How To Select The Proper Regulation D Exemption
The Securities Act requires that all offerings of securities be registered unless there is an exemption from registration that is available. The three primary exemptions that are utilized under Regulation D are rules 504, 505 and 506.
Whether you are seeking to raise capital for an investment pool or hedge fund, or are raising capital for a new or existing company, let Lerman Law Associates, P.C., work with you in determining whether Rule 504, Rule 505 or Rule 506 may provide the best fit for your financing needs.
Regulation D Exemptions Ease Hurdles To Raising Capital
All businesses wishing to sell securities to raise capital must register those securities with the Securities and Exchange Commission (SEC), or qualify for an exemption. These exemptions include rules 504, 505 and 506, the “safe harbor” provisions, each of which varies in the amount of money that can be raised and disclosure requirements to potential investors. Commonly known as “Reg. D” exemptions, the SEC created these rules to encourage small businesses to raise capital while also simplifying regulations.
Qualifying Businesses Under Rules 504, 505 And 506
Qualifying businesses save extensive legal and compliance fees while still allowing sophisticated investments from private financiers. In addition, Reg. D exemption protects the small business from unhappy investors wishing to claim a registration or disclosure violation.
When working within the Rule 504, Rule 505 and Rule 506, Lerman Law Associates, P.C., will assist you in determining which exemptions are available and which one will best suit your financing needs. Lerman Law Associates, P.C., will assist you in ensuring that your corporate structure is in place to suit your capital-raising needs, including review of your bylaws or operating agreements, developing your bylaws or operating agreement to accommodate your capital needs, investor questionnaires, preparing subscription documentations, offering materials, private placement memorandums, and federal and state filing requirements.
Rule 504 allows a business to raise up to $1 million in capital for over 12 months. In order to qualify, the company must have a business plan and purpose and not otherwise be subject to reporting requirements.
Companies exempt under Rule 504 can even offer limited public securities, without regulating who the investors can be (i.e., there is no rule requiring accredited investors, unlike Rule 505 and 506). Rule 504 does not require a prescribed disclosure document, unlike registered offerings. However, companies exempt under Rule 504 are still subject to rules regarding fraud, and individual state laws may have stricter rules governing securities offerings.
Rule 505 increases the investment limit to $5 million over a 12-month period. However, investors must be “accredited.” Accredited investors generally must be businesses that regularly invest, other sophisticated business organizations or high net worth individuals. Rule 505 does allow up to 35 nonaccredited investors, with the caveat that they must receive disclosure documents such as those given for registered offerings. If the company does not use nonaccredited investors, then it is up to the company to decide what information to give potential investors.
Rule 506 allows a company to raise unlimited amounts of capital. However, these offerings must be private, meaning the company cannot “go public” and sell common stocks. There have been recent developments regarding Rule 506 that impact “crowdfunding,” or general solicitation of an investment in private businesses.
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