- April 16, 2014
- Posted by: John Fischer
- Category: Accredited Investors
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.
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 www.accreditedinvestorleads.com.