What is Reg D?

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SEC Regulation D enables companies or entrepreneurs to in fact gain capital through the sale of equity or debt securities without needing to register those securities with the SEC.

Regulation D is a rule put in place by the Securities and Exchange Commission (SEC), which designates how financial institutions can classify certain types of accounts. This regulation can be advantageous to private companies or entrepreneurs that meet the affiliated account requirements. Why? Simply put, Reg D makes it easier for these companies or entrepreneurs to withdraw and receive their funds more quickly and at a lower cost than with a public offering.

While there are certainly additional considerations that come with this SEC regulation, the bottom line is that it is in place to increase access to money. This can be beneficial to holders of a Special Purpose Vehicle, or SPV. Some reasons why are listed below. However,  before getting into those reasons, it is important to make the distinction between the SEC regulation and the Federal Reserve Board Regulation D, as they are not the same.

The major difference is that the Federal Reserve Board Regulation D limits the number of withdrawals or transfers that the owner of an account can make. Specifically, the holder of a savings account or money market account cannot make more than six transfers or withdrawals in a month.

SEC Regulation D, on the other hand, enables companies or entrepreneurs to in fact gain capital through the sale of equity or debt securities without needing to register those securities with the SEC.

Reg D Requirements

According to the SEC, Section 4 of the Securities Act exempts an issuer from needing to register transactions that do not involve a public offering. Regulation D is considered a “safe harbor” within Section 4. This is because it provides objective standards that an individual entrepreneur or company can rely on to meet the requirements of the Section 4 exemption, enabling them to raise an unlimited amount of money and granting them the ability to sell securities to an unlimited number of accredited investors.

Alternatively, the regulation does establish that securities may not be sold to more than 35 non-accredited investors. Additionally, non-accredited investors must receive disclosure documents and financial information that may not otherwise need to be given to accredited investors.

However, this isn’t to say that additional requirements do not play a role. Even if the transaction falls under Reg D, and merely involves a single or two investors, the proper framework and disclosure documentation must still be provided. Specifically, a document (known as Form D) must be filed with the SEC within 15 days after the first securities are sold. This form may be filed electronically, and contains far less information than the documentation required for a public offering.

As this is a less exhaustive document and one that is easily submitted, it does not place a significant burden on the company or entrepreneur, but it is an important and necessary step in the process nonetheless. While the form requires the inclusion of some essential details that pertain to the offering, it mostly is a place for all names and addresses of the company's executives and directors.

Further, the regulation puts forth that there is to be no general solicitation or advertising efforts in place through which to market the securities. And these types of restrictions are only a few, as Regulation D exemptions do not undo the need for an issuer to remain compliant with state laws that pertain and regulate the offerings and sales of securities.

Information to Investors

As noted, outside of brief requirements contained within Form D, the entrepreneur or company does not have to register their offerings with the SEC, if exempt through Regulation D. That being said, there is plenty of information that should be provided to investors. The main reason for this is that a company or entrepreneur wants to remain compliant with antifraud provisions pertinent  to the securities laws.

These laws establish that an issuer must provide written disclosures of criminal convictions or other “bad actor” events. These disclosures must be presented within a reasonable timeframe prior to the sale. If anything, this regulation protects the issuer, as a company would be unable to later establish that they were unaware of previous incidents or troubling records of past employees.

Only Available to the Issuer

Regulation D is beneficial to an issuer of the securities, but that is where the benefits end. For instance, affiliates of the issuer or any other individual who might later decide to resell, are not protected by Regulation D. More specifically, the exemptions offered under Regulation D apply to the transactions themselves, not to the securities.

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