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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