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How to Raise Money With Reg D and a Private Placement

Businesses need capital to survive and to grow.  Entrepreneurs, inventors, and real estate gurus all need to learn how to raise money in order to launch their next great idea.  The challenge is that the capital market is still tight.  Money isn’t flowing from banks fast enough to meet the needs and demands that private industry has.  With this in mind raising money through Regulation D and a private placement has been an ideal solution.  In fact, more money is raised through private placement offerings than on the stock market every year.

If you are a business owner, entrepreneur, inventor, or dabble in real estate, you can use private placement to learn how to raise money you need to fund your next great idea.  Here is what you need to know.

Regulation D is an Exemption from Registration

Inside the Securities and Exchange Act of 1933 are several exemptions from registration.  Registration is required for selling shares on the open market (stock exchange).  Regulation D is the most popular of these exemptions and allows businesses to raise capital, while following the SEC guidelines, but without going through the formalized process.  This saves companies time and money, enabling even start ups to raise capital when they could never afford to register to “go public”.

Rules Withing Reg D

There are several rules that govern Reg D and you have the ability to select the one that works for your business.  These include: Rule 504, Rule 505, Rule 506 (b), and Rule 506 (c).  Each one has set guidelines regarding how much money you can raise and who is able to invest in the deal. The rules will help you on how to raise money. They also have guidelines regarding the disclosures that you have to give to investors.  Rule 504 and Rule 505 tend to be more lenient but you are capped on your capital raise, where with Rule 506 you can raise whatever you need within a 12 month period.

Accredited Investors

Regulation D is primarily set up for companies to work with accredited investors, people that meet set income and asset standards. Accredited investors are deemed to be knowledgeable and be able to tolerate a financial loss if the investment doesn’t work out. Both Rules 504 and Rule 505 do allow for a limited number of non-accredited investors to participate but in Rule 506 the investors either need to be accredited or “sophisticated”.  Rule 506 (c) takes this one step further and only lets you accept investments from accredited investors.  When determining which rule you want to use it is important to consider who you will be accepting investments from.


You are only allowed to advertise private placements that are issued under Rule 506 (c).  That is why this particular rule has more guidelines and restrictions on who can invest.

Disclosures and Filings

You are required to complete a Form D electronically through the SEC’s EDGAR system.  Plan on a couple of weeks for this process to complete as you will need to get a couple different passwords.  This is all done online and needs to be completed within two weeks of selling your first share.  If you are using Rule 506 (c) it is important to note that you must file this before you start to advertise your offering.  If you don’t, this mistake could cost you the ability to raise capital for an entire year.

You can have a successful private offering by contacting accredited investors that are ready to invest.  You can purchase lists of accredited investors at


The Flexibility Benefits of Reg D Rule 505

When issuing  a private placement it is important to select the rule under Regulation D that will provide you with the flexibility you need to raise money and operate business as usual. Regulation D has Rule 504, Rule 505, and Rule 506.  Each of them have different requirements and regulations regarding who can invest, how much money you can raise, and the disclosures you need to give.  Rule 506 is the most widely used exemption but there are some flexibility benefits of using Rule 505 instead.

Expand your investor pool using Rule 505.

In Rule 505 you can have up to 35 non-accredited investors participate.  On the surface this appears to be the same when using Rule 506 but that is not the case.  Rule 506(b) requires that all non accredited investors are sophisticated and Rule 506(c) does not allow for non accredited investors at all.  It is recommended that you focus on accredited investors, regardless of the rule that you use.  You can even purchase leads from  However, you never know when an accredited investor may have a cousin or coworker that also wants to invest but doesn’t meet the requirements.  If you have issued a private placement using Rule 505, you can work with them as well.

Disclosures and Information

When using Rule 505 you get to decide what information to give investors.  The more you disclose, the safer you are in the event of an investor complaint.  However, the disclosures are based on what you want to share and not specific requirements.  Rule 506 has additional disclosure requirements. This can be beneficial for companies that do not have a lot of capital and are putting together their private placement in house.  It is not always affordable to hire a CPA to certify or audit your financials.  When using Rule 505, they don’t have to.

One drawback to Rule 505 is that you are limited in how much money you can raise.  It caps companies at $5 million during a 12 month period.  It is geared towards smaller offerings and that’s why the disclosure requirements are virtually non-existent.  Simultaneously companies that are doing a larger raise typically have the funds to hire people to assist with producing the additional disclosures and materials.

Prior to issuing your private placement consider the following:

  • Who will invest in your offering?  If you are going to depend on local investors and people that you know it may become important to accept investment dollars from non-accredited investors.  This makes Rule 505 a good option.
  • Do you want to advertise?  If you don’t know any investors you can purchase a list and cold call them or you can advertise using Rule 506(c).  General solicitation is only allowed under Rule 506(c) so this could be the determining factor.
  • Can you afford to hire a CPA or professional?  If the answer is no, use Rule 505.  With no set disclosure requirements you can produce everything in house without worrying that you are not meeting the disclosure standards.  This does not protect you from an investor complaint but can help get your private placement out there faster.

Carefully evaluate how you want to structure your offering and how you will target accredited investors before deciding which rule to use.

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Differences Between Accredited Investors & Sophisticated Investors

The Securities and Exchange Commission regulated Regulation D, an exemption from registration.  Regulation D allows organization to issue a private offering to raise debt or equity without officially registering the offering to “go public”.  This exemption reduces the amount of paperwork required, lessening the time and money it takes to actually raise capital.

Under Reg D there are several rules where your private offering can be issued under.  These include Rule 504, Rule 505, and Rule 506.  Overall, the SEC encourages or requires companies to work with accredited investors when raising capital through a private offering.  However, the rules give room for a certain number of non-accredited investors to participate so long as disclosure requirements are met. In Rule 506 any non-accredited investor must be a Sophisticated Investors.  Many companies, or their representatives, don’t understand the difference between the three types of investors.  We break them down for you here.

Accredited Investor

This commonly used term is defined as an individual that has made $200,000 or more on an annual basis for the past two out of three years and is likely to make that same amount this year.  If it is a couple qualifying together that amount is raised to $300,000.  If they do not meet the income requirements, they can qualify using a net worth of over $1 million excluding their primary residence.  If you issue an offering using Rule 504, Rule 505, or Rule 506 (b) the investor can “self-certify” that they are accredited.  If you issue a private offering using Rule 506 (c) they must be certified by the issuing company or qualified third party.

Sophisticated Investors

If you issue an offering under Rule 506 (b) you can accept investment dollars from non-accredited investors if they are Sophisticated Investors.  This is the only exception to the accreditation rule.  A sophisticated investor is defined as someone that has superior knowledge of business and financial matters.  This definition leaves room for interpretation but it is important to define what that means to you and be able to back up your own personal definition.  For example, it could be a CFO, CPA, accountant, business owner, banker etc. If they SEC were to ask why you thought this person was sophisticated you should be able to point to an internal set of standards so you can prove that caution was taken when making these decisions.

Non-Accredited Investor

A non-accredited investor is simply everyone else.  These may be people that make a good living but are under the SEC’s income requirements.  Many start up companies will receive investor dollars from friends and family that are interested in supporting the individual owners, as much as the company itself.  These investors are often non-accredited but still want to participate.  Make sure that you review the specific guidelines under the rule you are using to raise capital before accepting funds from non-accredited investors.  Rule 506 (c) forbids it outright.  Rule 506 (b) says it is okay as long as they are sophisticated and you have no more than 35 of them investing in the round.

More money is raised through private offerings than on the stock market every year.  This is an excellent source of capital but make sure you are following the guidelines carefully so that you can stay within compliance.

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Will Rule 506 C Decrease Your Investor Pool?

The Securities and Exchange Commission created Rule 506(c) last year, pursuant to the requirements within the JOBS Act.  Rule 506c of Regulation D allows businesses to advertise their private offering.  This is the first time that people have been able to advertise their offerings under Regulation D.  Previously, you could only advertise a deal after it had been closed.  While they may get you an investor list for the next round, it does nothing for the here and now.   The passing of Rule 506c levels the playing field by allowing for advertising today, when you need it.

In order to advertise your private offering you have to only work with accredited investors.  Other rules under Reg D, encourage working with accredited investors but allow for a limited number of non-accredited investors.  This could cause you to lose some personal investors but isn’t a major problem in the scheme of things.  The largest challenge with this new rule is how it changed the certification process for accredited investors.

When an investor wants to put money into a private placement that is using Reg D Rule 504, Rule 505, or Rule 506(b) they can self-certify that they are accredited.  That means they can fill out a form, list their income and assets, and make a personal statement that they meet the qualification standards.  When a private offering is advertised and issued under Rule 506c an investor can no longer self-certify.  They have to provide documented evidence that they meet the criteria.  This can include bank statements, tax returns, a current credit report and more.  A big question you have to ask is whether or not your investors will be excited enough about your opportunity to go through the hassle of proving their accreditation.  Whether concerned about privacy or extremely busy, verifying all of your income and assets for the past three years is no easy task.

In order to be considered “accredited” an investor needs to have made $200,000 alone or $300,000 with a spouse for the past two out of three years, and anticipate that income continuing through the current year.  They can also have a net-worth of over $1 million, excluding their primary residence.  The challenge comes when the investors you are working with own  a business or rental properties that give them high tax write offs.  They may indeed be accredited but by writing off too many expenses, could appear that they do not meet the threshold.

As someone issuing a private offering, you need to carefully evaluate where you plan on getting your capital from.  If the group is concerned about privacy, or unlikely to give their personal financial information, using Rule 506c could shoot you in the foot by discouraging potential investors.  Further, if you plan on getting investments from a lot of businesses owners they may not make enough money on paper, even though they actually do receive it.

If, however, you plan on obtaining most of your investment dollars from people that you do not know and don’t live locally, advertising is probably your only option.  While the verification factor may still intimidate, if you don’t have a group of contacts this could be your only option for raising money under Reg D.

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Regulation D vs. Regulation A

There are several exemptions under the Securities and Exchange Act of 1933 that enable businesses to raise capital without officially registering with the SEC.  Regulation D is by far the most common and popular.  Now that the SEC has lifted the ban on general solicitation for Reg D Rule 506 (c), companies are benefiting from raising capital from an eager public.  What some people don’t realize is that they can also raise capital under Regulation A.  While different, both rules provide an opportunity to raise capital without registration.  Here we will explain the differences between the two so that you can decide which one is best for your business.

Regulation D

There are several rules under Regulation D, each with their own pros and cons.  Overall, Reg D enables businesses to raise capital from accredited investors without registering with the SEC. Rules 504,505, and 506 allow for limited investment from non-accredited investors but it increases the disclosure requirements.  If you are using Rule 56 (c) you can ONLY raise capital from accredited investors.

Rule 504 limits your capital raise to $1 million in a twelve month period.  It is $5 million for Rule 505 and uncapped for Rule 506.

Benefit: Disclosure requirements are limited as long as you only work with accredited investors.  If you are accepting money from non-accredited investors it is wise to obtain audited financial statements.

Con: You must file a Form-D within fifteen days of the first securities sale.

Benefit: Reg D has the least amount of paperwork requirements for compliance.

Con: The securities are restricted and cannot be sold on the open market unless the company registers to go public. This can be a negative for investors.

Benefit: You can advertise your private offering if you use Rule 506 (c).

Benefit: Many investors are familiar with Regulation D and comfortable with these types of private offerings.

Regulation A

Under Reg A, an issuer can raise up to $5 million within a twelve-month period.

Con: You still have to file forms with the SEC.  The Regulation A offering documents are less intensive than registering to go public, however, they are still a set requirement.

Benefit:  Your financial statements do NOT need to be audited.

Con: You are required to give investors a prospectus that is similar in nature to if your company was public.

Benefit: No Exchange Act reporting requirements until the company has 500 or more investors and over $10 million in assets.

Benefit: You can advertise a Reg D offering just like a public company would advertise their stock.

Benefit: These are un-restricted securities, meaning an investor can sell them at any time.  This is a huge bonus to investors that are concerned about future liquidity options.

Benefit: You can “test the waters” to see if there is interest in your private offering before completing the disclosure and form process.

If your company is an SEC reporting company you cannot use the Reg A exemption.

Additional information.

In both Regulation A and Regulation D, bad actors and felons are prohibited from participating in the offering. They cannot be on the team so do a background check on your management before issuing a private offering.  The SEC is considering raising the amount of money you can raise under Regulation A to $50 million in a twelve-month period.  We will bring you updates as they are available.

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Protecting Investor Privacy While Verifying Accredited Investors

Regulation D of the Securities and Exchange Act of 1933 makes it possible to raise capital through the sale of shares, units etc. while verifying accredited investors without officially registering the offering with the SEC.  Limited disclosure requirements make it easier to raise money in a private offering, and the private placement industry raises more capital on an annual basis than the stock market.

Recently, the SEC lifted the ban on general solicitation and made it possible for companies to advertise their private offering using Rule 506(c).  Simultaneously they also changed the requirements for verifying investors.  Rule 506(c) says that you can advertise your offering as long as you only accept money from accredited investors.

In the past, the SEC allowed investors to “self-certify”.  They could check a box and sign a form saying that they were accredited investors.  Per the changes to Rule 506, this is no longer an option.  Now, the company receiving the funds must take “reasonable steps” with verifying accredited investors.

These reasonable steps may include:

  • Reviewing IRS forms.  This may include tax returns, W-2’s, Ki-1’s, 1099’s etc for the past three years.  An investor needs to have made $200,000 on their own or $300,000 as a couple in order to qualify.
  • Reviewing bank statements.  Bank statements can be examined to determine income over the past several years.
  • Brokerage statements.  This can be used to prove assets along with statements for CDs.
  • Credit report proving liabilities.   In order to determine net worth, you have to verify not only assets but also liabilities.  An independent credit report is sufficient as long as it is a recent report.
  • Written confirmation from a registered broker dealer, CPA, or attorney.  One of these professionals would need to certify that they verified the net worth and past income of the investor within the past three months and confirm that they are an accredited investor.
  • Previous purchaser. If they investor participated in your 506 (b) offering, in the past, they can now participate in your 506 (c) offering, confirming their accreditation.

Understandably, these new guidelines are raising alarm bells for investors concerned about their privacy.  Most investors do not relish the thought of exposing their entire financial picture to an unknown company in order to give them money.  Fortunately, there are options you can offer investors that will guarantee their privacy.  Third party verification sites are now available where you can verifying accredited investors can become certified and provide that certification document to any company they wish to invest in.  You can also tie up with an attorney or CPA and refer your investors to them for the certification process.  Give your investor’s peace of mind so that you can continue to cultivate the relationship and have a successful capital raise.

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Hedge Fund Advertises Private Offering Using Rule 506c

Last year the SEC lifted the ban on general solicitation (rule 506c), per the JOBS Act.  This enables private companies, hedge funds, and overall issuers of private placement offerings to advertise their deals to the general public.  The caveat is that the advertisement must specifically state that the offering is for accredited investors only.  While it may be in a public magazine, television station, radio show etc. the general public is not permitted to invest through 506c of Regulation D.

This is great news for those looking to raise capital but many have been fearful about issuing advertisements for obvious reasons.  If you are among the first to do so you are guaranteed to have the SEC reviewing what you are doing for potential violations.

Remember that if you advertise under rule 506c you must verify the accreditation of every investor and keep that information on file.

Balyasny Asset Management is a Chicago Hedge Fund that has dipped it’s toes in the water by advertising in a magazine.  Their half page ad ran in Pensions & Investments on February 3rd.  The copy said, “Performing In All Conditions. Providing Strong Risk Management & Absolute Returns Since 2001.”

Balyansy isn’t the only firm to advertise since the general solicitation ban was lifted.  Bridgewater Associates and Pershing Square Capital have created generic YouTube videos.  All three of these firms are using the advertising as a way to promote their brand, not specific deals.  This is where small issuers and companies can differentiate themselves.  Rule 506c requires that investors be accredited if the specific deal is being advertised.  This may be more of a daunting process for large firms but small companies gathering a specific number of investors may find this to be more manageable, enabling them to publicly advertise each private offering.

One of the concerns many people have about the rule 506c is that the SEC has kept the rules surrounding advertisements ambiguous at best.  There are no set guidelines or boundaries, only the understanding that you can be penalized if you mess up.  This is not a comfortable place to operate in.  Issuers should error on the side of caution when creating ads and avoid promising any type of return or giving too many details.

Ideas for Advertising a Private Offering

  • Promote your firm or company’s profile.  Focus on building your brand and do the selling when investors reach out to you.
  • Highlight what is happening in the industry.  For example if you are in oil and gas, talk about the boom we are current experiencing and say something like “Investment Opportunities Available.”
  • State that the offering is for Accredited Investors Only.
  • Provide legal disclosures written by your attorney. This will be different for every offering.
  • Do not state a projected return.

In the future the SEC is likely to review all advertisements but for now it is up to individual discretion.  If you have a securities attorney ask them to review your ad prior to publishing it.  Otherwise follow our tips for a generic advertisement that will make the phone ring so investors can ask you specifics in person or over the phone.

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