Raising Capital

• Why is it critically important that you understand what is required to comply?
• If you are taking money from an investor, you must comply with Federal Securities Laws.
• A Securities Law exemption, “Regulation D,” allows you to solicit individual
  investors more cheaply than with other options.
• Your two best, least expensive options using “Regulation D” are:
• Rule 506(b) and Rule 506(c) – You will use one of these exemptions. Likely 506(c).

You have seen the term ‘IPO’ for “Initial Public Offering”.  Raising capital using an IPO is very expensive on many different levels. Regulation D is important because it allows you to solicit investor money at a very realistic and affordable cost.  Regulation D provides a “Federal Exception” to raising money using a Private Placement Memorandum (PPM). If you comply with the Regulation D exceptions, you will incur significantly less expense for soliciting investors. Regulation D Rule 506 (b) or Rule 506(c) makes raising funds from investors “affordable for anyone.

For our purposes, we are only concerned with the exceptions offered by either Rule 506(b) or Rule 506(c).

Rules 506(b)

The key takeaways are that:

1. You must have a prior relationship with the investor.
2. You can take money from up to 35 Non-Accredited Investors. (Any person who does
   not meet the requirements of an ‘accredited investor’ is a non-accredited investor.
   See our menu for the Accredited Investor Form.)
3. You can take any investment amount of any size from an unlimited number of
   accredited investors.
4. You cannot advertise.
5. There is no monetary limit on how much money you can raise.

Rule 506(c):

1. You can only accept money from Accredited Investors.
2. There is no limit to the number of Accredited Investors.
3. You can advertise.
4. You do not need a prior relationship with the Accredited Investor.
5. You cannot take money from a non-accredited investor.
6. There is no monetary limit on how much money you can raise.

Author’s Comments:

In both Regulation ‘D’ Rule(b) and Rule(c), no review or approval required of your Offering by the Securities and Exchange Commission (SEC).

The practical application is that you need the option to advertise in almost all circumstances, which only Rule 506(c) allows. I would discourage you from selecting Rule 506(b) to raise capital for that and other reasons.

To avail yourself of an exemption, you need to comply with the requirements of one of these Regulation ‘D’ rules. However, if you violate the requirements, you may lose the exemption and be required to return the investor’s capital.

NEXT: Proforma Cost of Raising Capital using Reg D Rule 506(c).