Offerings

The SEC's Regulation A also provides certain exemptions from the normal registration requirements for securities offerings. Unlike Regulation D, securities offerings under Regulation A allow solicitation to the general public for investment in the securities offering.

 Tiers under Regulation A

 Under Regulation A, there are two "tiers" of securities offerings that companies can make use of. Tier 1 offerings allow the issuer to issue and sell securities, the proceeds of which cannot exceed $20 million within twelve months.

 Tier 2 offerings, on the other hand, allow companies to issue securities whose aggregate offering price does not exceed $75 million. Unlike Tier 1 offerings, however, Tier 2 requires that any non-accredited investors purchasing such securities utilize no more than 10 percent of their net worth – or annual income, whichever is greater – to purchase such securities.

 In other words, a non-accredited investor seeking to purchase securities in a Tier 2 offering may not spend more than 10% of their net worth or annual income on such securities. The issuer may "rely on a representation" of such purchasers as to their compliance with this provision. However, such reliance will be deemed insufficient if the issuer knew the representations were false.

 Advertised and Sold Offerings under Regulation A

 Because offerings made under Regulation A are permitted to be advertised and sold to the general public, and few limits are placed on the number of securities non-accredited and unsophisticated purchasers may buy, this Regulation requires more strenuous disclosure requirements than Regulation D offerings.

 For example, issuers seeking to sell their securities under a Regulation A offering must file an “offering statement,” also known as Form 1-A. This offering statement is much more exhaustive than a Form D notice of sale.

 Review by the SEC

 Furthermore, the SEC must review this statement to assess whether the offering qualifies under Regulation A offerings. Form D, on the other hand, requires no such assessment by the SEC. By comparison, a Form D notice of sale contains 16 relatively straightforward items on five pages.

 Form 1-A, on the other hand, is 30 pages long, with detailed disclosure requirements for each of its three parts and 17 items. Form 1-A requires issuers to provide:

 ·       Detailed financial statements, including information on balance sheets and comprehensive income information;

·       Detailed information on the type, nature, and amount of securities offered;

·       Jurisdictions in which securities will be offered;

·       A summary and risk factors;

·       Plans of distribution, including information on underwriters;

·       Description of material physical properties of the issuer and its subsidiaries;

·       Detailed discussion of the issuer's financial condition, and so on. 

 Exemptions Under Regulation S

 Finally, Regulation S exempts issuers from the registration requirements if their securities are not offered in the United States. §230.901 specifies that a securities offering under the terms of the securities laws only "shall be deemed" to include offers within the United States and "shall be deemed not to include offers and sales that occur outside the United States."

 The upshot of this provision is that if no selling efforts are made domestically and are targeted at a foreign market for the securities, the issuer need not register its offering. Regulation S contains several important conditions and categories for exemption, which issuers should be familiar with,

 Risk Considerations for Regulation D Offerings 

As discussed above, Regulation D makes it easier for companies to raise capital through the issuance of securities by streamlining the process and minimizing disclosure requirements while restricting who may purchase such securities. Because of this more streamlined process, securities offered under Regulation D may be riskier than other investments.

 Lack of Disclosure Requirements

 For example, because Regulation D has few disclosure requirements, non-accredited investors must be their own best advocates. While Regulation D does not require issuers to provide detailed disclosures to offer a private placement, issuers are still subject to anti-fraud statutes, and §230.502 requires issuers to furnish certain information to non-accredited investors.

 In addition, they must also provide, before sale, the opportunity for purchasers to ask questions regarding the conditions of the offering and the chance to acquire any information from the issuer that can be provided without "unreasonable effort or expense."

 Restricted Securities

 Furthermore, under Regulation D, especially Rule 504 offerings, securities are often restricted – they are fairly illiquid and cannot be resold easily. Indeed, §230.502(d) restricts the resale of securities purchased under a Regulation D offering. Such securities cannot be resold without the normal registration process.

 Conclusion

 In sum, Regulations A and D offer a streamlined process for raising capital. Because of the exemption from the disclosure and registration rules, these offerings have certain limits on how much capital can be raised and to whom such offerings can be made. While companies can raise more capital through Regulation A exemptions than they can through Regulation D offerings,

 Regulation A offerings are comparatively stricter, requiring more onerous disclosure requirements – although not as cumbersome as the registration requirements under normal securities offerings.

 Because such offerings may, within some limits, be offered to non-accredited investors, it is supremely important for purchasers to conduct due diligence on such private placements, including making use of the questioning period required under Regulation D. Furthermore, companies utilizing Regulations A and D should become familiar with the disclosure requirements that exist and should be aware that they are still subject to anti-fraud provisions in what disclosures they do make to purchasers.

 Finally, with some exceptions, such securities offerings are still subject to state-level disclosure laws, and issuers must be aware of their specific state law requirements.

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