RAISING < $5,000,000 VENTURE CAPITAL FOR A STARTUP COMPANY

This information is part of the disclosures you must make with the Securities & Exchange Commission (SEC) when you file your Form ‘D’. Form ‘D’ explained, see Tutorial #4.

When soliciting public investor funds, you must comply with Federal Securities Laws. There are many Federal Regulations to choose from when raising capital from the public. However, suppose you are a startup with no past performance, and need to find investors to present your startup’s Offering Documents. In that case, the best and least expensive options will be Regulation D – Rule 506(c) or Rule 506(b).

 There are two Regulation D Rules: Rule 506(b) and Rule 506(c). Of Rule 506(b) and Rule 506(c)—You will likely choose exemption 506(c).

You have seen the term ‘IPO’ for “Initial Public Offering”. To raise capital using an IPO is very expensive on many different levels. Understanding Regulation D is essential 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”.

See Tutorial #2 Pro Forma Costs for Raising Capital using Regulation D Rule 506(c) or 506(b).

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 size investment from unlimited accredited investors.
4. You cannot advertise for investors.
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. See Tutorial #14  Accredited Investors.
2. There is no limit to the number of  Accredited Investors-
3. You can advertise for investors. See Tutorial 12 and 13.
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 is required for your Offering by the Securities and Exchange Commission (SEC). There is a form that needs to be filed called Form D. See Tutorial #4.

The practical application is that you most likely need the option to advertise, 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: Tutorial #2: Pro Forma Costs of Raising Capital Using 506(c)