Under federal securities laws, all securities offerings must be registered with the SEC unless the offering meets an exemption. Regulation D governs the exemptions for security offering filings. For startups, the two likely applicable exemptions fall under Rule 504 and Rule 506. When a company meets one of the exemptions, it must file Form D with the SEC. The filing gives investors notice of the Form D filing and informs the SEC of the private placement offering.
Under Rule 504 of Regulation D, offerings with an aggregate price up to $5,000,000 in any 12-month period are exempt from filing. The purpose of the exemption is to help small businesses and startups raise capital. Therefore, most startups fall under the private placement exemption through Rule 504; however, Rule 506 is the most frequently used exemption. Under Rule 504, investor receives restricted securities.
Under Rule 506 of Regulation D, there is no limit on the amount of money a company can raise. The company cannot use general solicitation of advertising mechanisms to market the securities unless the general solicitation is to only accredited investors (closed door meeting). The company may sell to an unlimited amount of “accredited investors” and up to thirty-five other sophisticated purchasers (whether personally or through a representative). Pursuant to this rule, the investor receives restricted securities. For more information on Rule 506, see here.
When a company’s security offering is exempt from SEC filing requirements, it is exempt from filing requirements ONLY and not other compliance regulations. While these exemptions provide a “safe harbor” for startups and small businesses that are raising money, the company must file Form D with the SEC within 15 days after the first sale of securities. Additionally, the company must comply with any Blue Sky state filing requirements. Most states require the company to file the Form D with the state regulatory agency. Of course, the company remains bound by the antifraud, civil liberty, and other rules and regulations enforced by the SEC.
Any investor who is considering investing in a company that is exempt from filing under Regulation D should first check the EDGAR database to find out whether the company filed the required Form D.
The fillable PDF version of Form D is available on the SEC’s website. To ensure compliance with both federal and state laws, startups should consult with a securities lawyer before issuing any securities.