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In order to successfully raise funds from an accredited investor, a company should have a sound business plan and needs to have a well-written Private Placement Memorandum (PPM) that discloses the full facts of the investment and business venture. |
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| Author: Susan Mackasey |
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Reg D (formally known as Regulation D) was implemented in 1982. Regulation D allows companies to raise equity or debt securities (investment capital) but bypass the typical need to file a registration statement with the SEC (Securities and Exchange Commission). This enables money to be invested in a company from private investors in the form of stocks and bonds. A deal that offers securities to a number of private accredited investors is called a Private Placement Offering (PPO). a Private Placement Memorandum (PPM) is required to secure funds. This is a confidential document about the firm including, but not limited to, transaction structure such as equity ownership or debt financing, plus the terms of the investment. It also includes potential risks, management details, and any other significant information for investors. Thorough knowledge of Reg D is critical in order to draft a legally binding PPM. .
Six Rules form Regulation D: Rules 501, 502, 503: Terms and conditions that apply in Reg D are defined in these three rules.
Rule 504: Pertains to transactions where securities under the amount of $1,000,000 are sold in any consecutive twelve-month period. This rule allows payment of commissions, creates no cap on investor numbers, and according to specific guidelines allows companies to sell securities that are not otherwise restricted.
Rule 505: Pertains to transactions, over a 12-month period, where the value of securities transacted is less than $5,000,000 of securities. Unlimited number of accredited investors are allowed to purchase but only thirty-five "non-accredited" investors. General solicitation is banned as is general advertising.
Rule 506: There is no dollar limit under this rule. It is open to all issuers for offerings sold to not more than thirty-five "non-accredited purchasers" and an unlimited number of accredited investors. It's not permitted to have General Advertising and/or General Solicitation.
The Two Primary Types of Reg D Offerings Are:
Equity: The firm, in the equity situation sells stocks or membership units to raise capital. This provides partial ownership for the buyer. New investors have to be confident in the success of the company; they will receive no payments if the company does not succeed. They will, of course, profit handsomely if the company does succeed.
Debt: A group of investors lends capital to the company. This is very similar to a traditional financial institution providing the loan but more flexible. Debt financing will almost always have a clear maturity date when the capital will be repaid in full. It also has a set annual rate of return, although conditional clauses have been known to exist.
PPM (Private Placement Memorandum)
In order to successfully raise funds from an accredited investor, a company should have a sound business plan and needs to have a well-written Private Placement Memorandum (PPM) that discloses the full facts of the investment and business venture. A PPM is a detailed document. The PPM almost certainly has to be written by a professional specializing in PPMs.
Accredited Investors
Reg D specifically defines Accredited Investors: A household with income of $300K per year or having a net worth over $1M or an individual earning $200k per year. It also includes venture funds as well some banks and other institutions.
Great importance is placed on the following by accredited investors:
"Proprietary technology such as patents
An experienced management team
An exit strategy within a reasonable time frame
Potential high growth in terms of revenue, market share, size, etc."
The investment community is large, fragmented and spread out.
Networking is key to finding investors. Useful starting points are business media and the Internet. As well, you should review your personal contacts including investment professionals that you know. In addition, industry and local organizations can be helpful. Pursuant to the Securities Act of 1933, after initial private placement funds are obtained, the company is required to file federal and state notice filings.
About Author
The author is a well-known expert Business & Investment Consultant. http://www.parexcellenceplanning.com develops business plans and prepares complete professional Private Placement Memorandums for Reg. D Offerings.
Article Source:
http://www.1888articles.com
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