Regulation D Offerings

Under the federal securities laws, any offer or sale of a security must either be registered with the SEC or meet an exemption. Regulation D under the Securities Act provides a number of exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the offering with the SEC; however, most states require that companies notify the appropriate regulator regarding their offering, for example, if a company wishes to sell securities in Texas, the company would file both a Form D with the SEC, and the required forms with the State of Texas, as well. The SEC does not charge a fee to file a Form D, but most states charge a nominal fee, typically from $0 to $500. Rules 504 and 506 are the most common exemption rules used. Rule 504 allows companies to raise up to $5,000,000 within a 12 month period, while Rule 506 allows companies to raise an unlimited amount of money. The SEC notes that 99% of companies who filed their Form D expressed that they relied on Rule 506, regardless of the amount of money they were raising. The SEC also noted that only 13% of companies reported using a registered broker-dealer to sell their securities, meaning, the securities were sold by a designated member of the company, e.g., CFO, or CEO.

Important note: while most states allow companies to file ‘after’ the first sale, some states require a filing ‘before’ offering a sale to investors.

Companies that comply with the requirements of Regulation D do not have to register their offering of securities with the SEC, but they must file what is known as a “Form D” with the SEC, after they sell their first securities to investors, meaning, within 15 days after the ‘first sale’ is executed. Form D is a brief notice that includes the names and addresses of the company’s promoters, executive officers and directors, and some details about the offering, but contains little other information about the company. You can access the SEC’s EDGAR database to determine whether the company has filed a Form D.

Even if a company takes advantage of an exemption, the company should make sure they provide sufficient information to investors to avoid infractions of the antifraud provisions of the securities laws. This means that any information a company provides to investors must be free from false or misleading statements. Similarly, a company should not exclude any information if the omission would make what is provided to investors false or misleading. Generally, if a company prepares a detailed Private Placement Memorandum, and includes all material information, it has complied with Regulation D, and the anti-fraud provisions.

You should always check with your state securities regulator to see if they have more information about the company and the people behind it. Be sure to ask whether your state regulator has received notice of the offering or, in the case of a Rule 504 offering, cleared the offering for sale in your state. You can get the address and telephone number for your state securities regulator by calling the North American Securities Administrators Association at (202) 737-0900 or by visiting its website.

Recap: Under the federal securities laws, any offer or sale of a security must either be registered with the SEC or meet an exemption. Regulation D Rules 504 and 506 are the two rules most commonly used. Companies must file a Form D with the SEC via their EDGAR database, and with the states where they sold securities to investors!