Summary of Regulation D, Regulation A, and Regulation Crowdfunding Requirements
Navigating the complex world of fundraising regulations is crucial for entrepreneurs and investors alike. In the United States, three significant regulatory frameworks governing private equity capital raises, Regulation D, Regulation A, and Regulation Crowdfunding.
Regulation D
Reg D provides exemptions under the Securities Act of 1933 that enable companies to raise capital from private investors without registering with the U.S. Securities and Exchange Commission (SEC). The Company simply needs to file a Form D with the SEC and follow one of the following three rules.
1. Rule 504: Companies can raise up to $10 million in a 12-month period from both accredited and non-accredited investors.
2. Rule 506(b): Companies can raise unlimited capital from accredited investors and up to 35 non-accredited investors. Companies opting for this rule are prohibited from engaging in general solicitation or advertising to attract investors.
3. Rule 506(c): Companies can raise unlimited capital from accredited investors and engage in general solicitation or advertising.
· Eligible Users: Reg D is available to domestic and foreign companies seeking to raise capital in the United States.
· Investment Limitations: There are no specific investment limitations under Reg D. However, companies must comply with anti-fraud provisions and ensure they do not engage in misleading or deceptive practices.
· Resale Limitations: Securities sold under Reg D are typically subject to resale restrictions. They may be restricted from freely trading on public exchanges, and investors may have to hold their securities for a certain period before selling them.
·Liability Exposure: Under Reg D, companies are exposed to potential liability for any misrepresentations or omissions of material facts. Issuers must exercise due diligence and provide accurate information to investors.
· Ongoing Reporting Obligations: Reg D does not impose ongoing reporting obligations on companies after the offering is completed. However, companies must comply with any specific reporting requirements set forth by state securities laws.
· Integration: Reg D offerings must be carefully structured to avoid integration issues. Companies must ensure that the offerings conducted under Reg D do not conflict with or impact other concurrent offerings.
· Preemption of Blue Sky Laws: Reg D offerings are exempt from state registration requirements but are still subject to state securities laws, commonly referred to as "Blue Sky Laws." However, Reg D preempts state securities laws for offerings made solely to accredited investors under Rule 506(b) and Rule 506(c).
Regulation A
Reg A offers an exemption from the Securities Act's registration requirements for smaller public securities offerings. It allows companies to raise capital from accredited and non-accredited investors, including retail investors.
· Eligible Users: Reg A is available to both domestic and foreign companies seeking to raise capital in the United States.
· Permitted Investors: Reg A allows companies to raise capital from both accredited and non-accredited investors, making it more inclusive than Reg D.
· Investment Limitations: There are no specific investment limitations for investors participating in a Reg A offering. The amount that can be raised is broken into two tiers.
o Tier 1: Within Tier 1 of Reg A, companies can raise up to $20 million in a 12-month period. However, it is important to note that this tier is subject to both federal regulations and state securities laws.
o Tier 2: Under Tier 2 of Reg A, companies have the opportunity to raise up to $75 million in a 12-month period. Companies in this tier are subject to fewer state regulations but must provide ongoing reporting to the SEC, enhancing transparency and investor protection.
· Resale Limitations: Securities sold under Reg A are generally not subject to significant resale limitations. Investors can freely trade these securities on public exchanges, subject to any applicable state securities laws.
· Permissibility of General Solicitation: Reg A allows companies to engage in general solicitation or advertising to attract investors.
· Issuer Disclosure Requirements: Companies conducting a Reg A offering must prepare an offering statement, similar to a mini-registration statement. The offering statement includes detailed information about the company, its business, risks, financial statements, and other material information.
· Liability Exposure: Companies must exercise due diligence in preparing the offering statement and ensuring the accuracy of the disclosed information to avoid potential liability for misrepresentations or omissions.
· Ongoing Reporting Obligations: After completing a Reg A offering, companies are subject to ongoing reporting obligations. These include filing annual and semi-annual reports, current reports for certain events, and exit reports if the offering is terminated.
· Integration: Reg A offerings must be structured to avoid integration with other concurrent offerings to ensure compliance with securities laws.
· Preemption of Blue Sky Laws: Reg A offerings are subject to state securities laws, including Blue Sky Laws. However, Tier 2 offerings enjoy a limited preemption from certain state securities registration requirements.
Regulation Crowdfunding
Reg CF is a regulatory framework that enables small businesses and startups to raise capital from accredited and non-accredited investors through SEC-registered crowdfunding platforms.
· Eligible Users: Domestic companies seeking to raise capital in the United States.
· Permitted Investors: Companies to raise capital from both accredited and non-accredited investors, making it accessible to a broader range of investors.
· Investment Limitations: Investors have investment limits based on their income or net worth. The limitations vary depending on the greater of the investor's annual income or net worth.
· Limits on the Size of the Offering: Reg CF imposes a maximum limit of $5 million that companies can raise within a 12-month period.
· Resale Limitations: Securities sold under Reg CF are subject to certain restrictions on resale. These securities are generally illiquid and cannot be freely traded on public exchanges.
· Permissibility of General Solicitation: Reg CF allows companies to engage in general solicitation or advertising to attract investors.
· Issuer Disclosure Requirements: Companies conducting a Reg CF offering must provide certain disclosures through the crowdfunding platform. These disclosures include information about the company, its directors, officers, and owners, as well as financial statements and other material information.
· Liability Exposure: Companies must exercise due diligence in providing accurate and complete information to investors to avoid potential liability for misrepresentations or omissions.
· Ongoing Reporting Obligations: After completing a Reg CF offering, companies are required to file annual reports with the SEC, providing updates on their business and financial condition.
· Integration: Reg CF offerings must be carefully structured to avoid integration with other concurrent offerings to comply with securities laws.
· Preemption of Blue Sky Laws: Reg CF offerings enjoy preemption from state securities registration requirements, providing companies with national access to investors without the need for state-level compliance.
Summary: Understanding the nuances of Regulation D, Regulation A, and Regulation Crowdfunding is essential for entrepreneurs seeking capital and investors evaluating investment opportunities. Each regulation offers distinct advantages and considerations.