When you purchase a car, you get an opportunity to read safety ratings and reviews. Also, you can test drive the vehicle to make a sound decision about your purchase. Similarly, to offer investors purchasing stock and other securities, such as bonds, with a similar opportunity to make a prudent investment decision, federal securities laws in the US were enacted that mandate companies to disclose crucial financial as well as other information through the registration of securities.  

This is why any offer of securities, such as shares, has to either be registered with the SEC (Securities and Exchange Commission) or exempt from such registration. 

When most people think of a security, they think of a stock or corporate bond that often trades on an exchange. While this is correct, note that many other investments, such as investment funds, are also securities, including those that are available in the private placement market, such as limited partnerships, pooled mortgages and syndicated real estate.

You know that raising finance is important to your organization’s long-term success and growth. This is especially true when your company enters the later stages of expansion and growth. As a result, you may contemplate issuing securities, such as bonds, under a private placement in order to secure more funding for your business. 

What is a Private Placement?

We can define a private placement as an offering of either equity, like preferred stock, or debt securities, such as bonds, to private investors. And it is worth noting that a company usually offers securities to a wide variety of investors in an IPO. On the other hand, in a private placement, the company will issue securities, such as stock, to just a few interested parties. This is the main difference between the two offerings.  

So, you might be thinking, why go for private placements? Note that private placements are highly advantageous because your company can easily sell shares or bonds to a relatively limited number of investors or trusted parties, and your company doesn’t have to go through the hassle of registering securities with the US SEC, which is very convenient.

What is Regulation D?

Under the requirements of the Securities Act of 1933, any sale or offer of a security has to either be registered with the US SEC or meet an exemption. Note that Regulation D is an important Securities and Exchange Commission regulation as it governs many private placement exemptions. This could apply to your case. 

So, we can say that Regulation D outlines and explains the conditions that allow companies to issue either equity or debt securities without registering these securities with the US SEC. However, you have to keep in mind that many other federal and state regulatory requirements are still applicable. 

The great thing about Regulation D is that it allows small companies, startups and even entrepreneurs to benefit from the several exemptions. And this allows these companies to skip the lengthy and extensive paperwork and stringent regulations usually associated with a public offering. Regulation D offers companies an expedite route through which they can offer debt or equity securities to third parties to raise funds for their operational and growth needs. 

When your company claims the exemptions under Regulation D, you will only have to inform the US SEC about the proceeding. So you don’t need its authorization in order to complete the placement. Did you know that Rule 504 and Rule 506 within Regulation D are commonly applied to various exempt securities when you issue private offerings?

Rule 504

Under this rule, your company can sell up to $5 million of securities in a 12-month period to accredited investors if your company isn’t a blank check company, and it is not obligated to file reports under the requirements of the Securities Exchange Act of 1934. 

Generally, a person qualifies as an accredited investor if his or her individual net worth or their joint net worth with their wife or husband exceeds $1 million. Also, keep in mind that the securities received by these investors are usually classified as “restricted stock.” And this means that an individual may not publicly sell the securities until they are either registered with the US SEC or qualify for an exemption.  

Rule 504 of Regulation D allows companies to sell equity or debt securities that are not restricted as long as one of these conditions is met:

  • The offering of securities is registered exclusively in one or multiple states that require a publicly filed registration statement along with the delivery of a substantive disclosure statement to investors;
  • Both the registration and sale of securities occurs in a state that requires registration as well as disclosure delivery. Also, the buyer has to be in a state without these requirements; or
  • The company sells the securities exclusively according to various state law exemptions which permit general advertising and solicitation, and the company is selling only to accredited investors. 

In most cases, restricted stocks have a standard holding period requirement of 6 months to one year.

Rule 506

Under this rule, your company is allowed to sell an unlimited number of securities to accredited investors. You can also sell securities to up to 35 other buyers. These 35 other purchasers have to be financially sophisticated; this means that they should have relevant and sufficient knowledge and pertinent experience in business and financial matters to make sound decisions about the investment. And it is worth noting that the securities received by an investor under this rule are restricted as well.

Regulation D Offerings and Investment Risk

As an investor, you have to do your research before investing in Regulation D offerings. This is because some of these securities can be quite risky. For instance, if you decide to invest in a private placement with a company, it might be impossible to sell those securities or shares later as they aren’t traded on public stock exchanges. 

Final Thoughts 

When your business enters the later stages of funding, it is worth considering a private placement as a feasible way to secure more funding for your company. Depending on your organization’s circumstances and current economic and market conditions, choosing to issue debt or equity securities through a private placement under Regulation D may be the best move for you.


About the Author

Dan Summers

Dan is the Founder and CEO of eVest Technology.

During his 30-plus-year career in real estate, Summers has been instrumental in some of the nation’s largest real estate transactions. Having spent decades interfacing with Goldman Sachs, Lehman Brothers, Deutsche Bank, CBS, Westinghouse and Bank of Boston, among others, Summers has built a national reputation for integrity, honesty and transparency.

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