Regulation D (Reg D) is a set of rules established by the U.S. Securities and Exchange Commission (SEC) that governs the private offering and sale of securities. When a company wishes to raise capital through a private placement, they often create a Private Placement Memorandum (PPM) to provide potential investors with detailed information about the investment opportunity. Here’s how Regulation D rules can affect your PPM:
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Exemption classification:
Regulation D provides several exemptions from the full registration requirements of the Securities Act of 1933. The most commonly used exemptions are Rule 506(b) and Rule 506(c). Each exemption has its own set of requirements and limitations, and the PPM must adhere to the specific rules applicable to the chosen exemption.
Accredited investors:
Both Rule 506(b) and Rule 506(c) have restrictions on who can invest in the offering. Rule 506(b) allows up to 35 non-accredited investors but requires that they have a pre-existing relationship with the issuer. On the other hand, Rule 506(c) permits only accredited investors, but there is no requirement for a pre-existing relationship.
Information requirements:
Regardless of the chosen exemption, companies conducting private placements must provide potential investors with sufficient information to make an informed investment decision. The PPM must include detailed information about the company, its business, the terms of the offering, potential risks, and financial statements, among other things.
General solicitation and advertising:
Under Rule 506(b), companies are not allowed to use general solicitation or advertising to attract investors, meaning they can’t publicly advertise the offering. However, Rule 506(c) allows for general solicitation and advertising but restricts the investors to accredited individuals only.
Blue sky laws compliance:
Regulation D is a federal rule, but companies must also comply with state securities laws, often referred to as “blue sky laws.” These laws can vary from state to state and may have additional requirements for conducting a private placement. The PPM must address any state-specific considerations to ensure compliance.
Bad actor disqualification:
Regulation D includes provisions that prohibit certain “bad actors” from participating in private placements. The PPM should include representations and warranties from the issuer and other relevant parties to confirm that no bad actors are involved in the offering.
Filing requirements:
While Regulation D does not require companies to file the PPM with the SEC, Form D must be filed within 15 days after the first sale of securities in the offering. Form D contains basic information about the offering and is used to notify the SEC of the exemption being claimed.
It’s important to note that the information provided here is a general overview, and the actual impact of Regulation D on your PPM will depend on various factors, including the exemption chosen, the nature of the offering, and the specific circumstances of your company and investors. Consulting with legal and financial professionals experienced in securities laws is crucial to ensure compliance and a successful private placement.