- June 12, 2014
- Posted by: John Fischer
- Category: Accredited Investors
Use accredited investor lists and raise money by issuing a private placement memorandum under Regulation D. This is an exemption from registration with the SEC that allows companies to raise capital without doing the paperwork that is required to go public. Under Regulation D, there are several rules, most of which require companies to work with accredited investors.
An accredited investor is defined by the SEC as someone that has made over $200,000 on their own in the past two years or someone who has made $300,000 jointly with their spouse. They may also have a net worth of $1 million outside of their personal residence. It can be difficult to identify this type of investor because there is no way to know how much money someone makes when you meet them. You can obtain accredited investor lists from www.accreditedinvestorleads.com. This is a tool you can use to reach the right type of investors and start raising money.
Reg D and a Private Placement Memorandum
Regulation D has several distinct rules that you can use to raise capital. There are advantages and disadvantages to using each one, so it is important to consider your goals prior to deciding which rule you want to use and issuing your private placement memorandum.
- Rule 504. This is designed for small companies that are trying to raise $1 million or less in a calendar year. The disclosure requirements are low, and a limited number of non-accredited investors may participate.
- Rule 505. Companies can raise up to $5 million using this rule. This is ideal for mid-sized offerings and companies that need to raise more can always do another round in the following twelve months. You can use accredited investor lists to identify potential investors.
- Rule 506b. This has been the most common rule used when raising money simply because there is no cap on what you can raise, and it provides protection against blue sky laws. Only sophisticated and accredited investors can participate.
- Rule 506c. This is a new rule that the SEC created in response to the JOBS Act. The big difference is that companies can advertise their offering and only accredited investors may participate. There are stricter rules for verifying someone’s accreditation status and earlier filing deadlines.
Once you know which rule you want to use you can issue your private placement memorandum. This document should contain the following information (at minimum):
- Background on the company
- The leadership team
- What you are doing currently
- What you will do in the future
- How much money you are trying to raise
- What you will do with that money
- What an investor gets in exchange for their investment
- Financial data, both current and projected
- Market conditions
- Marketing strategy
- Operational strengths
- Risk factors and disclosures
Include as much information as you need in order to tell your story and give accredited investors information on why they should participate.
With your accredited investor lists in hand, start calling investors. Use the initial phone call to establish a relationship and get them excited about your opportunity. When they want to know more information, you can provide them with your private placement and walk them through the closing process.