Regulation D – Reg D
Regulation D – Reg D
Private placements refer the issuance of either debt or equity securities to investors in the private market. Private placements are an effective way for small companies who have limited access to the capital markets and/or bank lending to secure financing. Because private placements are non-public transactions, they are considered “exempt transactions” by the SEC which allows them to avoid the high costs and lengthy timetable associated with registering securities. One way an issuer can obtain a private placement exemption is through adhering to the rules set forth in Regulation D, or Reg D.
Briefly, Reg D lays out a basic set of rules for private placement transactions. First off, sufficient information must be provided to all potential investors and the SEC so that a potential investor can make an informed investment decision. Additionally, there can be no general solicitation or resale of the securities without registration. Since the securities being offered are not intended for resale, they are classified as “restricted.” Lastly, any securities sold within a specific time period are treated as one offering under Reg D. After these rules are satisfied, the issuing company must file a Form D with the SEC. The Form D prohibits any sort of public solicitation or advertising for the securities, such as television ads or seminars.
Reg D also contains specific rules depending on the size of a private placement. Rules 504, 505, and 506 refer to offerings of up to US$1 million, up to US$5 million, and over US$5 million, respectively. Rules 505 and 506 specify that only “accredited investors” and up to 35 non-accredited investors can purchase the securities. An accredited investor may be an institutional investor or a common retail investor, if the retail investor meets certain standards. Some of these standards include a net worth of at least $1 million (less net equity in their primary residence), an income exceeding $200,000 for the past two years, and so on. Moreover, rule 506 states that any investor who is not “accredited” must be “sophisticated.” Sophisticated investors are individuals who possess both experience in finance and the knowledge to properly evaluate the risks of a given investment. To clarify, rules 504 and 505 do not require all non-accredited investors to be sophisticated; this distinction only applies under rule 506.
Private placement financing’s primary benefit is that it provides the necessary financing to help growing companies. While there are many rules surrounding private placements in the form of Reg D, these rules play an important role in ensuring the suitability of an investment. Through controlling the solicitation, resale, and investor pool for private placements, legislation like Reg D serves to protect small investors from making inappropriate investments.
Any company that wants to perform a private placement should make sure that they are dealing with a registered broker-dealer. It is illegal for other types of firms to assist companies in these types of transactions. Versailles Group has and affiliated broker dealer, VGL Global LLC, which is a registered broker and capable of completing a private placement. VGL Global’s website is www.vglglobal.com.
