What is Regulation D (Reg D)?
Regulation D (Reg D) is a Securities and Exchange Commission (SEC) regulation governing private placement exemptions. Reg D offerings are advantageous to private companies or entrepreneurs that meet the requirements because funding can be faster to obtain and less costly than with a public offering. Usually used by smaller companies, the regulation allows capital to be raised through the sale of equity or debt securities without the need to register those securities with the SEC. However, many other regulatory requirements, both state and federal, still apply.
Launching a Reg D Offering
These transactions need not be offered discreetly. Within the regulation are directives that, depending on which rules are applied, may allow offerings to be openly solicited to prospective investors in their network.
- Regulation D lets companies doing certain private placements raise capital without needing to register the securities with the SEC.
- The company or entrepreneur must still file a Form D disclosure document with the SEC after the first securities are sold.
- Those selling under Regulation D must still comply with applicable state laws covering the offer and sale of securities.
- Regulation D exemptions only apply to the transactions, not to the securities themselves.
The requirements for raising capital through an Reg D investment are significantly less onerous than is the case with a public offering. Even if the transaction only involves just one or two investors, the company or entrepreneur must still provide the proper framework and disclosure documentation. A document known as Form D must be filed electronically with the SEC after the first securities are sold. Form D, however, contains far less information than the exhaustive documentation required for a public offering; it comprises the names and addresses of the company's executives and directors, along with some details regarding the offering.
The issuer of a security offered under Reg D must also provide in a reasonable time in advance of the sale written disclosures of any prior “bad actor” events such as criminal convictions or regulatory orders. Without this requirement, the company might be freer to claim it was unaware of the checkered past of its employees, and so less accountable for any further "bad acts" they might commit in association with the Reg D offering.
Other Requirements Under Regulation D
The issuers of Reg D offerings are obligated to abide by some securities laws.
According to rules published in the Federal Register, transactions that fall under Reg D are not exempt from antifraud, civil liability, or other provisions of federal securities laws. Reg D also does not eliminate the need for compliance with applicable state laws relating to the offer and sale of securities. State regulations, where Reg D has been adopted, may include disclosure of any notices of sale to be filed and of the names of individuals who receive compensation in connection with the sale of securities.
The benefits of Reg D are only available to the issuer of the securities, not to affiliates of the issuer or to any other individual who might later resell them. And the regulatory exemptions offered under Reg D only apply to the transactions, not to the securities themselves.