Equity Private Placement vs. Debt Regulation D Non-Public Offering of Securities
For virtually all entrepreneurs, the most efficient mechanism to procure equity financing under an exemption is through the use of Regulation D (Reg D), which is a limited offer and sale of their company’s stock, shares or securities, without registration under the Federal Securities Act of 1933. A positive outcome by complying with Regulation D is that it provides the company’s officers and directors an insurance policy of sorts regarding disclosure. Private Placement creates all of the following Regulation D private placement memorandums.
Different Types of Securities
There are two common and basic types of securities that companies offer via a Regulation D: equity and debt securities.
Equity Offering
Equity securities typically consist of common stock for a corporation (or units for an LLC) and convey a portion of the ownership interest (the shares) in the company to the holder of the security. Stockholders are usually entitled to receive dividends when - and if declared - as well as vote on corporate matters, and receive information about the company, including financial statements and updates on company growth. Private Placement can help structure your private equity offering.
Debt Offering
Debt securities usually consist of bonds (debentures and more) and represent debt obligations of the company. Debt offerings have a specified interest rate, including the maturity date and repayment amount to the investor(s). In a registered securities offering (via private placement memorandum), a company should only offer debt securities if it can demonstrate that it has the ability to repay the debt based on its past performance (what Private Placement calls “the position of power”). It is typically difficult for small companies or even start ups (though not impossible) to demonstrate the ability that they can repay the investor(s) his/her initial investment via a debt offering. Companies with an operating history have a better chance of securing debt financing for their company.
Private Placement can help structure your private debt or “non-public” offering.
The Six Common Rules of Regulation D that Private Placement Help With
The first three Reg D rules are concerned with definitions, conditions, and notification.
• Rule 501 contains the definitions of the various terms used in the rules.
• Rule 502 lists the conditions, limitations, and information requirements for the exemptions in Rules 504, 505, and 506.
• Rule 503 includes the SEC notification requirements.
Rule 504, 505, 506 encompass the specifics of raising money under Reg D.
• Rule 504 is generally relevant to securities sales up to $1 million. Rule 504 is maintained to be the most beneficial to the entrepreneur. More below.
• Rule 505 applies to securities offerings from $1 million to $5 million.
• Rule 506 is for securities offerings exceeding $5 million.
To read more about 504, 505 and 506 Regulation D offerings, select one of the following links:
• More Information on Regulation D Rule 504
• More Information on Regulation D Rule 505
• More Information on Regulation D Rule 506
Please contact us for more information regarding the structure and development of a private placement memorandum.