“Regulation D” (or Reg D) is a United States Federal program created under the Securities Act of 1933, indoctrinated in 1982, that allows companies the ability to raise capital through the sale of equity or debt securities (private or public stock shares). Specifically, this allows small businesses to raise capital from private investors, without going through the red-tape and financial burden of securities registration.
The Reg D basics include 2 general “exemptions” that are relied upon to raise capital. These exemptions equate to rules, which allow different amounts of capital, different types of investors, and different methods for conducting an offering. Before determining which PPM template you need you will need to read these rules and figure out which rule works best for your particular offering.
Rule 504 | Raise up to $5 million
Rule 506 | Raise any amount ($5k – $1B+)
The Reg D programs were designed to provide an exemption to sell securities in a private capital raise without registering the securities (any business transaction involving investors), and also to provide the appropriate documentation for properly accepting and using the capital.
There are 2 basic types of Regulation D Offerings (which can also be combined):
- An “equity” offering is where the company sells partial (or a majority) ownership in the company (via a security, stock or LLC membership units) to raise capital. Equity offerings are preferred by early stage companies because there is no structured repayment schedule or debt payments, the investors receive a return when the company profits and those profits are shared.
- A “debt” offering is where the company raises debt financing by selling a promissory note to investors with a set annual rate of return, and a maturity date for when funds will be paid back to investors. A debt offering is much like a business loan, but instead of a bank providing the financing, a group of investors lends funds to the company.
Preparing a Regulation D Offering involves three steps:
*Reg D Basics