Raising Capital Under Regulation D

Raising Capital Under Regulation D

Form D is a notice of exemption from the requirement, under the Securities Act of 1933, that any issuance of securities must be registered with the Securities and Exchange Commission  (SEC). The Form was created with the adoption of Regulation D, which states that funds or companies that meet the requirements outlined under Rule 504 or Rule 506 within Regulation D, may sell securities without having to fulfill the same compliance obligations as issuers who register with the SEC. This allows issuers to raise capital faster and at a lower cost than they would if they were to conduct a public offering, which must be registered with the SEC and meet additional regulatory requirements. 

Who Files Form D?

This may sound similar to our previous blog on Form C, which allows filers to raise investment through crowdfunding and also has fewer compliance obligations than registered offerings. While Form C is for filers looking to generate relatively small amounts of investment from a larger and more diverse pool of investors, Form D tends to be for filers aiming to generate larger investments from more advanced investors. Despite some similarities, there are a few key differences between the two forms:

  • Unlike the $1,070,000 cap set for Form C filers, Form D filers are allowed to raise up to $5,000,000 in any 12-month period if they are relying on Rule 504 and an unlimited amount if the filer is relying on Rule 506
  • Form D filers have fewer disclosure requirements for financial information or target amounts to be raised in the offering
  • Investors in offerings made under Regulation D do not have any of the same investment limits that they would face for Form C offerings
  • The most illustrative difference between the two filing options is that for the most part Form D filers are required to receive investment primarily from accredited investors (a term also defined under Regulation D which includes banks, insurance companies, pension funds, and high net-worth individuals), while Form C filers raise money primarily through non-accredited investors

The idea behind these differences is that more advanced investors will have the resources to do their own research and the leverage to ask for any information they might find necessary before making an investment decision. Since the investors have more power in the negotiations, the SEC does not need to impose restrictions.

The benefits and restrictions of Form D offerings are somewhere in-between those of SEC registered offerings and Form C offerings. Form D filers face fewer compliance obligations than registered offerings and can raise more money than Form C offerings at the expense of limiting the pool of potential investors. 

Rules 504 and 506

As mentioned above, the restrictions and obligations that Form D filers face differ depending on whether the issuer is relying on Rule 504 or Rule 506 (there are two distinct exemptions within Rule 506; Rule 506(b) and Rule 506(c)). These differences are outlined in the table below:

 
Rule 504
Rule 506(b)
Rule 506(c)

Dollar Limit

$5,000,000 for any 12-month period.

None.

None.

Investor requirements

Available to accredited and non-accredited investors.

Available to accredited investors and up to 35 non-accredited investors. Non-accredited investors must be sophisticated and be provided with additional financial information.

Available to accredited investors only.

Restrictions on type of company

Not available for Exchange Act reporting companies or investment companies.

None.

None.

Advertising

Not allowed.

Not allowed.

Permitted only if the issuer has taken reasonable steps to verify that all investors are accredited.

Blue sky laws (state laws regulating the sale of securities)

Must comply with blue sky laws.

Do not need to comply with blue sky laws.

Do not need to comply with blue sky laws.

Regardless of which rule the issuer relies on, all securities sold are restricted, meaning that they cannot be re-sold for at least 6 to 12 months after purchase. All issuers must file their Form D within 15 days of the first sale.

Filing Solutions

Regulation D provides multiple possible avenues for companies to raise investment. If you or your company is interested in a capital raise under Regulation D, reach out to us for any of your SEC compliance needs.