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In 2012 congress passed the JOBS Acts, which allows for private companies to offer their shares to investors under certain exemptions.
One such exempt offering is the Reg D 506(C). The Reg D 506(C) allows for open marketing to accredited investors.
Drakoln Capital Partners are experts in this arena.
Somewhat most pertinently, in many cases, individuals and entities that previously held an accredited investor status will be able to keep that status despite changes in income and such. This eligibility is meant to protect investors' ability to manage their portfolio in this COVID-19 period.
The approved amendments expand the classification of individuals and entities that fit the definition by including new markers of eligibility such as previous investing history and certifications or licenses approved by the SEC, which will even include certain persons and organizations that were previously unable to engage in capital markets.
Expanded considerations in the amendments extend to family offices, entities with at least $5 million in investments, different entity types, and RBICs in the qualified institutional buyer exemption.
Read more about the SEC amendment here: https://www.dlapiper.com/en/us/insights/publications/2020/09/sec-adopts-changes-to-accredited-investor-definition/
According to verifyinvestor.com one might guess that as of mid-2018, there are somewhere between 12.5 million and 13.5 million accredited investor households in the United States.
In 2018 over 28 trillion dollars was sitting in qualified plans of some sort, over 9 trillion dollars is sitting in some form of IRA that can easily be accessible for alternative investments such as 506(c) PPMs.
Both Reg D 506(b) and 506(c) require most if not all investors to be accredited. Accredited investor rules were put in place to ensure that investors were sophisticated and financially stable enough to risk their invested capital on private, non-registered investment opportunities.
Investors can meet the requirements for accredited status based on either high annual income or high net worth.
While not the case with 506(b), issuers of Reg D 506(c) offerings are required to take reasonable steps to verify the accreditation of investors.
With the 506(c), issuers are able to market their offerings online, vastly expanding their possible reach. For example issuers in certain verticals, such as commercial real estate, have used digital marketing to great advantage.
While marketing and advertising tactics are allowed under general solicitation, it should be noted that unless your employees fall under the issuer exemption, any actual selling of securities must be done by representatives of a registered broker-dealer.
Regulation D offerings are exempt from registration with the SEC, but the SEC and the various states require filings providing notice that an offering is occurring. The SEC requires an issuer to file notice on Form D within 15 days of the date of first sale of a Reg D security on the SEC's Edgar System.
The Form D contains basic information about the offering; for each state into which the security is sold, the issuer must file a notice within 15 days of the first sale in that state.
With the notice filing, the states require the issuer to pay a filing fee, usually between $100-$500.
Prices vary from private consultants, pre-seed venture funds, to attorneys. You have to determine what is the best path for you and your company.
At the outset it can be an expensive investment in the financial health of your business, but the rewards can pay themselves back exponentially.
Each offering is slightly different and so are the filing costs. Each offering has legal fees, administration and subscription expenses along with regulatory compliance fees on both a federal and state level.
The components for the raise are necessary and each is vital to a raise's success. A Private Placement Memorandum (PPM) must be created, attached with both Subscription and Operating agreements.
Part of the expense is just the ability to pay either a consultant or attorney to give you the right advice on how to structure the offering along with executing all the required regulatory filing. None of these can be overlooked.
Read below some of our rates.
In 2013, the Securities and Exchange Commission (SEC) created an entirely new type of offering not subject to registration under the Securities Act of 1933.
The SEC approved final rules that eliminate the prohibition against general solicitation and general advertising in certain offerings of securities pursuant to Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933, as amended.
The SEC also approved final rules disqualifying felons and other “bad actors” from Rule 506 offerings, and proposed related amendments to Reg D, Form D and Rule 156 under the Securities Act.
Every Reg D raise requires that pertinent information about investors be captured. It is necessary to obtain their signatures on the requisite documentation, and collect payment.
Often times for those that are new to capital raising for their business this can be especially burdensome activities while also running the company. It requires a system in place to handle any volume of investors, but it does not stop there.
Every company must either have an investor relations system or create an internal investor relation team.
Whatever the case frequent correspondence, management updates, distribution notices, K-1s, financials, and more are a necessary part of cultivating that segment of the business.
Every Reg D offering must be both federally and state compliant. Federal securities laws require proper investor communication along with complying with anti-fraud provisions of the Securities and Exchange Act, making “bad actor” checks, maintaining books and records, and verifying that an investor is actually accredited are just a few examples.
State wise there is something that is called Blue Sky Laws. Each Reg D issuer must also issuers must also comply with state securities laws in the states that the securities are being sold in.
A full registration for Reg D exempt offerings are not required in each state, the reality is that state regulators still have the authority to punish issuers for any sort of fraudulent activity in their state.
Running afoul of regulations or not filing on time can lead to heavy fines or sanctions if you are not careful. In some instances state regulators can go as far as to force you to return the capital raised.
Reg D 506(c) does not prohibit bringing foreign investors (“non-U.S. persons”) into the offering.
However, the offering documents will need to include additional clauses regarding the eligibility of non-U.S. persons to invest and the risks of including non-U.S. persons in a U.S. private securities offering.
If you are an international business looking for funding, submit your application we will evaluate case by case the necessary steps to take.
We need to know more about your business and goals, based on that we'll create a customized strategy. Here are several possible outcomes:
Early stage also known as pre-seed companies need the 506(c) Exempt offering almost more than anyone else. One of reasons why businesses fail is because of lack of capital, particularly startups that have hungry teams, great ideas, and boundless passion but no capital to support it.
We work with companies around the globe. What people don’t realize is that over $1.7 trillion dollars was put into these types of offerings and is actually becoming the preferred way for institutional investors, family offices and HNW individuals to invest over IPOs.
There is no need to physically relocate to the US. The corporation you raise funds with should be domiciled in the U.S. Never the less there are many benefits to relocating to the U.S. for your company and you should discuss with your immigration attorney.
Even if you are at the idea stage, we can help you validate your idea and translate it into a real business strategy with the Early Stage Program.
There are some key differences between Reg A and Reg D, even though they both come in two different types they function in two completely different ways.
While Reg D offerings have an unlimited amount that can be raised, only accredited investors can participate. Reg A offerings have broader access to the public and are often times considered “pre-ipo” offerings because of this.
Nevertheless, to have access to a broader investor audience there are some restrictions. Reg A offerings must still file an offering statement with the Securities and Exchange Commission (SEC) and their public offerings cannot exceed either $20 million in one year or $50 million in one year.
In addition to that Reg A offerings must be accompanied by documentation.
This documentation is almost a mirror image of a standard prospectus that would accompany a registered offering.
This is why Reg A offerings are considered a “pre-ipo”, they follow very closely what a registered offering would actually do.
While Reg A offerings have more stringent documentation requirements than Reg D offerings there are some advantages.
There is no need to audit the financial statements, there are multiple ways to arrange circulars, and unless you have more than 500 shareholders and $10 million in assets there is no need to provide reports to the SEC.
All offerings under Regulation A are subject to state and federal jurisdiction and the circular must state which Reg A Tier on the front of their circular.
Reg A Tier 1 and Reg A Tier 2
A Reg A tier 1 offering will offer a maximum of $20 million in any one-year period. The offering circular is filed and vetted with Securities and Exchange Commission (SEC) and the relevant states the offering will be placed.
The key benefit is that a Reg A tier 1 one offering is only required to issue a report on the final status of the offering.
Reg A tier 2 offerings can offer up to $50 million in any one-year period. The unique difference is that once the offering is reviewed and vetted by the SEC it does not have to be qualified by any state security regulators. On the other hand Reg A tier 2 offering are required to continually produce reports on the offering including its final status.
While both offerings allow you to have accredited investors work with you and bring in an unlimited amount of investment, one allows for general solicitation, the 506(c) and the other does not, 506(b) and is considered a private placement in it’s most classic sense. We specialize in helping companies raise funds under the 506(c) exemption and only under special circumstances will we ever initiate a 506(b) offering.
User of this website are reminded that past performance is not indicative of future returns and there can be no assurances that the investment will achieve comparable results. Recipients should also note that all financial returns herein are presented on a gross basis and do not reflect the impact of fund expenses, management fees or carried interest, which may be substantial and will reduce returns to investors in the investment.
You can learn more about investing in Regulation D and Regulation A offerings from the SEC or FINRA.