Capital Formation Strategies

How It Works - Regulation D Program Basics

Regulation D is a government program created under the Securities Act of 1933, instituted in 1982, that allows companies the ability to raise capital though the sale of equity or debt securities. The programs were designed to provide two main things, an exemption to sell securities in a private transaction without registering the securities (something that happens in any transaction involving investors) and the appropriate framework and documentation for doing so properly. Reg D Offerings are the practical method companies use to raise capital from individual investors.
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Any Small Business or entrepreneur that is seeking to raise equity or debt capital from investors can use Reg D
 

Two Basic types of Regulation D Offerings that can be structured:

 
  • An equity offering is where the company sells partial ownership in the company (via the sale of stock or a membership unit) to raise capital. Equity offerings are preferred by early stage companies because there is no set repayment schedule or debt service payments, the investors profit when the company profits.

 

  • A debt offering is where the company raises debt financing by selling a note or bond instrument to investors with a set annual rate of return and a maturity date that dictates when the funds will be paid back to investors in full. A debt offering functions much like a business loan except instead of a bank providing the financing it is a group of investors lending funds to the company. 
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Preparing a Regulation D Offering involves three primary steps:

Raising Capital for Start-Up and Early Stage Companies
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Pre-Offering Structuring: Most entrepreneurs or Small Business owners are not experts in raising capital and thus typically have poorly structured transactions. An improper or non-existent transaction structure will portray a very unprofessional image of you to potential investors.  Structuring includes setting share price and number of shares or note amount and length of term, which Reg D program to use, minimum and maximum offering amounts, and minimum amount of investment per investor.

 

Document CreationPreparing an offering involves the creation of the related Regulation D offering documents to include:

 

                  • Private Placement Memorandum
                  • Subscription Agreement
                  • Promissory Note
                  • Form D SEC Filing

 

Marketing: The offering is now ready for marketing to investors. You will need the capability to implement a diversified marketing campaign that involves brokerages, Internet Marketing, and Direct Investor Marketing strategies. A Regulation D Offering will solve all of the technical issues you will face when dealing with investors (investment structure, investment documentation, etc.), these are issues that should be addressed before you interact with investors. Not addressing them ahead of time presents a very unprofessional image of you to the investor.

 

The Regulation D Programs can be used by domestic as well as foreign corporations. While the programs can be used by any corporation type, the preferred structure is a stock "C" Corporation or Limited Liability Corporation "LLC".

 

 



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