Reg D – What Is It?

Reg D, or Regulation D, refers to the SEC exemption provided to businesses for issuing debt or equity securities without going through the SEC registration process. These type of security offerings are targeted at private investors. Within Reg D, the SEC provides three rules that guide the amount of the offering and who the target prospective investors are. These rules are know as rule, 504, 505, and 506.

The document used to comply with Reg D is known as a Private Placement Memorandum, or PPM. The PPM can be thought of as a prospectus for a private offering. A PPM can be accomplished in one of three manners – through a competent securities attorney, a private placement writing service, or through the purchase of a private placement template. Having an attorney draft your private placement memorandum can cost north of $20,000. There are several private placement consultants that will draft your private placement for $5,000 to $15,000. And finally, a private placement template will cost you around $300. However, in the case of writing your own PPM with a template, or using a private placement service, you should factor in the cost of have a good securities attorney review and sign off on your PPM before you hit the streets.

Writing your PPM is not difficult, but will take you some time. While this is a little of an oversimplification – the PPM essentially your business plan with a term sheet. Of course, it more than that, but the bulk of your PPM will be the who, what, where, how and why of your business:

  • who you are
  • what your company does
  • what your company sells
  • why  customer buy what you sell
  • who your customers are
  • how you manufacture or go to market
  • who your competitors are
  • what are the industry drivers
  • how your financial performance has been

I think, based on the calls I receive, the hardest part for business owners is trying to figure out what type of security to issue and what the cost of that security should be. Again, not hard, but if you are not familiar with certain corporate finance terms and concepts, there can be a very steep learning curve.

The other difficult part of writing your offering memorandum, is the risk section. In this section you will want to discuss all of the risks of your company, the industry, and your transaction. You should do this without giving in to the natural inclination of wanting to mitigate each risk (hey, your trying to get a deal done, right?). You should approach this section as coming up with all of the reasons that an investor wouldn’t want to invest in your deal.

Once you have your private placement memorandum drafted and signed off by an attorney, you are ready to start “smiling-n-dialin.”

Regulation D provides companies with a great opportunity to raise private capital for their business needs. A security issued under Reg D can be accomplished by a start-up or a existing mature company.